Pension Accounting - Here It Comes
The long-awaited U.S. pension accounting overhaul is coming. According to their website, the Financial Accounting Standards Board ("FASB") will announce new rules tomorrow morning in the form of FASB Statement No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans.
Part of a multi-phase project to promote transparency as relates to post-retirement benefits accounting, companies will initially have to recognize the "overfunded or underfunded status of a defined benefit postretirement plan measured as the difference between the fair value of plan assets and the benefit obligation." Income statement adjustments are expected to follow thereafter.
Already, experts are predicting a dire impact for more than a few companies. According to the Center for Financial Research & Analysis, their survey of S&P 100 firms suggests a reduction to total equity of nearly eight percent. Their Portfolio Pension Monitor provides investors with details on a company by company basis.
What has most people worried is not only the direct impact of the new accounting rule but also the domino effect that is likely to occur. CFO.com earlier quoted John Ehrhardt, a principal with the actuarial consulting firm Milliman, as saying that new pension accounting requirements "could wipe out a company's entire net worth, forcing some to grapple with lenders on the terms of their loans or else fall into default. (See "FASB Pension Rule Could Spur Loan Woes" by David M. Katz, April 13, 2006.)
AltAsset.net just published summary results of a Grant Thornton survey that bears bad news for companies with defined benefit plans. They quote Mat Bhagrath, partner at Grant Thornton Corporate Finance as saying: "Following the introduction of new accounting rules, pension fund deficits have risen to the top of the corporate agenda. It is hardly surprising that private equity investors have become increasingly cautious about investing in companies with a defined pension shortfall." (See "Private equity investment in companies with a defined pension scheme deficit plummets", September 27, 2006)
Not one to underestimate the import of this brave new pension world, other accounting issues loom large. With little fanfare, FASB released its Statement of Financial Accounting Standards No. 157, Fair Value Measurements, a few weeks ago. Its potential impact is huge.
OPEB for public funds is right around the corner in the form of Statement No. 45, Accounting and Financial Reporting by Employers for Postemployment Benefits Other Than Pensions and the Government Accounting Standards Board has announced its intention to create what I call a "FAS 133 look alike" for states, cities and other municipal users of derivative instruments.
Add other regulatory mandates for reporting and the picture is clear. Pension professionals everywhere are going to be very busy.
Are you ready?
