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New Pension Accounting: Volatility City?

(continued)

To see the effects the change in accounting treatment might have on a single company, consider Dupont's pension expense over the five years (see chart). The chemical company's adjusted expense figure swung from a 2,077 percent deviation between expected and actual results in 2002 to a negative deviation of 374 percent in 2006.

The study's results for percentage change to income from continuing operations was similarly "all over the map," said Mulford. Using the revised accounting treatment, the median company would have reported a 51 percent drop in income from continuing operations in 2002, while income would have risen by 9.8 percent in 2006.

When it comes to the volatility of individual companies, Boeing stands out as being especially affected by fair-value pension accounting (see chart). The aircraft manufacturer would have recorded a 177 percent dip in income in 2002, but a 168 percent rise in 2006. Alcoa would have suffered from a big swing in volatility as well, going from a 306 percent drop in income in 2002 to a 9.8 percent rise in 2006. Caterpillar's fair-value adjustments would have been recognized as a 171 percent decrease in income in 2002 and an 11 percent jump in 2006.


Pension expense swings
Percentage change in adjusted pension expense if recorded at fair value. (%)
Company name* 2006 2005 2004 2003 2002
3M -150.5 32.0 -72.0 232.0 1182.3
Alcoa -64.5 4.8 53.2 61.2 1000.4
Altria Group -91.5 45.6 168.5 93.8 716
Boeing -145.1 -121.7 -35.0 195.9 5314.9
Caterpillar -93.6 199.6 0.9 271.6 1338.0
Citigroup -184.9 -81.9 247.3 98.2 1338.9
Dupont EI de Nemours -474.8 -56.2 68.4 -65.8 2077.0
Johnson & Johnson -18.4 27.8 85.9 138.7 993.9
JP Morgan Chase 64.1 71 136.6 22.2 1068.5
Merck & Co. -134.2 -12.4 -26.7 26.1 779.6
United Technologies -215 -2.5 33.5 107.7 2471.3
Verizon Communications -258.8 -49.7 -200.4 98.6 N/M**
*Sampling of Dow 30 companies. **N/M = Not meaningful. If the expense changed from a negative number (a benefit) to a positive number (a cost), the percent change is not calculated.
Source: "The Effects of Enacted and Proposed Pension Accounting Changes on Leverage, Profitability and Earning Volatility," 2008, Georgia Institute of Technology.

Reader CommentsDisplaying 3 of 3

  • Daniel Moore

    Mar 27, 2008 11:04 AM ET

    My point about liabilities

    Liabilities were included, but apparently under the assumption that there will be no change in how to calculate the … more

  • Charles Mulford

    Mar 27, 2008 8:36 AM ET

    Fair Value of Pension Obligations Included

    We appreciate the opportunity to clarify how our study on pensions was conducted. We recalculated pension expense … more

  • Daniel Moore

    Mar 27, 2008 7:39 AM ET

    Mulford study half-baked

    The Mulford study, essentially an update of the 2002 Credit Suisse 'The Magic of Pension Accounting' got some things … more

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