Health Benefits

FASB: Put Pension Status on the Balance Sheet

The board takes the first step in its purported overhaul of the current retiree-benefit accounting system.
David KatzMarch 31, 2006

The Financial Accounting Standards Board proposed Friday that employers should put the amounts that their retiree-benefit plans are underfunded or overfunded on their balance sheets.

FASB also wants to require employers to gauge their retiree-benefit-plan assets and obligations as of the date of their financial statements. The proposed changes would boost “the transparency and completeness of financial statements for shareholders, creditors, employees, retirees, donors, and other users,” the board claimed.

The exposure draft the board issued stems from the first phase of a previously announced “comprehensive project to reconsider guidance” in Statement No. 87 (Employers’ Accounting for Pensions) and Statement No. 106 (Employers’ Accounting for Postretirement Benefits Other Than Pensions). A second, much more complex phase will tackle the entire retiree-benefit accounting system, including health benefits as well as pensions. The board expects to link up with the International Accounting Standards Board on that part of the effort.

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Current accounting standards don’t provide complete information about postretirement-benefit obligations, according to FASB. For example, the standards enable an employer to recognize an asset or liability in its balance sheet that almost always differs from its overfunded or underfunded positions. Instead, employers report their current funded status in the notes to financial statements. That incomplete reporting spawns delayed recognition of changes in plan assets and liabilities that affect the costs of providing benefits, the board asserted.

Indeed, Bradley Belt, the outgoing executive director of Pension Benefit Guaranty Corp., has contended that because employers operate under both generally accepted accounting principles and Employee Retirement Income Security Act rules, they sometimes engage in “information arbitrage” — choosing whichever system tells a better story. That has enabled some plan sponsors to report that their plans are “fully funded” when they are actually running short of funds.

“Many constituents, including our advisory councils, investors, creditors, and the [Securities and Exchange Commission] staff, believe that the current incomplete accounting makes it difficult to assess an employer’s financial position and its ability to carry out the obligations of its plans,” said FASB member George Batavick. “We agree. Today’s proposal, by requiring sponsoring employers to reflect the current overfunded or underfunded positions of postretirement benefit plans in the balance sheet, makes the basic financial statements more complete, useful, and transparent.”

With the exception of the requirement to measure plan assets and obligations as of the balance-sheet date, FASB’s proposed changes would be effective for fiscal years ending after December 15. The board would require public companies to apply the proposed changes to the measurement date for fiscal years beginning after December 15. Nonpublic entities, including nonprofits, would have to apply the changes in fiscal years beginning after December 15, 2007.

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