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.
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Finally, on the issue of consolidation, FASB will take up the question of whether to put pension benefit obligations (PBO) on the liability side of the balance sheet and fair value assets on the asset side. Currently the net of those two numbers appears on the balance sheet. While that proposed change might appear to be merely a cosmetic one, it changes the leverage when you're thinking about such issues as debt-to-market cap, notes Steele. "It potentially forces people to think about the balance sheet differently," says Steele.
Most observers believe that FASB's deliberations will be slow and laborious and are likely to continue for years. And given the trend, in which companies are moving away from DB plans, Baruch College Zicklin School of Business professor Norman Strauss says: "It may be that FASB finishes its work on accounting for pension expenses in the income statement just in time for the last DB plan in America."
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