FASB "Observation" Could Create Cash Balance Headache

May 27, 2003 (PLANSPONSOR.com) - Rumors of a new directive on cash balance plan accounting has fanned concerns among the benefits community.

Last Wednesday Watson Wyatt issued a press release noting that a proposed new accounting approach for determining liabilities in cash balance pensions would artificially drive up the liabilities for many of these plans on corporate balance sheets.   Those comments were stirred by a reported consensus from the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (FASB) on accounting for the controversial hybrid pension plan.  

Different Assumptions

Watson Wyatt noted that the new accounting approach would require many companies (those who credit interest to individual accounts on a market-based rate, rather than a fixed rate) to value the accounting liability for their cash balance plans using different, more conservative assumptions than used by all other pension plans.   Impacted cash balance programs would be required to value their liability using a discount rate based on government yields, which are lower than the rates on high-quality long corporate bonds used by other plans.

The proposal was introduced by FASB’s Emerging Issues Task Force (EITF) at a May 15 meeting and is scheduled for consideration by the Board tomorrow, according to the ERISA Industry Committee (ERIC).   At the May 15 meeting, the EITF had affirmed that cash balance plans should be accounted for as defined benefit plans and concluded that the traditional unit credit method is the appropriate attribution method under SFAS 87, both issues that the group had been asked to address.  

Observation Decked?

However, the EITF had not been asked to address the discount rate issue.   Rather, it seems to have crept onto the agenda courtesy of an “observation” by a FASB staff member, an observation that “consisted of a statement that cash balance plans that use a single, market-based rate to credit interest should use that interest crediting rate to discount the account balance when determining the liability for future cash balance benefits,” according to Watson Wyatt’s review of the situation.  

In a letter to the FASB, Watson Wyatt said, “We were surprised to learn, through correspondence and conversation with members of the FASB staff, that an “observation” by a staff member on an issue distinct from Issue 03-4 had been included in the minutes of the meeting, and that upon ratification of the minutes, such observation would take on the mantle of formal FASB guidance, equivalent in weight to the Implementation Guides prepared for SFAS Nos. 87 and 88.”

Consequently, Watson Wyatt has strongly urged the FASB to “remove any reference to the method of setting the discount rate from the minutes of the May 15 EITF meeting prior to their approval, on both procedural and technical grounds.”  

In its  letter to the FASB , Watson Wyatt notes that establishing a different methodology for a subset of cash balance plans would undermine the comparability of financial statements, as well as yielding anomalous results.   Additionally, the consulting firm noted both the significance of the proposed change to discount rate setting and the lack of opportunity for discussion as reasons to set the issue aside.

ERIC concurs , noting, "The FASB should not make a decision of this magnitude without giving all interested parties, including the employers that sponsor cash balance plans, an opportunity to submit comments on the issue."