If you make me account for it I won’t do it: Consideration of the change in pension accounting

Implications: What to be ready for given that publicly traded firms will have to adjust their balance sheets for underfunded / overfunded pension plans ending for years after 12/15/06?  Look into the footnotes of the 05 financial statements.  For some companies, the adjustment will be big and net equity on the balance sheet will be reduced commensurately (that said, the markets doing well will likely mitigate negative adjustments that would have been much larger in recent years). Also, look for companies to begin discussing changes in existing pension plans (just as they did with other post retirement benefits in the early 90s when the accounting for these liabilities was changed along similar lines to those for pensions).

Analysis:

The FASB has decided that, among other things, firms that the difference between pension liabilities and pension assets will be reported as an asset (overfunded plan) or liability (underfunded plan).  This begins a reversal of a history of obfuscation in pension accounting and ought to be a net positive, increasing everyone’s understanding of pension plan positions and significantly reducing the likelihood that any interested party can claim “ignorance” with respect to pension status.  At the same time, for many firms, liabilities will increase significantly and comprehensive income (an element of equity) will be reduced one for one by this accounting. I suspect that making companies report pension status on their balance sheets will spur some to get their pension house in order.  Such a house cleaning may well entail significant restructuring or elimination of current pension plans (e.g., spurring the seemingly inexorable move to defined contribution plans).