FASB Proposes Bringing Pension Obligations to Balance Sheet

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The Financial Accounting Standards Board (FASB) issued a proposed statement on Friday that would require public companies to recognize the overfunded or underfunded position of defined benefit postretirement plans on their balance sheets, effective for fiscal years ending after December 31, 2006. The proposal would also require companies to measure the value of the plans as of the balance sheet date.

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Private companies and nonprofit organizations would be subject to the requirement for fiscal years beginning after December 15, 2007.

The exposure draft represents the completion of the first phase of the Board's announced plan to reconsider Statement No. 87, Employers' Accounting for Pensions, and Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. The second phase will address timely measurement of the status of pension funding, Reuters reports, among other remaining issues. FASB said that the Board expects to collaborate with the International Accounting Standards Board in Phase Two.

“The current accounting standards don't provide complete information about these post retirement benefit obligations,” said George Batavick, FASB member, Reuters reports. “We think (the proposal) will provide more complete, more useful, more transparent information for investors.” The proposed change would not have any effect on corporate profits, just the balance sheet, the New York Times says.

Some analysts say that the new requirement could wipe out shareholder equity, especially for older companies in the auto, airlines and steel industries with heavily unionized work forces, the Times reports.

“It is definitely the most significant change we've seen in pension accounting in quite some time,” Diane Mott, an accounting analyst at Bear Stearns told Reuters. She said that although sophisticated investors already make many of those changes themselves, it can level the playing field for average investors.

A survey of 122 chief financial officers and comptrollers by the accounting firm Grant Thornton showed, according to Reuters, that 87 percent thought companies should be required to account for pension plans on their balance sheet.

The second phase of the FASB project, which is expected to be more controversial, will address the assumptions involved in calculating pension numbers and the timing of disclosure of changes in these assumptions, the Times said. For example, many companies have not yet disclosed losses in their portfolios from the 2000-2003 bear market.

FASB is seeking written comments on the proposal by May 31 and plans to hold roundtable meetings on the proposal on June 27, 2006 in Norwalk, Connecticut.

In another action last week, FASB amended its rule on accounting for the purchase of life settlements in a Staff Position report issued on March 27. Purchasers of life settlements will now be permitted to record the value of the life settlement by using either the investment method or the fair value method, Life Partners Holdings, Inc. says. Existing accounting rules had required the purchaser to “write down the initial transaction price to the cash surrender value of the underlying polices, which was typically less than the initial transaction price.” The text of the FSP, Technical Bulletin 85-4 No. FSB FTP 85-41, is available on the FASB Web site.

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