So Long Footnoted Liabilities

Pensions and other retiree benefits are graduating to the balance sheet.

Verizon, Ford, and ExxonMobil, pay attention. It looks as though pensions and other retiree benefits are about to graduate from the footnotes to the balance sheet. And companies that have previously been able to hide underfunded retirement programs may have to count them as liabilities — often multi-billion-dollar liabilities.

In November, the Financial Accounting Standards Board voted to move toward a proposal that would require companies to report the difference between the net present value of their pension- and other retirement-benefit obligations and the amount the company has set aside to meet those obligations. And although a final decision is a year or more away, the numbers won’t be pretty.

Standard & Poor’s, in fact, estimates a retirement-obligations shortfall of some $442 billion in the S&P 500 alone. Indeed, it is difficult to overstate the potential impact of the FASB plan, which is expected to be only the first phase in a larger effort to overhaul the accounting treatment of pensions and benefits. “We believe this FASB project will have a significant impact on stock evaluations, income statements, and balance sheets, and will become the major issue in financial accounting over the next five years,” S&P wrote in its December report.

The news was welcome to many in the accounting business who have been concerned that current rules allow companies to hide retiree obligations in the footnotes. John Hepp, a senior manager with Grant Thornton LLP, praised the board’s decision to move toward a “simplified approach. We think this will be a big step forward.”

But it won’t be without pain for many companies faced with adding a large negative number to their balance sheets, such as telecom giant Verizon Communications Inc. S&P reported in December that Verizon has underfunded the nonpension portion of its postretirement benefits by an estimated $22.5 billion. The company is clearly trying to get a handle on retirement benefits and health-care costs, announcing that same month that it will freeze the pension benefits of all managers who currently receive them.

While Verizon refused to comment, it is far from alone. Ford and General Motors have underfunded their retirement obligations by $44.7 billion and $69.0 billion, respectively, and other big names facing a shortfall include ExxonMobil ($16.4 billion) and AT&T ($14.8 billion).

If any of these companies think the markets will treat these obligations as a one-time problem, they had better think again, says S&P equity market analyst Howard Silverblatt. “Moving this onto the balance sheet is going to wake people up,” he says. “The bottom line is that shareholder equity [in the S&P 500] is going to be decreased by about 9 percent.” And as companies begin to explore their legal options for limiting the financial damage — including paring back benefits even further — Silverblatt predicts that the issue will become more politicized and remain in the public eye for years to come.

The Top 5 Underfunded Plans: Who Will Fall Short?
Company Funding Status
(In Negative $Millions)*
General Motors -68,989
Ford Motor -44,659
Verizon Communications -20,817
ExxonMobil -16,446
AT&T -14,798
*Includes pension- and other retirement-benefits obligations as of 2004.
Source: Standard & Poor’s

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