Wednesday, April 05, 2006

One Step Towards Better Disclosure

The Financial Accounting Standards Board (FASB) has proposed a slight change in the way companies report their true pension assets and liabilities.

Now, much of the real information about a company's pension liabilities is hidden in footnotes. For example, looking at the balance sheet of the companies in the S&P 500 one sees a $99 billion net pension asset; however, scanning the footnotes reveals a liability of $165 billion. That is, the balance sheet is off by $264 billion.

If the FASB proposal becomes accepted, companies will have to show a truer balance sheet picture of their pension fund deficits or surpluses. This will make the balance sheet a more complete picture of reality, but, in so doing, it may cause some companies to drop their pension plans since such key ratios as debt/equity, which figures in many loan agreements, would likely be worse for many companies.

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