Peeling away financial reporting issues one layer at a time

FAS 158: Pension Accounting Crawls its Way Towards Reality

The FASB has belatedly, and only half-way closed the proverbial barn door on misleading pension accounting in FAS 158. In re-measuring pension assets and liabilities on the balance sheet, Paragraph 16a of SFAS 158 requires that the effect on equity of the transition to FAS 158 be reflected as an adjustment of the ending balance of accumulated other comprehensive income (AOCI). This would have taken effect on December 31, 2006 for calendar year-end companies.

Apparently, however, a significant number of companies (I wish I knew how many) have not fully complied with the FAS 158 transition rules–by incorrectly reporting the adjustment as a component of comprehensive income for 2006.

Of course, the skeptic that I am wants to know whether 'errors' were commited mostly by companies that were able to show positive amounts of other comprehensive income (OCI).  If anyone has any data on this, please let me know!

In any case, the SEC Staff has chosen to turn a blind eye toward any possible efforts at manipulation.  They have taken the position that a quantitatively significant misapplication of the transition provisions of FAS 158 need not be considered material if: (1) there are no qualitative indications of materiality (see SAB 99 for guidance in determining qualitative materiality), and (2) the transition adjustment component of comprehensive income had been clearly disclosed. 

 You can find a report of the SEC Staff position online in the form of an AICPA publication, Center for Audit Quality Alert #2007-30.

 

Here Comes the Rant

 

If pension accounting (principally FAS 87) were not such a complicated mess, obviously designed to appease the country's largest employers at the time (and incidentally create jobs for accountants and their actuary cousins), how many more employees would now be receiving their full pension benefits?  How much less dire would be the status of the Pension Benefits Guarantee Corporation (PBGC)?  One thing I do know is that four FASB members voted yea, and three voted nay.  If only one more member had a backbone, how much wealth destruction would have been prevented?

 FAS 158 is the supposed culmination of the first phase of a project to move toward more straightforward, transparent and complete recognition of assets and liabilities related to pension plans and other postretirement benefits.  Pension accounting should be as simple as this:

  1. Calculate the net pension liability/asset as the difference between the fair value of plan assets and the actuarially determined projected benefit obligation.  This number goes on the balance sheet.
  2. Report the change in the net pension liability/asset on the income statement.

Although not perfect (remember, dear readers, that perfection is the enemy of the good), the first step was accomplished in FAS 158.  What is taking the FASB so long to require the second step?  C'mon folks, show us that you have a backbone!

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