Pension Accounting Changes Negatively Affecting Earnings Statements

January 27, 2012 (PLANSPONSOR.com) – As companies issue their earning statements for 2011, many are reporting a charge due to pension accounting changes.

The Boeing Company, AT&T, UPS, Windstream Corp. and FirstEnergy Corp. all announced that lower discount rates and a change to recognizing pension gains and losses in the year in which they occur, rather than amortizing them over time, has resulted in a charge for pensions. In 2010, the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) came to an agreement on reporting changes in pension values and cost immediately (see FASB, IASB Reach Tentative Agreements on IAS 19).  

Pension plan sponsors expected to face increased pension contributions and expenses due to market volatility and low interest rates, higher funding requirements of the Pension Protection Act, the introduction of mark-to-market balance sheet requirements and expanded disclosure under U.S. and international pension accounting standards (see Plan Sponsors Can Expect Contribution Increases in 2012).  

UPS, Windstream and FirstEnergy all announced that they are recording actuarial gains and losses, on the income statement, in the year incurred rather than amortizing them over time. A mark-to-market adjustment will be made in the fourth quarter of each year reflecting actuarial gains or losses that fall outside a recognition corridor (10% of the greater of plan assets or benefit obligations). These gains or losses result from changes in discount rates, the reconciliation to actual return on plan assets and other actuarial assumptions.   

The adoption of the new methodology must also be applied retrospectively to prior periods.