Business Objects to FASB's Plan for Measuring Future Pension
Costs
Participants in a public roundtable held on Tuesday,
June 27, at the Financial Accounting Standards Board (FASB)
headquarters in Norwalk, Connecticut, engaged in heated debate on
FASB's plan to use a projected benefit obligation (PBO) metric for
measuring pension liabilities that will appear on the balance sheet
according to a revised standard, rather than the accumulated benefit
obligation (ABO) that most companies prefer. The PBO metric would
require companies to project salary increases and other costs into
their calculation; the ABO method does not require estimates of
future liabilities, CFO.com reports.
The new standard, which FASB is planning to issue in September,
represents the completion of phase one of their planned revision of
pension accounting. This standard will take effect for fiscal years
ending after December 16, 2006, Reuters reports. A second standard
will address additional pension accounting issues.
"There is very little disagreement that the obligation should be
on the balance sheet, but there are some different views as to how
the obligation will be measured,・said George Batavick, a FASB board
member, according to Reuters.
"We got some signals well ahead of time that certain groups were
going to bring up the measurement issue,・he added.
Actuaries strongly opposed the PBO method, Reuters says. "PBO is
not an appropriate measure of benefits that the employer has
guaranteed ... since these additional costs will only be realized if
the employee continues to work,・said William Sohn, chairperson of
the American Academy of Actuaries・Committee on Pension Accounting.
Scott Taub, the Securities and Exchange Commission's (SEC's)
chief accountant argued that FASB must discuss the issue of
measurement. "If there's no discussion, that is something we will be
watching out for," he said, according to CFO.com. The SEC is
"concerned by people's unwillingness to use estimates," he
continued. "We're not looking for each number to be 100 percent
exact when you book numbers in your financial statements."
The investor community favors the use of the PBO method. "I think
the PBO is the number that is the most meaningful for a plan that
will stay in place,・said Janet Pegg, an accounting analyst at Bear
Stearns, according to Reuters. Fear of PBO may, however, prompt
employers to freeze or cut pension benefits.
Some propose that FASB adopt a temporary solution since the
proposal that companies recognize their pension liabilities is the
first part of a two-phase plan to revise pension accounting rules,
Reuters says
Sohn recommends that companies use ABO on balance sheets first,
because it will allow further debate. "It's not a matter of just
looking at those two,・Batavick says. "There might be five or six
other ways to measure it.・
FASB is considering more radical steps in phase two of their
proposed revision of pension accounting rules, according to Chairman
Robert Herz in testimony before the Senate Banking, Housing and
Urban Affairs Committee on June 14, CFO.com reported separately. The
Board is considering elimination of "smoothing" for pension
investment results, and Herz suggested that companies prepare for
this change by putting more money into their funds. They could also
consider using more conservative investments, like bonds.
International Accounting Standards Board (IASB) Chairman David
Tweedie, who also testified, said that while FASB and IASB were
considering the same issues, they were doing it in reverse order and
learning from one another. IASB will address "smoothing" in their
first phase, CFO.com says.
The FASB standard for phase two will not be completed for another
two or three years, CFO.com says. FASB and IASB will then reconcile
their respective rules for a global standard.
AccountingWEB.com Jul-5-2006