FASB Pension Draft Draws Fire

The Financial Accounting Standards Board (FASB) issued an exposure draft Employers’ Disclosures about Pensions and Other Postretirement Benefits that required all written comments for the proposal be submitted by May 31, 2006. That is exactly what they got. CFO.com reports that the draft is stage one of two stages designed to overhaul retiree benefits accounting.

The FASB received some 112 letters from senior management and other corporate executives voicing strong opposition to the implementation of these changes. The intention of the changes is to provide clearer and fuller accounting of pensions and other postretirement benefits, according to CFO.com. The FASB plans to host several roundtable meetings concerning this exposure draft on June 27.

To provide better and more complete information, the FASB is responding to concerns raised by investors and other users of financial statements expressing a need for greater transparency of pension information, according to CPA Letter.

One provision will change the deadlines for the measurement of pension balances and add to the turmoil of annual closing periods. Richard Levy, senior vice president and controller of Wells Fargo & Company, wrote in his May 31 letter to the FASB that, “A requirement to use a year-end measurement date will severely strain and possibly compromise the current closing schedules and financial reporting process,” according to CFO.com.

Objections stemming from the requirement for public companies to use assumptions about future pay levels in the calculation of balance-sheet liabilities are many. CFO.com reports that those liabilities could possibly be inflated with the use of assumptions.

The measurement of final retirement plan balances in the middle of an already busy annual closing schedule is another objection, reports CFO.com. Levy wrote in his letter to the FASB, “For large companies with numerous postretirement benefit plans, a reasonable amount of time after the measurement date needs to be provided to all for the collection of plan data and preparation of required general ledger entries and financial statement disclosures.”

Levy continued in his letter, “Changing the measurement date to coincide with the company’s year end may require companies to either revise their budgeting process or cope with reoccurring budgeting variances in this area,” according to CFO.com.

A date change might also increase the demand for actuaries and other benefit services providers, also increasing compliance expense. Loretta Cangialosi, a vice president and controller at Pfizer, wrote to the FASB, “Overall costs would increase since companies would be competing for the limited resources of service providers in gathering this information in a relatively short period of time,” according to CFO.com.

Charles Cooley, Lubrizol Corporation’s CFO, told CFO.com, “If the current exposure draft is adopted, the new measurement date requirements could put added pressure on [pension and benefit-plan] trustees, actuaries and company sponsors to obtain the required information in a timely manner. This could add days, if not weeks, to the closing process if the required information is not available and could push back earnings releases and filings.”

The effective date of these proposed changes is December 15, 2006, and all fiscal years thereafter. CFO.com reports that Cooley made the suggestion that the effective date be moved up to December 15, 2007, in order to give companies more lead time to conform.

Other provisions would require pension sponsors to enter the economic status of their retirement plans on the balance sheet. This status shows if a plan is overfunded or underfunded and has only appeared in footnotes to financials up to now. This status is the difference between the fair value of benefit plan assets and the “projected benefit obligation” or PBO. The PBO is the net present value of all pension benefits earned by employees calculated to a certain date, according to CFO.com. This calculation is obtained using assumptions about future pay raises and career lengths.

If adopted, this exposure draft would amend these four FASB statements, according to Ernst & Young. These statements are:

  • FAS 87, Employers’ Accounting for Pensions
  • FAS 88, Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits
  • FAS 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions
  • FAS 132 (Revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits

CFO.com reports that the second stage of the FASB will address “smoothing” or the practice of averaging out pension values over time, rather than reporting these numbers at fair value.

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