• Employer’s Accounting for Pensions - FASB No. 87
  • May 19, 2011 | Author: Lonny S. Cades
  • Law Firm: Cohen, Seglias, Pallas, Greenhall & Furman, P.C. - Philadelphia Office
  • Financial statements are relied upon by lenders, bonding companies and by those deciding whether to grant credit to companies. One of the main financial statements is the balance sheet. The balance sheet sets forth the assets, liabilities and net worth of a company. Information on the balance sheet is also used by lenders, bonding companies and those extending credit to determine if the company is meeting certain technical financial covenants that are often used to determine the credit worthiness of a company. If the recommendations of the Financial Accounting Standards Board (FASB) set forth in FASB No. 87 concerning the reporting of certain unfunded pension liabilities are adopted, it will become increasingly difficult for companies to borrow money, post bonds and obtain credit.

    The FASB sets forth on its website that "The mission of the FASB is to establish and improve standards of financial accounting and reporting that foster financial reporting by non-governmental entities that provide decision-useful information to investors and other users of financial reports." The FASB is "...independent of all other business and professional organizations".

    FASB No. 87 recommended that "This Statement requires immediate recognition of a liability (the minimal liability) when the accumulated benefit obligation exceeds the fair value of plan assets...". Essentially what this means is that if a defined benefit pension plan is underfunded, which is the case for most multi-employer union plans, that this must be reflected on the financial statements of the member employer.

    The three major factors identified by FASB No. 87 are delaying recognition of certain events, reporting net cash and offsetting liabilities and assets.

    The adoption of FASB No. 87 is currently under review. If adopted, underfunded pension liability would be required to be addressed in a company's financial statements, which could have devastating results. The employer would be required to report its percentage of the underfunded liability as a liability on its balance sheet. This would result in any and/or all of the following:

    1. Greater difficulty in obtaining financing;

    2. Greater difficulty in obtaining bonding; and

    3. Technical defaults under present bank loans based on being out of the financial covenants.

    It is important to remain cognizant of the push to have FASB No. 87 adopted. In addition, although most accountants are aware of FASB No. 87, not all are. Therefore, it would be beneficial to you to advise your accountant as to the existence of FASB No. 87.

    We will continue to monitor the status of FASB No. 87 and advise if it is adopted and thereupon required to be reported on financial statements.