In late March or early April, the Financial Accounting Standards Board (FASB) is set to take up the thorny issue of measurement when it comes to including liabilities and assets from defined benefit (DB) plans and other post-employment benefits (OPEB) on corporate income statements as prescribed in FAS 158. According to John Steele, a senior consulting actuary in the retirement practice at Watson Wyatt Worldwide Inc., FASB will need to address four principal issues: 1) liability measurement; 2) profit and loss recognition; 3) classification of the pension expense; and 4) consolidation of pension liabilities on the balance sheet.

In the area of liability measurement, FASB will have to decide what are the obligations that need to be measured, what assumptions to use in measuring those obligations, and how to apply fair value principles in those liabilities. In P&L recognition, FASB will grapple with whether to keep or get rid of delayed cost recognition (smoothing) of pension expenses on the income statement.

Classification, notes Steele, will be a key area. Currently, the pieces that make up pension expenses are calculated and then netted, with the total amount going into the operating cost; classification would break apart the pension cost, likely putting part into operating costs, part into investing costs and part into financing costs. "If the volatility that is going to be added by marking the income statement to market is allocated to something that is a non-operating cost, then it kind of puts it into a safe place because operating costs are typically what equity analysts focus on," says Steele. He adds that if FASB adopts that approach to classification, then the overall impact of the income statement changes is likely to be positive for many companies.