GAAP and IFRS

One Step Forward on Pension Disclosures

The next round of pension accounting rules will include more "granular" information about assets.
Marie LeoneJuly 16, 2008

Pension investment disclosures in financial statements will become more “granular” in the future, though it’s not yet clear what additional information will be required or what format will be mandated.

The Financial Accounting Standards Board met on Wednesday to discuss its project on post-retirement benefit obligations, focusing on how to update disclosures about plan assets. The meeting was part of FASB’s effort to rework guidance on FAS 132(R), Employers’ Disclosures About Pensions and Other Postretirement Benefits, to improve transparency about the types of assets held in plans.

In general, the board members agreed that more qualitative information about asset categories, and investment concentration and risk, is needed to complement the largely quantitative data that now appears in financial statements and accompanying footnotes.

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As a former fiduciary of pension plans, FASB chairman Robert Herz said he would like to see disclosures aligned with the way pension professionals make investment decisions, which would include a description of investment strategies and how the plan is achieving its goals through asset allocation.

For example, Herz would expect future pension disclosures not only to reveal that a plan is invested, say, 40 percent in equities, but to say that 25 percent of those equities are concentrated in the pharmaceutical industry, of which half are in high-growth stocks. The disclosure would also note, for instance, that none of the holdings exceed the plan’s policy of investing more than 5 percent of the assets in any one stock.

Further, board member Leslie Seidman advocated a principle that required companies to use a “management approach” to disclosures. This means that the description of asset allocations would include information deemed important by the plan’s key decision-makers to a given reporting period. For instance, disclosures would include the chief investment officer’s concerns that the plan has, say, a 5 percent investment in collateralized debt obligations that were affected by the current subprime mortgage crisis.

The discussion was driven by 45 comment letters received from users, preparers, and auditors of financial statements. The comments focused on three areas: whether companies should disclose high-level information about which funds and trusts they invested in, or disclose information about the underlying assets in the fund; whether the list of plan asset categories in the proposed guidance should be changed; and whether materiality guidance should be provided for identifying significant plan asset categories.

The board was quick to rule on the materiality guidance issue, unanimously agreeing that it was not needed as part of FAS 132(R). And after some debate, most members agreed that drilling down to the underlying assets that make up mutual funds, trusts, and funds of funds was not necessary — although more qualitative disclosure would be required.

Board member Thomas Linsmeier commented that one way to solve the problem of not knowing what securities are held in funds — including hedge funds and private equity funds — is to identify the fund by name in the financial statement. This would give investors the opportunity to research fund performance. Naming the fund would also solve the additional problem some investors have with a lack of timely information provided by hedge funds and private equity funds, as well as foreign funds. Indeed, naming funds would help shed some light on investments that report results after pension plans file their own results.

On the issue of example categories, the board decided to take more time to develop a list, and accompanying table format, that sufficiently covers the areas that would be most useful to investors. Currently, the list provided in the proposed staff guidance is similar to the ones contained in other FASB rules. For example, the list of derivates categories in the proposed staff guidance is similar to the one contained in FAS 161, Disclosures about Derivative Instruments and hedging Activities.

Eventually, FASB will update FAS 132(R) to include rules pertaining to the disclosure of fair value of asset categories and disclosures about fair value measurement. But the board did not indicate when it would revisit those topics.