Unhappy auditors and plan sponsors may be roaring in response to the outcome of yesterday's FASB board meeting. In case you missed it, Norwalk-based accounting rulemakers opine in favor of enhanced asset risk disclosures. Despite industry arguments to the counter, FASB concludes that benefits outweigh costs, citing credit-related large losses as a factor in their decision to enhance plan transparency.
As stated in our July 15, 2008 post ("FASB Meets to Unlock Pension Investment Risk Information"), critics offer that FAS 132(R) compliance entails time-consuming data collection and analysis, across asset categories and fund managers and, in some cases, for multiple corporate entities. According to CFO.com reporter Marie Leone, FASB chairman Bob Herz (himself a former pension fiduciary) favors layers of information. A plan that allocates four out of every ten dollars to equities would be asked to disclose industry and sector concentrations as follows:
- 40% in equities
- 25% of that 40% in pharma
- 50% of that 25% in high-growth pharma stocks.
Leone adds that FASB board members unanimously dismissed the need for a materiality guidance rule, also concluding that "drilling down to the underlying assets that make up mutual funds, trusts, and fund of funds was not necessary" as long as qualitative text is provided to financial statement users. Click to read "One Step Forward on Pension Disclosures" by Marie Leone (CFO.com, July 16, 2008).
Click to access the FASB audio file for "Disclosures about plan assets" (July 16, 2008 FASB board meeting). Noteworthy is the discussion about what constitutes an "optimal" level of granularity, while acknowledging that some fund managers are VERY reluctant to say too much about how they invest.
Call me circumspect but one wonders whether point in time qualitative information would be better replaced with a description (even if somewhat broad) of risk management and valuation policies and procedures for (a) the plan sponsor and (b) external money managers, respectively.
Process is extremely important. An investment may not return much over a given period(s). However, if financial statement users know that a plan sponsor (and/or asset managers, in the case of outsourcing the investment function) is regularly measuring and managing risk, there may be less angst on the part of nervous beneficiaries and shareholders.
What an interested party does not know (and can't control or influence as a result) is a sure way to lose sleep.