Business Objects to FASB’s Plan for Measuring Future Pension Costs

Participants in a public roundtable held on Tuesday, June 27, at the Financial Accounting Standards Board (FASB) headquarters in Norwalk, Connecticut, engaged in heated debate on FASB’s plan to use a projected benefit obligation (PBO) metric for measuring pension liabilities that will appear on the balance sheet according to a revised standard, rather than the accumulated benefit obligation (ABO) that most companies prefer. The PBO metric would require companies to project salary increases and other costs into their calculation; the ABO method does not require estimates of future liabilities, CFO.com reports.

The new standard, which FASB is planning to issue in September, represents the completion of phase one of their planned revision of pension accounting. This standard will take effect for fiscal years ending after December 16, 2006, Reuters reports. A second standard will address additional pension accounting issues.

“There is very little disagreement that the obligation should be on the balance sheet, but there are some different views as to how the obligation will be measured,” said George Batavick, a FASB board member, according to Reuters.

“We got some signals well ahead of time that certain groups were going to bring up the measurement issue,” he added.

Actuaries strongly opposed the PBO method, Reuters says. “PBO is not an appropriate measure of benefits that the employer has guaranteed ... since these additional costs will only be realized if the employee continues to work,” said William Sohn, chairperson of the American Academy of Actuaries’ Committee on Pension Accounting.

Scott Taub, the Securities and Exchange Commission’s (SEC's) chief accountant argued that FASB must discuss the issue of measurement. “If there’s no discussion, that is something we will be watching out for," he said, according to CFO.com. The SEC is “concerned by people’s unwillingness to use estimates,” he continued. “We’re not looking for each number to be 100 percent exact when you book numbers in your financial statements.”

The investor community favors the use of the PBO method. “I think the PBO is the number that is the most meaningful for a plan that will stay in place,” said Janet Pegg, an accounting analyst at Bear Stearns, according to Reuters. Fear of PBO may, however, prompt employers to freeze or cut pension benefits.

Some propose that FASB adopt a temporary solution since the proposal that companies recognize their pension liabilities is the first part of a two-phase plan to revise pension accounting rules, Reuters says

Sohn recommends that companies use ABO on balance sheets first, because it will allow further debate. “It’s not a matter of just looking at those two,” Batavick says. "There might be five or six other ways to measure it.”

FASB is considering more radical steps in phase two of their proposed revision of pension accounting rules, according to Chairman Robert Herz in testimony before the Senate Banking, Housing and Urban Affairs Committee on June 14, CFO.com reported separately. The Board is considering elimination of “smoothing” for pension investment results, and Herz suggested that companies prepare for this change by putting more money into their funds. They could also consider using more conservative investments, like bonds.

International Accounting Standards Board (IASB) Chairman David Tweedie, who also testified, said that while FASB and IASB were considering the same issues, they were doing it in reverse order and learning from one another. IASB will address “smoothing” in their first phase, CFO.com says.

The FASB standard for phase two will not be completed for another two or three years, CFO.com says. FASB and IASB will then reconcile their respective rules for a global standard.

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