Motives Behind DB Sponsors’ Move to Mark-to-Market Accounting

A study suggests that defined benefit plans’ move to mark-to-market accounting may be less driven by transparency motives and more driven by executive compensation motives.

By Rebecca Moore | November 09, 2016
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Since December 2010, companies like Honeywell, AT&T, Verizon Communications, UPS and others announced they would use mark-to-market recognition in corporate earnings statements of defined benefit (DB) plan gains and losses.

This move to mark-to-market accounting, an alternative to amortizing gains and losses over many years, resulted in large reported losses for many. The Boeing Company, AT&T, UPS, Windstream Corp. and FirstEnergy Corp. all announced that lower discount rates and a change to practices around recognizing pension gains and losses in the year in which they occur—rather than amortizing them over time—resulted in a charge for pensions. For example, AT&T ended 2011 on a down note, posting a $6.7 billion loss in the fourth quarter due largely to a change in how it accounts for its employee pension benefits and the breakup fee it was required to pay after scrapping its bid to buy T-Mobile USA.

In many announcements, the companies stated they were changing accounting methods to increase transparency. Companies say this is a more accurate measure of a DB plan sponsor’s financials. In addition, removing amortization removes long-term market fluctuations and when DB plan sponsors use this accounting to project into the future, it improves their ability to budget for the plan, she adds.

Other than for financial reasons, Willis Towers Watson has seen clients move to mark-to-market accounting to align with international accounting standards or to align their measures with their competitors’.

However, Professor Jaewoo Kim, and others from the University of Rochester, Simon Business School, note in a research report that the possibility that company managers were incented to change accounting methods to report higher future profits and extract higher compensation was not unnoticed by financial analysts and commentators in the financial press. Kim and his fellow researchers call this motivation “managerial opportunism.”

NEXT: Some support for the transparency motive