FASB Rule Puts Pensions on Balance Sheet

The board will start requiring publicly traded companies to state the underfunded or overfunded status of their pension and benefit plans on their financials at the end of fiscal years ending after December 15.

The clock for putting the funded status of pension and retiree-benefit plans on corporate balance sheets started ticking on Friday, when the Financial Accounting Standards Board issued a standard marking out the guidelines for the first phase of its project for revamping retiree-benefit accounting.

FASB will begin requiring publicly traded companies to state the underfunded or overfunded status of their pension and benefit plans on their financial statements at the end of fiscal years ending after December 15. All other entities must start reporting that status at the end of the fiscal year ending after June 15, 2007.

In a sharp departure from past practice — in which companies typically report three quarters’ worth of retirement-plan results, say, in footnotes to their 10-Ks — the new FASB standard will also require most employers to reveal a whole year of their plans’ assets and liabilities on their balance sheets. That requirement will be effective for fiscal years ending after December 15, 2008.

The standard, FAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans, will also require companies to include estimates of their future pension liabilities on their balance sheets. In issuing that requirement, the board overrode objections from employers and actuaries about the possibility of inaccuracy in such estimates.

In the new standard, the funded status of a pension will be defined as the difference between the fair value of a plan’s assets and the projected benefit obligation, a gauge of liabilities that includes estimates of employee salary increases and other costs far into the future. Opponents of the metric favored the use of an accumulated benefit obligation because it doesn’t include estimated future pay increases.

In FASB meetings on the issue, board members made it clear that their prime constituency in at least the first phase of the pension project has been investors. In a release accompanying the new standard, the board said, however, that it “will make it easier for investors, employees, retirees, and others to understand and assess an employer’s financial position and its ability to fulfill the obligations under its benefit plans.”

Under previous accounting standards, the funded status of retiree-benefit plans “was not always completely reported in the balance sheet,” according to the release. “Employers reported an asset or liability that almost always differed from the plan’s funded status because previous accounting standards allowed employers to delay recognition of certain changes in plan assets and obligations that affected the costs of providing such benefits. Past standards only required an employer to disclose the complete funded status of its plans in the notes to the financial statements.”

With the completion of the first phase of its overhaul of retiree- benefit accounting, FASB expects to collaborate with the International Accounting Standards Board on a second phase. That phase, likely to be much more complex than the first, could include the elimination of employers’ ability to “smooth” pension values over a number of years.

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