Verizon Communications Inc., Basking Ridge, N.J., is changing its accounting methods for pension and other post-employment benefits, which will assign $20.2 billion in losses to previous years, company executives said Friday in a conference call to securities analysts.
Verizon will recognize gains and losses in the year that they occurred instead of “smoothing,” or amortizing them over time, Fran Shammo, executive vice president and CFO, told analysts during the conference call.
The change will make accounting “more straightforward” and “more transparent,” he said. “We've been considering this for some time. For us, it was a question of when, not if, we would make this change.”
Verizon had $45.232 billion in retirement assets, including $25.255 billion in defined benefit assets, as of Sept. 30, according to Pensions & Investments data.
According to Verizon data presented to analysts, the change in accounting for pensions and other benefits means the company has made cumulative adjustments of $20.2 billion for all years through 2010. The biggest adjustment was a loss of $15 billion in 2008. For 2010, the adjusted loss was $600 million.
Mr. Shammo also said Verizon has lowered its assumed rate of return on pension assets for 2011 to 8% from 8.5%, and it will take a cumulative $600 million pretax charge in 2010 for its revised accounting. The company had lowered its assumed discount rate to 5.75% in 2010 from 6.25% in 2009.
The change won't affect cash flow or pension funding, and it won't affect liabilities for pensions or other post-employment benefits, Mr. Shammo said. Verizon will announce its 2010 financial results on Jan. 25.
The $600 million cumulative charge for 2010 was due “primarily to a lower discount rate, partially offset by a return on assets that was higher than expected, and favorable health-care trends and other costs,” the company said in a news release.
Changing the discount rate increased the company's overall benefit liability by $2.9 billion in 2010, Mr. Shammo said, but part of that was offset by some gains — producing the net adjusted loss of $600 million for the year.
“The estimated return on pension assets in 2010 was approximately 14%, compared with an assumption of 8.5%, resulting in an actuarial gain of approximately $1 billion,” the news release said. “Health care and other retiree benefits were favorable compared to assumptions, resulting in a $1.3 billion reduction in liabilities.”
According to an 8-K filing Friday with the SEC, Verizon in the fourth quarter “elected to immediately recognize actuarial gains and losses in its operating results in the year in which the gains and losses occur. This change is intended to improve the transparency of Verizon's operational performance by recognizing the effects of current economic and interest rate trends on plan investments and assumptions.”