Russ Banham, CFO Magazine
August 1, 2006

So long, defined benefit plans

I assume that it is the ultimate goal of the FASB to eliminate defined benefit plans altogether. Many companies struggle with whether to continue those plans - given all the market vagaries that drive them up and and down; the additional reporting requirements, etc. Now the new, additional requirements...timing wise, future crystal balling wise, and otherwise....should suffice to push a batch of those remaining companies over the line into the 'defined contribution' zone....

Posted by David McConnell | Aug 10, 2006 8:51 AM ET

Pension Liability Anomaly - Future Tense Present Imperfect

The estimation and recording of future pension liabilities of a company represent the quantification of an element of future expenses which have related future impacts on the company.

However, whenever an estimation of future values of pension obligations occurs, there is often overlooked the simple accounting corollary that these expenses have a revenue or shareholder-benefit value. This value should redound at a level higher than the corresponding expense: it will be expected to reflect a future earnings potential at a level higher than and directly proportional to the expenses that will be incurred and regarded as part of the company's future pension liabilities.

What we are saying is that there is an implied co-relation between expenses and income and, from a business expectation, an implied relationship that income will always exceed the expense - for the firm/ company to remain profitable and viable.

So, to bring on book future expenses without considering this relationship on the revenue side, does not seem to make good business sense nor acceptable business logic.

Put another way: If an estimate of future earnings (or if a future increase in shareholder value) which should be generated as a result of certain projected expenses now being carried on the balance sheet - are not being simultaneously recorded on the balance sheet, it would stand to reason that these expenses (quantified as liabilities for future pension obligations would be deemed NOT to be counterbalanced by potential future benefits if traditional accounting equations are to be maintained.

So, can we be forward-looking on both sides of the balance sheet? Or should we be looking simply at the real need to record 'present' pension obligations which may have been avoided by believing that all pension obligations were a future cost to the company?

Posted by Stephen Noel McCarthy | Aug 7, 2006 3:55 PM ET