Proposed Changes to U.S. Accounting Standards
As briefly mentioned in my previous blog, The Financial Accounting Standards Board (FASB) is proposing to drastically change employers´ accounting for pension, retiree medical and other post-retirement benefits with their recently released Exposure Draft on March 31, 2006. They welcome comments until May 31, 2006.
These changes as proposed could add billions of dollars to corporate balance sheets, reduce shareholder equity and cause immeasurable problems with the already shaky Defined Benefit pension system.
While the intent of FASB to improve transparency is honorable, the price of its´ proposals are too high and left alone could kill defined benefit plans.
The main areas of conflict with their intentions are:
(1) Include significant liabilities on companies´ balance sheets for non-pension post-retirement benefits. These benefits can generally be cancelable at anytime as evidenced over the last number of months with many major corporations eliminating such benefits for all those that they can legally reduce or eliminate. Inclusion on the balance sheet should just be for accrued vested entitlements.
(2) Moving from the current practice of Accrued Benefit Obligation (ABO) to Projected Benefit Obligation (PBO) will artificially increase liabilities for many plans, and undoubtedly cause the cancellation of more defined benefit plans. Projecting benefits out for assumed compensation increases other than one year at a time should not be relevant. Companies are in complete control of total compensation which they increase for competitive reasons. So as compensation goes up increases in pension value should also go up and in fact the ABO should still be used.
(3) All calculations of assets and liabilities need to be done at year-end date versus the current provision of up to three months earlier. This can create undue hardship on plan sponsors in order to gather the necessary information, conduct complex calculations, analyze results and report within an abridged time-frame and could also lead to future freezing of defined benefit plans.
(4) Retrospective changes would need to be done with all years currently shown in financial statements restated using the new rules for comparison purposes. This will provide undue hardship on employers to recalculate for past years.
Although the FASB changes have been constructed with the right intentions, I do not believe that they will accomplish their desired goals. Moreover, their changes might actually be the death blow to the defined benefit pension system.
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Again, I just want to remind you of our next Employer of Excellence annual conference this year at the beautiful Red Rock Casino Resort Spa in Las Vegas from October 24-27th. This year there will be a separate Global Benefits Track - Rolling Dice Across Borders sponsored by IBIS (International Benefits Information Service) in addition to our normal benefits workshops. I look forward to seeing you all there!
