Under the proposal, a sponsor would recognize the funded status of its benefits plan on its balance sheet, reflecting all previously unrecognized actuarial gains or losses, even if the plan were fully funded. Despite recent improvements in market returns, unrecognized actuarial losses linger because of sustained declines in interest rates. In effect, this proposal translates into reduced shareholder equity for the plan sponsor.
Economic purists maintain that markets are generally efficient, and since financial statement notes already disclose the funded status of benefits plans, their cries of lower share prices or impaired credit ratings are largely unfounded. The problem is that pure theory does not always translate into economic reality.
For instance, investors and analysts disagree as to whether the projected benefit obligation, the accumulated benefit obligation or some variant best depict the sponsor’s liability.
In phase two, the Board will tackle complex issues such as how to display cost elements in the statement of operations and measurement of the sponsor’s benefit obligations. Then, treading on new ground, the issue of whether post-retirement benefits should be consolidated into the balance sheet by the sponsor will be considered.
The notion of consolidating post-retirement benfits by the sponsor has its origins in the post-Enron era. As is the case with most of the ensuing accounting issues that followed, the trend is to account for more on the company’s balance sheet, including post-retirement benefits, rather than less.
From an accounting standpoint, the balance sheet is a reflection of a corporation’s access(not necessarily legal ownership) to assets. What does this imply about pension fund surpluses? Traditionalists—those who view plan sponsors and their benefit trusts as separate—will find this proposal illogical. If the benefits go onto the plan sponsor’s balance sheet, there is an implication that surplus belongs to the sponsor.
Therefore, if you instead believe that surpluses belong to employees(or to plan sponsors only when granted), then the proposal does not make sense. How can an accounting decision decide a legal matter?
The FASB has already made some significant decisions, and expects to issue a phase one exposure draft in early 2006, with implementation targeted for Dec. 31, 2006 for calendar year-end sponsors. Sponsors will have to put onto their balance sheets the net actuarial position of the plan, rather than the accounting position.
The FASB expects to conduct its second phase collaboratively with the International Accounting Standards Board(IASB). In early March 2006, the Canadian Accounting Standards Board(AcSB) discussed whether similar proposals should be required in Canada. Given the recently ratified strategic direction to move toward international accounting rules, the AcSB has decided to determine whether the IASB intends to make any modifications to its own accounting guidance before making a decision.
The real crux of the issue for accountants is defining the true cost of benefits to the sponsoring entity. In the past, disclosure and presentation enhancements have been used as interim solutions. When the second phase is complete, and when each major standard setter agrees on measurement, transparency will be achieved. Most would concede that this is still some years away.
Frank D’Andrea is manager, financial reporting and accounting policy with Hydro One in Toronto. email@example.com