Rewriting Pension History. Some big firms move to recognize Gain or loss in the year they occur - Case Study Example

Rewriting Pension History. Some Big Firms Move To Recognize Gain or Loss in the Year They Occur Rewriting Pension History. Some Big Firms Move To Recognize Gain or Loss in the Year They OccurA few of the large companies are simplifying their accounting system of their pension plans, shifting from the existing accounting procedure of spreading the outlay of huge pension gains as well as the losses into incomes over a period of time to the system of recognizing the overdue losses or gains in the year of their occurrences. AT&T Inc., Honeywell International Inc.

, and the Verizon Communication had lately ceased the very old accounting practice of leveling huge gains and losses created by their pension assets into their financial outcomes spread across a number of years. Instead, these companies would now take into account such gain as well as losses in the corresponding year of their incurrence. The mentioned companies did so, in order to make their income look superior in the upcoming years. The companies claim that the change would make their income reporting additionally transparent and that the prevalent low rate of interest made this a suitable point in time for the change in practice.

The change in the practice is on the face of the criticisms for the fact that the present accounting rule can have a considerable impact on the income of the companies for years. The current accounting system concerning the pension assets are very ambiguous and do not provide any information to an investor about the gains or losses in the pension assets in a particular year. The actual gain or loss of a particular year is significantly affected due to the distribution of the previous years’ gain or loss values over a period of time.

This practice propagated by Financial Accounting Standards Board does not comply with the matching principle either. For instance, Honeywell, AT&T and Verizon had huge values of unrecognized losses as on 2009, viz. 55%, 49% and 43% of the pension assets respectively. The non-recognition of these losses on the income statement of 2009 would have an impact on the actual earnings of the companies in the coming years. Though these companies consider the latest mark-to-market strategy to be preferable due to its simplicity, the anticipated rise in the interest rates could also help their pension plans.

The high rate of interests would lower the value of the companies’ future pension obligations due to the discounting effect. The reduced pension obligation would result in lowered interest expense to be paid by the companies and hence enhance the performance of the pension assets and lead to superior earnings. However, this change involves potential risk for the shareholders of the companies. The absence of smoothening of the results of the pension assets would considerably increase the year-to-year unpredictability of the companies’ earnings.

A surge in the stock market would increase the earnings significantly, while a plunge would considerably impede the same. This volatility in the earnings would consequently affect the earnings per share and increase the unpredictability of the shareholders’ value.Other companies might also implement the mark-to market strategy for their pension assets. In the last part of 2009, 74 companies in the S&P’s 500-stock index possessed underfunded pension assets as well as high unrecognized pension losses.

Removing the old practice of spreading the loss over the years would enable them to get clear of those past losses. BibliographyRapoport, Michael. “Rewriting Pension History Some Big Firms Move to Recognize Gains and Losses in the Years They Occur”. September 05, 2011. The Wall Street Journal, 2011.