|  | | 2006 News and Press Releases | | |
HEADLINE NEWS:
Shareholder Equity Likely To Diminish Under New Accounting
Drew DeSilver - Seattle Times
Securities Mosaic. November 26, 2006
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EXCERPT: For more than two decades, the Financial Accounting Standards Board (FASB) has let companies put pension numbers on their books that were at best incomplete and at worst nearly meaningless. A plan's obligation was measured as if it were about to be shut down, rather than assuming it would continue into the foreseeable future. Changes in the market value of a plan's assets, variations in interest rates and employee turnover, and other factors were "smoothed" out over several years, rather than recorded right away. The idea was to reduce volatility; fluctuating pension assets and obligations could make financial statements yo-yo unpredictably. But in valuing stability over accuracy, FASB's old rules allowed corporate pension accounting to drift further and further from reality. Few worried much about this in the go-go 1990s, when the soaring stock market gave most corporate pension plans the appearance of robust health. Flaws revealed But the steep market declines earlier this decade revealed just how precarious many plans were. Zion said the pension plans in the S&P 500 were $240 billion in the black in 1999, but three years later fell $203 billion into the red. Several high-profile instances of companies dumping pensions onto federal insurers underlined the importance of knowing just how healthy corporate plans are, or aren't. The new rule is the first step in FASB's effort to clean up pension accounting. In the second phase, still several years off, FASB intends to completely overhaul the way plan assets and obligations are calculated. For corporate managers, who loathe volatility in their financials, the accounting reforms will be an added incentive to keep down the costs of the benefit plans, Zion [an accounting analyst at Credit Suisse in New York] said. That's likely to accelerate current trends such as making retirees pay more for health care, freezing pension plans or closing them to new workers, or shutting the plans completely, he said. |
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