Shareholder Equity Decline Part of FASB Statement 158 Effects

January 22, 2008 ( -Most companies that have adopted pension accounting reform rules have seen a reduction in assets, an increase in liabilities, and a decline in shareholders' equity, a new study found.

The January 2008 research by the Georgia Tech Financial Analysis Lab also found that proposed accounting changes calling for the recognition of full pension costs on a firm’s income statement are likely to generate a good deal more volatility in a company’s earnings. “The volatility of pension expense and income from continuing operations would increase significantly if full pension costs were recognized as they are realized,” researchers contended.

The researchers looked at the effects of the Financial Accounting Standards Board (FASB) Statement 158, Employers’ Accounting for Defined Benefit Pensions and Other Postretirement Plans, which requires a pension plan’s funding status be reported on company balance sheets rather than in balance sheet footnotes (See  Running the Fund: Out of Balance ). The research examined the annual reports of 24 companies in the Dow Jones Industrial Average.

The initial adjustment to balances resulting from the adoption of the accounting “can cause unusual, sometimes large changes in measures of leverage and profitability,” the Georgia Tech study said.

In addition, the effect of the accounting on total shareholders’ equity showed a median decrease (for all 24 companies) of 4.93%. General Motors showed the largest percentage decrease of 147.29%, the report said. The accounting also resulted in GM recognizing an additional pension and other postretirement benefit liability of $27.4 billion.

The study said that for most companies, recognizing a larger pension liability caused artificial improvements in returns on assets and returns on equity, as well as an increase in leverage as measured by total liabilities to total shareholders’ equity.

The Georgia Tech study report is here .