August 2000

Department of unintended consequences

In their article in the May CPA Journal, “The Effect of SFAS 135 Technical Corrections on Measurement of Net Periodic Pension Expense”, authors Kathryn M. Means and Julia L. Higgs correctly identify an inconsistency in the new disclosure requirements of SFAS 135 versus the resulting computational instructions of SFAS 87 as modified by SFAS 132 and SFAS 135. However, we believe that they have carried the interpretation of this inconsistency too far, resulting in a recommended change in practice not intended by FASB.

Recent amendments to accounting principles included changes to financial statement footnote disclosures to more closely reflect the original basis for the asset return component of pension cost: the expected return. Previous disclosure rules called for showing actual asset returns, with a separate component balancing out the difference between the actual return and the expected return. Disclosures under the amended standards mirror the intended basis for measurement and recognition, with an asset return component that is based on the expected rate of return on the market-related value of plan assets determined at the beginning of the accounting period.

Those same recent amendments introduced a technical anomaly whereby SFAS 87 could be read as prescribing a change in the methodology used to determine pension cost. Under this wording glitch, pension cost would include a component for the actual return on the market value of plan assets, determined as of the end of the accounting period, without any offsetting entry in any other component of pension cost. This anomaly would bring the determination of pension cost in direct disagreement with the footnote disclosures that were changed by the very amendments that introduced the anomaly and, more importantly, would significantly alter accounting principles and practice for the measurement and recognition of pension cost. Jules Cassel, senior technical advisor at FASB, has made it clear that this was not intended and that further technical corrections will be made by FASB to eliminate the anomaly in the rules.

Given the clear context and intent of the recent amendments as well as the expected forthcoming technical correction, we believe that employers should not change their approach to determining pension cost under SFAS 87 on account of what will be a temporary anomaly in the standard.

Adrien R. LaBombarde, ASA Research Actuary Milliman & Robertson, Inc. Houston, Texas

The authors respond:
We seem to be in agreement that the change by FASB was not intentional. However, there was a change. A literal application of SFAS 87 as amended by SFAS 135 would require recognition of the actual return on plan assets as a component of net periodic pension cost. Therefore, we cannot suggest that practitioners ignore the amendment. Our recommendation was not that companies immediately change their method of pension accounting but that they should seek clarification from the SEC or an interpretation from FASB before releasing financial statements. Until FASB issues a technical correction on the subject, that remains our recommendation.

Kathryn M. Means, PhD, CPA
Julia L. Higgs, PhD, CPA
Florida Atlantic University

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