The Financial Accounting Standards Board has ignited a firestorm of objections to its proposal to require a more complex breakout of the asset allocation and valuation of corporate pension funds.
The proposal would amend Financial Account Statement 132(R) — Employers' Disclosures about Pensions and Other Postretirement Benefits — and would take effect essentially in time for the 2008 10-Ks most corporations will file next spring.
Corporate executives are rightfully dismayed at having to gear up for yet another pension accounting rule change. At issue is how useful more complex disclosure would be to investors, analysts and other financial statement users.
The FASB should set aside the proposal for now to reconsider the need for such a detailed breakdown. FASB officials should consult further with corporate executives, investors and other statement users about the urgency for more extensive disclosure and the utility of increasingly complex pension accounting.
Even amending 132(R) won't end the pension accounting changes. FASB officials promise still more major pension accounting transformations.
A project under way could have pension costs and earnings flow directly into corporate income statements. That project also could require marking pension liabilities to market, replacing the existing method of amortizing, or smoothing, the obligations over several years. The project also is considering changing how pension obligations should be measured: either on the basis of accumulated benefit obligations; or more inflated projected benefit obligations; or some other way.
Until these decisions are reached, the FASB is using PBO for pension liabilities, which magnifies them beyond what has accrued. But if the FASB adopts ABO, the liabilities would shrink, jerking around financial statement users.
In addition, there is the prospect of a move to match U.S. standards with those of the International Accounting Standards Board, requiring more changes.
The most recent changes occurred in 2006, when FASB put into place Statement 158, which moved the funding status of pension plans — whether overfunded or underfunded — to the corporate balance sheet from the notes in financial statements.
FASB's overhaul of pension accounting is one of its most ambitious and longest-running undertakings.
By the time it finishes remaking pension accounting, there will be fewer defined benefit pension plans and fewer other post-employment benefits plans to value. They have been in decline for two decades as companies seek to cut costs, including the cost of accounting, which keeps mounting.
The pending proposal, like all FASB rules, is designed to better reflect the economic costs and risk exposure of pension plans — a welcome move. Improving the asset allocation disclosure, especially with alternative investment allocations growing, is particularly important now that the pension funding status directly affects the corporate balance sheet.
But the current proposal could be a costly burden and difficult to accomplish. The details of underlying hedge fund and private equity assets might not be available, at least in the time frame for reporting.
Plans generally aren't growing and are becoming a smaller part of total corporate assets and liabilities. And focusing on the assets is missing the boat. For financial statement users, the major risks in plans come from the liabilities.
Yet Keith P. Ambachtsheer, president of KPA Advisory Services Ltd., a Toronto-based pension consulting firm, noted there is nothing in the proposal about disclosing the structure of liabilities in terms of inflation sensitivity and duration. And Morgan Stanley's Michael Peskin said, “The only risk that counts is mismatch risk” between pension assets and liabilities.
Without added disclosure of liabilities, the proposal's call for derivatives disclosure could be misread. “It would be misleading to pick up the asset risk, but not a reduction in the asset/liability risk,” Mr. Peskin said. “Until they get more detail on the liability side, it's premature to dig deeper on the asset side.”
FASB officials should remember corporate pension funds are required by law to operate under a fiduciary standard that promotes diversification and the avoidance of large concentrations of risk, the very thing FASB's effort aims to disclose in a costly, complex way.
