Pensions: FASB Looks to the Future

The board gives a thumbs-up to the idea that companies should try to figure out the cost of their pension liabilities going forward.
David M. Katz, CFO.com
July 12, 2006

Overriding the objections of employers and actuaries, the Financial Accounting Standards Board unanimously agreed on Wednesday to require companies to include estimates of their future pension liabilities on their balance sheets.

Hewing closely to the views of investors, the board members okayed the use of a projected benefit obligation (PBO) to account for pension liabilities on the balance sheet. They also all approved a speedy completion of the first phase of FASB's overhaul of pension and other postretirement-benefits accounting. In doing so, they turned down requests that they delay matters to work on more precise ways of measuring employers' pension and benefit obligations.

In the first phase of its project, the board proposes to start requiring companies to state the underfunded or overfunded status of its pension plans on their balance sheets for fiscal years ending after December 15. The funded status would be the difference between the fair value of a plan's assets and the PBO, a gauge of liabilities that includes estimates of employee salary increases and other costs far into the future. Opponents of the metric favor the use of an accumulated benefit obligation (ABO) because it doesn't include estimated future pay increases.

Yet estimating future costs and discounting them back to present values is common in other areas of accounting, contended FASB Chairman Robert Herz at Tuesday's meeting. "I certainly believe PBO is better than ABO," he said. "I don’t think you can just exclude the possibility of future salary increases."

Agreeing with the board's proposal to proceed on the basis of two phases rather than as a single project, FASB member Leslie Seidman referred to a "clear mandate from investors to proceed on this basis." Investors have said that it's important to complete the first phase and have at least some measurement of pension assets and liabilities on the balance sheet as soon as possible.

In a reversal of a past decision, the board also agreed that companies shouldn't be required to fully apply the proposed rule over past years. But FASB ended up deadlocked on the question of whether companies should provide footnote reporting of a plan's funded status for the first year preceding installation.

Analysts and investors want to see full retrospective reporting on corporate financial statement analysts, says Peter Proestakes, who manages the FASB pensions and other postretirement benefits project. But given the amount of work that would take, some companies would not be able to meet the deadline, he said.

To help break the deadlock on the one-year retrospective footnote reporting, Herz instructed the board's staff to get more information from investors and analysts about how they might make use of such disclosure.

In deciding so firmly in favor of PBO on Wednesday, the board seems to have put an at least temporary end to a hotly contested debate. In letters to the board and at a FASB roundtable last month, pension actuaries and senior corporate executives lambasted the proposed use of future estimates.

Projecting future salary increases in pay doesn’t represent a present liability and thus doesn't belong on the balance sheet, they contended. Thus, some argued, the board should delay launching its project until it found a more precise way to measure pension obligations.

For their part, analysts and investor groups have been all for the implementation of PBO reporting on the balance sheet, arguing that it would provide them with a lot better information than is currently on offer.