Reynolds American Inc., Winston-Salem, N.C., adopted mark-to-market accounting for its defined benefit pension plans, a move “more quickly recognizing the effects of current economic and interest rate trends on plan investments and assumptions,” according to a company filing Monday with the Securities and Exchange Commission.
The tobacco company's pension plans had $4.9 billion in assets and $5.5 billion in liabilities as of Dec. 31.
The new accounting method will recognize actuarial gains and losses in the period in which they occur.
Under Reynolds American's old accounting method, the company had amortized gains and losses “into operating results over the average future service period of active employees in these plans,” the filing said.
The new accounting method “will not impact (corporate) cash flow or (pension) funding requirements,” Thomas R. Adams, Reynolds American executive vice president and CFO, said in a statement Monday.
The company expects to contribute up to $218 million to its pension plans in the fourth quarter, raising its total contribution for the year to potentially $309 million, including $91 million contributed in the first nine months of the year, according to an Oct. 28 SEC filing.
Mark-to-market accounting “increases transparency at the operating company level by reflecting current market returns, interest rates and health-care costs,” Mr. Adams said in the statement.
Reynolds American also adopted the new accounting for non-pension post-retirement plans.
Under its new approach for the pension plans, Reynolds American will recognize in the period in which they occur actuarial gains and losses that exceed 10% of the pension liabilities or the market value of pension plan assets.
In addition, to calculate the expected return on plan assets, Reynolds American “will no longer use an averaging technique permitted under generally accepted accounting principles for the market-related value of plan assets, but instead will use actual fair value of plan assets,” the filing said.
Reynolds American applied the changes retroactively, adjusting financial statements of earlier periods, the filing said.
The new method, including other post-retirement plans, raised Reynolds American's operating income for the first nine months of the year.
Under the new method, for the nine months, it reported $32 million in pension income and, including post-retirement plan adjustments, reported corporate operating income of $1.88 billion, the statement said.
Under the old method, for the nine months, it reported $76 million in pension expense, consisting of $105 million in amortized net pension losses and $29 million in pension income. Including post-retirement plans, it reported corporate operating income of $1.75 billion under the old method.