Finance Pros Say Pension Rules Need Change

February 14, 2003 ( - Pension accounting rules should be overhauled, and companies should be required to disclose their pension finances more frequently.

That is what a group of investment bankers, corporate credit rating analysts, and money managers told the Financial Accounting Standards Board (FASB) in a recent meeting, according to a report in Dow Jones.

The panel contends current pension reporting regulations give companies enough leeway to distort their true financial portraits. This, in turn, can end up misleading investors and financial firms.

After receiving an abundance of complaints about the current rules, FASB has been considering whether to add pension accounting to its formal agenda of items for review (See  Pension Accounting on FASB Radar Screen ).   The current step in such a consideration by the rulemaking board was to convene a meeting of various financial firms to advise it on a number of accounting concerns. Pension reform was the topic of a session at the first meeting of the group.

Hurricane Force

Pension rules have been much discussed in recent months as a controversy continues to brew with each new company report of pension underfunding. (See  America’s Pension Crisis ).   These underfundings then require extra company pension contributions, which may have an impact on corporate earnings.

Particularly controversial is the practice of “smoothing” (See  Smooth Move ). Smoothing allows companies to take certain assets and obligations off their balance sheets and amortize them as income or expenses over time.  Additionally, companies may be allowed to report their expected return on assets, instead of actual losses and gains.

So, under the current FASB rules, a corporation can have a pension fund in deficit today, but continue showing positive numbers on the balance sheet.

Additionally, some critics of the current “smoothing” rules say the regulations need to be amended to require a more frequent report of corporate pension finances. The current rules only require plan sponsors to disclose details of their pension assets and liabilities once a year.