Regulators adopt pension-cost rule

September 30, 2006|By Bloomberg News

NORWALK, Conn. -- U.S. accounting rule makers adopted a standard yesterday that will force companies to disclose the future costs of retirement benefits on their balance sheets, wiping out billions of dollars in net worth.

The Financial Accounting Standards Board's rule will increase balance-sheet liabilities of the largest U.S. companies by $466 billion, reducing their net worth by 7 percent, according to estimates by Howard Silverblatt, an analyst at Standard & Poor's in New York.

"This standard will substantially improve the clarity, completeness, timeliness and usefulness of financial reporting for investors and all others who rely on this information in financial statements to make financial decisions," said Rebecca McEnally, director of capital markets at the CFA Centre for Financial Market Integrity, an advocacy group affiliated with the CFA Institute in Charlottesville, Va. CFA is the designation for certified financial analyst.

Manufacturing companies, such as automakers and steel producers, will be among the hardest hit by the new order.

General Motors Corp., the world's largest automaker, said in its 2005 annual report that putting the cost of future pension and medical benefits on the balance sheet will make its liabilities greater than its assets, erasing the company's net worth.

"We truly won't know the impact of the changes until we see the changes," said Renee Rashid-Merem, a GM spokeswoman.

Until now, companies listed the cost of retirement benefits in the footnotes of their financial statements. Now, an unfunded benefit will be treated as a liability and an over funded benefit will become an asset on the balance sheet.

Under the changes, companies may no longer delay recognition of pension and retiree medical plan investment gains and losses by spreading them out over several years, as is now permitted. This practice has been referred to as "smoothing."

The rule, which takes effect in mid-December, is designed to give investors a more complete picture of a company's true obligations on the balance sheet.

"Through this standard, people will have better information to determine an employer's ability to make good on its retirement promises to its employees," said George Batavick, one of FASB's seven board members. FASB has its headquarters in Norwalk.

Some corporations had opposed the change.

Citigroup Inc. Deputy Controller Robert Traficanti said in a May 31 letter that the rule "will likely increase earnings volatility, impacting price-to-earnings ratios and shareholder value without clear benefit to the company or its shareholders."

He said the rule probably would result in a reduction in the number of pension plans, "causing a significant impact on employee welfare across the country."

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