The Financial Accounting Standards Board’s crusade to get companies to report their financials in fair-value terms is plunging deeper into the forests of pensions and health care benefits.

Last year, FASB required pension plan sponsors to record the funded status of the plans on their balance sheets. At the same time, FASB has been working to spread the gospel of fair-value reporting to the far reaches of accounting. Put the two together and you get the inevitable question: How should employers apply fair value to the newly reported pension-plan assets on the balance sheet?

At its August 2007 meeting, at a time when the subprime crisis was starting to emerge, FASB directed its staff to look into ways to improve disclosures about plan assets in Statement 132(R) Employers’ Disclosures about Postretirement Benefit Plan Assets. The project would be part of the second phase of its project to overhaul the accounting for traditional pensions and retiree health care plans. The first phase culminated in a following hard the requirement that employers lift postretirement benefit disclosure out of the footnotes and into balance sheet.

In November, the board agreed to broaden the effort to include disclosures of fair-value measurements of plan assets. It made that move based on its decision that the disclosures in FASB Statement No. 157, Fair Value Measurements, don’t apply to retirement plan assets.

On current balance sheets, employers lump together plan assets measured at fair value with benefit liabilities that aren’t, yielding a net amount not measured at fair value. Also, it’s hard for plan sponsors to apply Statement 157, which requires companies to report earnings gains or losses immediately, to postretirement benefit accounting, which allows delayed recognition of gains and losses.

The result is FASB Staff Position (FSP) No. 132(R)-a, which would amend Statement 132 (R), which was issued last week. FASB wants to get feedback from its constituents on a proposed guidance aimed at improving “the quality of financial reporting by increasing disclosures about the types of assets held in postretirement benefit plans.” Respondents have until May 2 to comment.

To many employers, the plan is likely to amount to overkill. The proposal represents “three steps in the right direction where one step would be enough,” John Ehrhardt, a principle at Milliman, an actuarial consulting firm in New York, told CFO.com. Despite all the disclosures the proposal would require, it still doesn’t disclose mismatches between employer assets and liabilities, he says.

Users of financial statements, however, complained to FASB that “that many employers solely provide the categories of equity, debt, real estate, and other investments when disclosing each major category’s percentage of the fair value of total plan assets held.” Those broad categories of assets “are not specific enough to determine the types of assets held as investments and the related concentrations of risk that may arise from a lack of diversification.”

Indeed, the FASB plan would ask plan sponsors to be a whole lot more specific about the kinds of assets in their plans. The current rule, Statement 132(R), requires only that an employer disclose the percentage of the fair value of total plan assets for each major category of plan assets, “indicating that major categories include, but are not limited to, equity securities, debt securities, real estate, and all other assets.”

In contrast, the new proposal would require plan sponsors to disclose separately on its annual balance sheet the fair value of each “significant” category of plan assets. The categories would include cash and cash equivalents; equities; national, state, and local government debt; corporate debt; asset-backed securities; and structured debt.

Apparently with the current economic crisis in mind, the accounting board would also require plan sponsors to report the fair value of their derivatives. The reporting would go deep, reporting the hedging instruments separately by type of contract. An employer would have to list, for instance, whether the plan assets are in contracts that hedge such things as foreign exchange, equities, commodities, credit. They would also have to provide fair values of their assets invested in hedge funds; private equity funds; venture capital funds; and real estate.

FASB’s staff is also suggesting that employers should be required to reveal “the nature and amount of a concentration of risk arising within or across categories of plan assets”—in other words, how much or how little their risks are diversified. For an example, the staff had real estate on its mind once again: “[I]nvestments in real estate can be made directly by the plan, through a real estate investment trust, or through a hedge fund that holds a significant position in real estate.” Thus, a plan that might seem diversified by investing directly, through a REIT, and through a hedge fund has actually concentrated its risk in the area of real estate.

Under the FASB proposal, employers would also have disclose facts that enable the users of financial statements to assess what valuation methods were used to produce the fair-value figures.