Staff members noted, in a report issued this week, that pension trusts are currently exempt from consolidation by the companies that sponsor them, effectively resulting in the netting of balance sheet assets and liabilities. The plans can also put off recognition of gains and losses related to their retirement obligations and the assets used to fund these obligations. According to the report, there may be approximately $535 billion in pensions and other retirement obligations that are not recognized on US corporate balance sheets.
The report, issued as follow up to Sarbanes-Oxley accounting changes, recommends generally that companies preparing financial reports:
- discourage transactions motivated primarily by accounting and reporting considerations, rather than economics
- expand the use of objectives-oriented standards
- improve the consistency and relevance of disclosures
- focus financial reporting on communication with investors, rather than just compliance with rules.
The SEC staff also backed the idea of reporting financial instruments such as derivatives at fair value. Requiring companies to value financial assets based on market prices would eliminate the need for complex hedge accounting and lessen reliance on transactions that can obscure a company’s true financial picture, the staff said.
“The report identifies improvements that have occurred in financial reporting since passage of the Sarbanes-Oxley Act and, importantly, it offers recommendations for further improvements designed to increase both the transparency and usefulness of the balance sheet,” said Donald Nicolaisen, SEC chief accountant, in a news release announcing the staff report. “Greater transparency can be achieved in some areas simply by reducing accounting choices and complexity. Since the events leading to passage of the Sarbanes-Oxley Act, we have made progress in improving financial reporting to investors, but more can still be done. I’m hopeful that this report will help focus efforts on further ways to improve transparency.”
The SEC staff members also called for a reconsideration of accounting for leases, transfers of financial assets with continuing involvement, contractual obligations, contingent liabilities and derivatives, as well as special purpose entities.
The study, complied by the SEC’s Office of Chief Accountant, Office of Economic Analysis and Corporation Finance Division, was based on information from 200 US public companies, including the 100 largest. The report is here .