Upfront: Weighing The FASB's Pension Plan Project

The Financial Accounting Standards Board (FASB) sent shudders through many retirement-plan sponsors in November when it voted to reconsider its statements on accounting for pensions and other postretirement benefits. The announcement of the new project came less than a year after the board issued its much-debated standard on accounting for share-based payments. Companies are just starting to assess the potential effects of the changes that the FASB wants to see. New research paints a gloomy picture of the likely impact on the bottom line.

The FASB sees the initiative as part of its ongoing drive "to ensure that standards for pensions and other postretirement benefits provide credible, comparable, conceptually sound and usable information to the public." The board will reconsider its guidance in FAS 87, which governs accounting for pensions, and in FAS 106, which covers accounting for other postretirement benefits. The effort will unfold in two stages. In the first, which it expects to be finalized by the end of this year, the standard setter will seek to require companies to pull key financial information about their plan's funding status out of the footnotes of financial statements and place it squarely on the balance sheet. The second, more long-term phase will address a broad range of issues including methods for measuring companies' postretirement obligations and for recognizing the various elements of that cost.

A study by professional services firm Towers Perrin looked at how the planned rule changes would have affected the financial results of the 78 Fortune 100 companies that sponsor defined-benefit retirement plans if they had been in effect in 2004. These organizations would have been required to recognize an additional liability of $331 billion on their balance sheets at year-end 2004, compared with the $62 billion that they actually recognized. After tax adjustments, the planned changes would have wiped out $180 billion in shareholder equity, 9.3 percent of the group's total.

An analysis by Watson Wyatt Worldwide found similar results. The consulting firm studied the effect the new rules would have had on the U.S. pension finances of Fortune 1000 sponsors for fiscal year-end 2004. The total decrease in shareholder equity for this group was 9.5 percent. But the study noted that some companies would have reported an increase in shareholder equity.

The Towers Perrin study also looked at the potential for increased balance-sheet volatility. An additional 10 percent return or loss on assets, if recognized on the income statement, would have changed the Fortune 100 companies' pretax income by 19 percent.