Pension Accounting: The Debate Continues

Fair value accounting for alternatives has been a can of worms.

Balance sheet, check. Shining a light on hard-to-value assets, check. Quarterly reports, fuhgettaboutit!

Here’s a flash for you folks who’ve been staying up nights worrying that pension gains and losses will be accounted for as net income and therefore reflected in your company’s earnings per share price: enough people kvetched that the International Accounting Standards Board (IASB) that had been proposing such a change backed off.

That’s the good news — and I’m sure you’re glad I told you because now you can catch up on zzzzs. Pension plan gains and losses can be noted as comprehensive income — part of shareholder equity and not part of the income statement. “This has been received pretty positively in my discussions with clients,” notes Murray Akresh, partner in human resource services for PriceWaterhouseCoopers in New York.

And let’s face it, we’re living through some very significant volatility affecting plan assets. Stepping back, fair-value accounting for alternative investments has itself been a can of worms but companies have been dealing with this for a couple of years now. With the credit crisis effects, billions of dollars of net income were wiped out. The balance sheet reflected this but not the income statement. Phew.

Still the Financial Standards Account Board (FASB) and IASB press on, requiring extensive disclosures and asking for more specifics in alternative investment disclosure. While FASB and IASB rules are clearly in the process of converging, there are still kinks in getting an international board to understand U.S. corporations’ dilemmas, Akresh implies. “IASB proposals can sometimes be seen as too extensive when they go beyond what FASB is requiring.”


Financial executives at corporations around the U.S.—especially those who belong to such organizations as Financial Executives International (FEI)—are crafting letters to respond to IASB proposals before or on the deadline of September 6.

The exposure draft of IASB standards suggest requiring some aspects of pension costs to be split into three categories: service costs, finance costs and remeasurements, explains Aaron Anderson, director of IFRS (International Financial Reporting Standards, which are those that IASB sets out) accounting policy and implementation for IBM Corp. in Armonk, N.Y. and who is drafting a letter for FEI as well. “By splitting all those things that affect financials for pensions into three categories, it simplifies to some degree pension accounting, which today is very complex.”

“I believe it’s a positive step in making it a bit easier to report the risks companies have taken for the obligations they’ve incurred,” Anderson says. Three categories seem like a popular number for the fair-value accounting standards of FASB as well. The sticking point is for level three--those hard-to-value investments that can’t be looked up by opening up the newspaper.

With all these standards ongoing and pending regarding pension accounting where plan sponsors have a problem is frequency. “Right now we have to report annually and that’s difficult enough,” notes Anderson. “One of the few concerns is how often IASB wants pensions to remeasure costs. Quarterly is very difficult. Here we have practical concerns, like how to do it in time for a press release.”

IBM, like other multinationals, has plans all around the world. “We may be in hundreds of countries and have 50 to 100 plans in each nation,” he explains. “And then there are times we’ve grown by acquisition. So there are many different types of plans, different employee pools, and each one deserves unique attention.”

Anderson likes the approach that IASB is taking with what he regards as simplifying reporting into three categories but wants reporting to remain annual and not become quarterly. “Don’t change the number of remeasurements required, but definitely simplify accounting.”

Acceptance of more scrutiny is real, PWC’s Akresh affirms. As for how to comply with stricter rules to value alternative investments, Akresh says that most big pension plans have armies of investment advisors, custodians and trustees who grapple with such issues. But he also sees in speaking to clients that what is being opposed and is definitely in the process of being commented on is IASB’s notion of stepping up from annual valuations to quarterly. “Annually is already a very tight deadline for companies with pension plans all over the globe,” he agrees.

But the end game of more transparency for the ultimate investors is a worthy goal, Akresh and Anderson agree.