At Honeywell, David J. Anderson, chief financial officer and senior vice president, said in a teleconference: “(W)e think this approach will provide better clarity ... regarding Honeywell's underlying operating performance.”
Honeywell, based in Morristown, N.J., has $12.8 billion in assets in its U.S. pension plans and $3.9 billion in its non-U.S. pension plans.
Under its new mark-to-market accounting, Honeywell plans to recognize some $5.5 billion of those deferred losses, splitting them up among its 2010 financial statements and for prior years by restating their financial statements, Mr. Anderson said in the transcript of the Nov. 16 teleconference. As a result, “we'll be recasting our reported financials to reflect the impact of the recognition of those losses in the years in which they incur (or) were incurred, and we'll no longer be amortizing deferred losses going forward,” he said.
Most of the Honeywell pension losses will be reported in prior years, including $3.29 billion in 2008. Making that change, for instance, reduced 2008 corporate net income by $1.98 billion, according to a Honeywell report.
Honeywell, in its modified market-basis accounting, plans to recognize annually any pension plan gains or losses in excess of a so-called corridor of 10% of the greater of the market-related value of plan assets or the plans' projected benefit obligation. Honeywell will defer recognizing gains or losses that fall within the corridor.
AT&T and Verizon in adopting the new approach got rid of that corridor, typically used as part of the amortized method of accounting.
At companies with defined benefit plans, Mercer's Mr. Alpert noted that in general, the huge pension plan losses in 2007 and 2008 will be amortized as an expense for possibly five or 10 years, reducing corporate income. But companies adopting the new accounting will avoid carrying the losses.
“The move isn't right for everyone, because of the volatility it brings to (corporate) earnings” by recognizing actual market movements in the year they occur rather minimizing volatility by smoothing them over a number of years, Mr. Alpert said.
For Honeywell, Mr. Anderson said “the adoption of (mark-to-market) accounting now, while (interest rates) rates (for discounting pension liabilities) are stable and likely to rise over the next 24 months, mitigates the potential for pension expense downside volatility.”
“Honeywell is taking steps to enhance the visibility and limit the volatility of pension expense going forward by reducing our assumed rate of return, evaluating our asset mix, and looking for more of a matching portfolio as we approach fully funded status over the next several years,” he said.
“Convergence is in the air,” Mr. Alpert said. “Sometimes an idea gets going and gets it own head of steam and everybody starts doing it.”
Mr. Alpert doesn't have an opinion on whether the new accounting change is better than the current method. “In theory, an investor could do all these adjustments on his own” because the detail is in the financial statement footnote anyway, he said. “The change in accounting doesn't change the fundamental operations of companies or pension plans, but only how it gets presented.”
“(M)ark-to-market is where the accounting world is headed and it's where international standards are today,” said Honeywell's Mr. Anderson in the teleconference transcript. “(W)hat adds credence and momentum to that (accounting) change is the recent IASB proposal, which is getting a lot of attention.”
Francis J. Shammo, Verizon executive vice president and CFO, said the new approach “actually is a preferable accounting method and one that aligns with the fair value accounting concepts and current (International Financial Reporting Standards) proposal,” according to a Jan. 21 teleconference with investors. Verizon, based in New York, has $25.2 billion in pension assets.
Verizon has been considering the new accounting for some time and “accelerated our action” and adopted this change now after AT&T, Honeywell and “some other large-cap companies” recently announced their adopting of the market-based approach, Mr. Shammo said.
The accounting change won't affect pension plan funding requirements, Mr. Alpert and the corporate executives agreed.