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Golden Makes Case for Pension Accounting Changes

December 11, 2013
As international accounting convergence winds down, the FASB is paying attention to its internal priorities.FASB Chairman Russell Golden indicated that the U.S. board may focus on revamping pension accounting.The board also is developing a policy to reduce complexity in writing new accounting standards.

FASB Chairman Russell Golden made the case for improving pension accounting standards as he outlined the FASB’s post-convergence priorities on December 10, 2013.

Speaking at the AICPA’s National Conference on SEC and PCAOB Developments in Washington, Golden indicated that the project, although still in the research stage, would receive more formal attention from the FASB soon.

“While we have a robust standard in GAAP, the passage of time, the creation of new plans, the development of new environmental factors… all indicate to me that it may be useful to see what evolutionary changes might be useful to consider,” Golden said.

Published in 2006, SFAS No. 158Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,(FASB ASC 715-20), requires companies to book underfunded pension plans as liabilities on their balance sheets.It was considered an improvement to SFAS No. 87,Employer’s Accounting for Pensions,which was issued in 1985.

The 2006 standard was released as part one of a two-part project to shed light on what can be a major cost for U.S. businesses.The board at the time said it would later pick up the effort to address pension plan expenses.

The 2008 financial crisis and the FASB’s ramped-up effort to complete high-profile international convergence efforts with the IASB, however, meant the pension project got put on the back burner.

In recent years, complaints about pension accounting have persisted, especially as historically low interest rates produced anemic investment returns and the cost of employee pension plans ballooned.(See FASB Gets Pressured to Shine a Light on Pension Accounting in the April 1, 2013, edition ofAccounting & Compliance Alert.)

Much criticism also has been directed at the specific way companies determine their future liabilities, which involves applying an estimate of interest rates to discount the present value of future costs.Some observers say the discount rate is calculated based on projected returns that are overly optimistic.

The FASB in April started discussing early-stage plans to tackle a potential pension accounting project.The board held a few educational meetings to brainstorm ideas but has not yet voted to add an examination of pension accounting to its formal agenda.

The FASB plans to look at the IASB for guidance on some aspects of a potential project, Golden said.

In June 2011, the IASB published IAS 19,Employee Benefits,which amended a 1998 standard on the issue.The 2011 update aimed to make it easier for investors and analysts to understand how defined benefit plans affect a company’s financial position, Golden said.

“We will consider the IASB results in the next steps,” Golden said. “We also plan to consider changes in types of plans in our market place, including cash balance pension plans.”

As in years past at the AICPA conference, Golden shared the dais with IASB Chairman Hans Hoogervorst.In recent years, the chairmen of the FASB and IASB have outlined goals for international accounting convergence.In 2011, Hoogervorst and former Chairman Leslie Seidman used the AICPA conference to announce that flying back and forth across the Atlantic to set joint accounting standards was no longer a feasible long-term relationship, signaling the end to convergence.

This year, the board chairmen briefly touched on convergence issues and focused instead on the individual goals of their respective boards.

Golden, who has said reducing complexity in accounting standards is one of the main goals of his time as chairman, outlined details about how the FASB will assess complexity while developing new accounting standards.

The board is developing an internal policy to consider complexity, he said.This policy would direct the FASB to evaluate whether a potential new standard would reduce or increase reporting complexity.It would require a public meeting to discuss the topic, and the FASB would have to address the question of complexity in the basis for conclusions of a new standard.

“In an nutshell, we want to make it easier for you to know what to do and we want to make it easier for you to do it,” he said. “But let me be clear, any decision we make will be weighted by what the investor needs.If a change would impair the investor’s ability to do his or her work, we would not consider this an appropriate agenda item.”

Hoogervorst and Golden also fielded questions from the audience about their remaining big-ticket convergence projects.

Activity on the lease accounting project, on which the boards recently started reviewing feedback, is slated to ramp up in 2014.The controversial project requires companies to report on their balance sheets the costs associated with leasing storefronts, warehouses, fleets of truck, and business equipment, among others.While many businesses, auditors, and investors agree with the main premise of the project, they do not agree with the method the FASB and IASB have proposed to make the change.

“I am sure the cost-benefit analysis is going to be one of two central themes of redeliberations,” Hoogervorst said.