Fair-Value Revolution

Historical cost accounting is fading as Corporate America marches into a new era.

One current critique of 133 is that it allows two companies to account for the same transaction in different ways. It also enables a company to mark a hedging instrument at fair value without doing that for the hedged risk. Under the new proposal, all companies would use the same method of hedge accounting and each company would be required to use consistent accounting on both sides of a hedge.

5. Pensions: FASB’s fair-value crusade is plunging deeper into the forests of pensions. In November 2007, with the subprime-mortgage crisis in high gear, the board agreed to get plan sponsors to disclose the fair value of retirement-plan assets more broadly. On current balance sheets, employers lump together plan assets measured at fair value with liabilities that aren’t, yielding a net amount marked to market in mongrelized form.

The result is proposed guidance aimed at improving “the quality of financial reporting by increasing disclosures about the types of assets held in post-retirement benefit plans,” according to a FASB staff position issued in March. The FASB plan would require plan sponsors to disclose separately on their balance sheets the fair value of each “significant” category of plan assets, including cash and cash equivalents; equities; national, state, and local government debt; corporate debt; asset-backed securities; and structured debt.

FASB is also proposing that plan sponsors disclose the fair value of their pensions’ derivatives positions. Employers would have to list the hedging instruments separately rather than in aggregated form and classify them by type. For instance, employers would have to disclose, if significant, a plan’s hedges against such risks as foreign exchange, interest rate, and commodity price. They would also have to provide fair values of pension assets invested in hedge funds, private-equity funds, venture-capital funds, and real estate. To top it off, they would have to disclose facts that enable financial-statement users to assess the valuation methods used to produce the fair-value figures.

Those chores will take heavy lifting — especially for plan sponsors with a multinational presence, notes Kabureck. “If you’ve got a lot of foreign plans, it’s going to be hard to accumulate that information, because trusteed assets in pension funds are independent of the [parent] corporation,” says the Xerox accounting chief. — D.M.K.

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