Peeling away financial reporting issues one layer at a time

FAS 158: Funded Status is Padded with Company Shares

FAS 158 makes it look like the 'funded status' of defined benefit  post-employment benefit plans are now transparent.  Actually, they are not.  To see why, consider the following three transactions:

  1. Company A purchased 500 shares of its own stock on the open market at $30 per share.
  2. Company A contributed $1,500 to its defined benefit pension or retiree healthcare plan and instructs the trustee of the plan to purchase 500 shares of Company A stock on the open market.
  3. Company A contributed 500 shares of its own stock to its defined benefit pension plan.

Transaction #1: Everyone who has taken Accounting 101 (and passed) knows that the 'treasury stock' resulting from the first transaction is presented as a deduction in shareholders' equity on the balance sheet. It would be nonsense to present your own stock as an asset, just because you purchased it back from shareholders.

Transaction #2 and #3: But, very few know that a company can, within limits, report that it is satisfying its pension funding obligations merely by printing stock certificates.  That's because FAS 87 and FAS 106 permit the reporting of the 'investment' by the pension trust in Company A stock as an asset–albeit well hidden, because it is netted with the company's pension liability. 

What kind of company would fund a pension plan with its own stock?  Certainly cash-strapped companies.  The effect on employees is to compound their financial risk: as the company goes south, so goes job security and pension security. 

What kind of accounting standard setter would permit such an aburd accounting practice?  I'll leave the answer to that one for your own ruminations.  But there can be little doubt about the consequences. The favorable accounting treatment allowed companies in trouble to delay their day of reckoning by literally papering over the gap in their pension funding with stock certificates hot off the press.  When finally called to account, obligations had become much greater, and assets had become much smaller. 


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