FASB Reacts

FASB Votes to Revise Pension Rules (Nov 10 WSJ, p. C3) a day after the House Ways and Means Committee approves H.R. 2830, the Pension Protection Act of 2005 (the Act), which now awaits a vote by the full House of Representatives. If passed, the Act will, among other things, “establish new minimum funding standards for…defined benefit pension plans,” increase some premiums paid to the PBGC, specify certain interest rate assumptions and calculations, and require “additional disclosures in annual reports and to plan participants and beneficiaries.” The Act would amend the Employee Retirement Income Security Act (ERISA) as well as the Code of the Internal Revenue Service. FASB’s proposed actions will enhance certain provisions of the Act. For instance, heightened disclosure of pension obligations would be facilitated by a FASB requirement that companies report ‘on their balance sheets the amounts by which their pension plans are over- or underfunded.’ This information has traditionally only been contained in footnotes to the financial statements. FASB reports that new rules, such as this one, may be in place by the end of next year and the board estimates that these simple revisions “would affect corporate balance sheets by hundreds of billions of dollars.”

However, the most sweeping changes to the pension accounting system will likely take several years to effect as FASB, in conjunction with the International Accounting Standards Board (IASB), ‘reconsider all elements of the current system.’ These changes will likely address how pension values are calculated at any given point in time (i.e. at fiscal year end), as well as how future obligations are determined.

It will be interesting to see how Wall Street reacts when the first phase of FASB’s approach is implemented next year.