Verizon Changing Pension Accounting Method

January 21, 2011 ( - Verizon Communications Inc. has adopted a new policy that changes the method of accounting for pensions and other post-employment benefits (OPEB).

The policy recognizes gains and losses in the year they are incurred, rather than amortizing them over time. Under the new method, annual adjustments will be made to reflect actual return on pension plan assets, changes in discount rates, and differences from other actuarial assumptions.  

“Our decision to adopt this new accounting policy will make our financial reporting easier to understand and more transparent,” said Fran Shammo, Verizon executive vice president and chief financial officer, in a press release.  

Verizon will report fourth-quarter and full-year 2010 results on January 25, and the company said that the impact of this accounting change will result in cumulative pre-tax charges of $600 million for full-year 2010.  This is due primarily to a lower discount rate, partially offset by a return on assets that was higher than expected, and favorable health care trends and other costs.  

According to the press release, the company lowered its assumed discount rate, which was 6.25% at the end of 2009, to 5.75% for purposes of determining its pension and OPEB liability.  This change increased the liability by $2.9 billion in 2010.    

The estimated return on pension assets in 2010 was approximately 14%, compared with an assumption of 8.5%, resulting in an actuarial gain of approximately $1 billion.  The company said it has lowered its return on pension assets assumption from 8.5% to 8% for 2011.  

Health care and other retiree benefit costs were favorable compared to assumptions, resulting in a $1.3 billion reduction in liabilities.  

The Verizon announcement comes on the heels of a similar announcement by AT&T (see AT&T Changes Benefit Accounting Procedures).