Friday, September 29, 2006

FASB No. 158 - New Defined Benefit Plan Accounting Standards

Today, the Financial Accounting Standards Board (FASB) issued the final Statement No. 158 Accounting for Defined Benefit Pension and Other Post Retirement Plans. Per FASB, the funded status and costs associated with employer’s postretirement benefit plans were not readily available to investors in a complete or understandable way under the old accounting rules. The new accounting standard:
  • recognizes a balance sheet asset for a plan’s overfunded status or a liability for a plan’s underfunded status,
  • measures its funded status as of the end of the employer’s fiscal year, and
  • recognizes changes in the funded status in the year in which the changes occur through comprehensive income or changes in net assets for non-profits.

  • The industries primary objection to this standard was FASB's use of a Plan's Projected Benefit Obligation (PBO) rather than the Accumulated Benefit Obligation (ABO) to measure pension liabilities. One consulting actuary estimated that this change could reduce shareholder equity across large public companies with active Defined Benefit plans by almost 10%. Plan curtailments are certainly a rational response given this estimate.
    The PBO creates a higher liability than the ABO because it includes an estimate of future increases in compensation which are not current obligations. The industry belives the future compensation increase estimates would not qualify as a current liability under other FASB rules and shouldnt be included here. The FASB believes that the PBO fairly represents a Plan's contractual and economic obligation.

    The issuance of Statement No. 158 completes the first phase of the Board’s comprehensive project to improve the accounting and reporting for defined benefit pension and other postretirement plans. A second, broader phase of this project with potentially more damaging income statement accounting impacts on defined benefit plans remains.

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