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SEC Looks for Consistent Story in Pension Disclosures

Tammy Whitehouse | May 7, 2012

The Securities and Exchange Commission is getting a bit concerned about how companies are describing their pension obligations when they accelerate the recognition of their losses under new accounting policies.

At a recent accounting conference, SEC Chief Accountant James Kroeker said companies marking their pension obligations to market pricing in some cases are using non-GAAP methods of disclosure for pensions, according to the Wall Street Journal. Kroeker said that has the effect of taking the actual return on plan assets and adding it back to the expected return on plan assets, which doesn't include the amortization of prior deferred losses.

A handful of major companies – including Honeywell, AT&T, and Verizon – adjusted their accounting policies around defined benefit pension plans to accelerate the recognition of pent-up losses, in large part tied to the major market downturn of 2008 and 2009. Accounting rules have long allowed companies to “smooth” over pension-plan losses to reduce volatility in reported earnings by deferring the recognition of those losses into future periods.

Honeywell, AT&T, Verizon, and others said the new policy of more immediate recognition enables them to be more transparent with investors about the true state of their pension obligations, but it also has the added benefit of reducing the drag on future earnings by pushing old losses into prior periods. The SEC has indicated it was taking a close look at companies following such an approach, but it has so far been silent on whether it had concerns about the tactic.

Kroeker said the staff is concerned about whether the non-GAAP disclosures might be confusing to investors, who may believe they are getting actual numbers on a mark-to-market basis when in fact they are getting expected numbers. He said it might be useful to investors for companies to give more information about whether their numbers reflect actual performance or longer-term projections.

Kroeker's remarks represent the first meaningful signal from the SEC to reflect how regulators are viewing the accounting change. “We haven't heard of the SEC objecting,” says Jim Verlautz, a retirement actuary and principal with consulting firm Mercer. “It sounds like they aren't objecting to the change in accounting method. They're objecting to how companies are talking about it afterward.”

The SEC has begun warming up a bit to the practice of making non-GAAP disclosures to investors, as long as they are clearly reconciled to GAAP accounting, says Verlautz. The confusion may arise, he surmised, because companies following the mark-to-market approach report expected results quarterly and then actual results at the end of the year.

“Some analysts say that is what they want to hear, so they can understand the difference between what is a one-time loss and what we can expect going forward,” he says. As different analysts and investors are looking for different bits of information, Verlautz says companies are wise to give both expected and actual results, but should take care to assure it complies with disclosure requirements.