FASB Holds Firm on PBO, APBO

July 13, 2006 (PLANSPONSOR.com) - The Financial Accounting Standards Board didn't waver Wednesday at a meeting to discuss again the tenets of its March 31 proposal, which would change the way companies account for pension obligations on their balance sheets.

According to the Wall Street Journal, the board stood firm at its July 12 meeting on the proposal to overhaul the accounting methods companies use to represent pension assets and liabilities. Members also addressed one of the most vociferous debates surrounding its proposal, which centers around whether the funded status of the pension plan should be based on projected benefit obligations (PBO) or accumulated postretirement benefit obligations (APBO), or both.

The board released the proposal  in late March (See FASB Issues Proposed Accounting Changes for Pensions and OPEB ), but it allowed a two-month comment period.

Companies have argued that the calculation of pension liabilities and assets should be based on the retirement benefits that workers have already built up, not on projected obligations, according to the Journal. Projected obligations would have to take into account salary increases a figure that would further increase the amount of the liability, according to the Journal.

Such was the contention in one letter from FedEx executive John Merino to the board, in which he asked FASB to reconsider its requirement to “measure the net asset or net liability in the balance sheet on the basis of the underfunded or overfunded projected benefit obligation (PBO), because we do not believe the salary progression component of the PBO meets the definition of a liability,” nor do overfunded plans necessarily constitute an asset (See FASB Racks Up 235 Letters on Pension Accounting Proposal ).

class=”times”> Despite objections, FASB chairman Robert Herz said at the meeting, “I don’t see how you can exclude the idea of future salary increases,” the Journal reported.

Other aspects of the proposal have also drawn criticism. Many companies do not want to give the underfunded positions of their pension plans more prominence on the financial statements by bringing it out of the bottom footnotes and onto the liabilities side of the balance sheet. Current accounting standards for defined benefit pensions and OPEBs allow an employer to recognize an asset or liability in its balance sheet that almost always differs from its overfunded or underfunded positions.

There is also the task for large companies, and those with multiple pension plans, of having to restate several years of financial statements, including balance sheets, statements of shareholders’ equity, footnote disclosures and, in many cases, the income statement.

In June, the ERISA Industry Committee (ERIC) sent a separate letter to the board with its own contentions over the March proposal, saying, among other things, that PBO and APBO should not be considered liabilities (See ERIC Brings Contentions Over FASB Draft ).