Financial Reporting:

Pensions and Other Post-Employment Benefits, Including Health Care Costs

 

How should the costs of pensions and other post-employment benefits (OPEBs) be reported in the financial statements?

Position: The costs of pensions and OPEBs should be reported at fair value in the balance sheet with changes in the fair values reported each period in the income statement. Similarly, the fair value of assets set aside to fund the pensions and OPEBs should be reported at fair values.

Rationale:

• The costs of pensions and OPEBs are promises made by companies to their employees to fund their retirements, and are frequently among the largest obligations for companies worldwide

• These obligations and companies’ inability to fulfill their promises are a major factor in a number of major bankruptcies

• Current financial reporting rules permit company managers to: a) treat the obligations as off-balance-sheet items with disclosure only in the footnotes; and b) defer much of the costs of the plans for 15 or more years

• Such deferrals and off-balance-sheet treatments mean that the effects of these plans on the companies’ operations and on their solvency are not considered by those who are not highly sophisticated in financial reporting and analysis

• A current agenda item for both the FASB and the IASB is to reconsider the financial reporting for such plans

• The CFA Centre believes that both the obligations and funds set aside for both pensions and OPEBs should be reported at fair value in the balance sheet, with all changes in the fair values reported in income as incurred

Where stated:  IAS 19 Employee Benefits 04 (PDF); FAPC - FASB Pensions and Benefits (PDF); Improvement of IAS 19, Employee Benefits 02; Comprehensive Business Reporting Model

 

Opposing Argument:

• Some have argued that if these plans are required to be reported completely and accurately in the financial statements that some company managers may move to terminate or otherwise change the plans, adversely affecting employees’ future retirement benefits

• Such an argument is frequently made when changes in financial reporting are proposed. A recent example is the proposal (now final rule) to require the expensing of stock options at fair value. Some managers argued that if options were to be reported accurately that companies might reduce the grants of such compensation, harming innovation

 

CFA Centre Position Regarding the Opposing Argument:

• The purpose of financial reporting is to provide the information investors and other users require to make financial decisions, including capital allocation and investment decisions. Investors' decisions must be based upon accurate and complete information

• False, misleading, incomplete, and inaccurate financial reporting will undermine the efficient and effective allocation of capital and investors’ trust and confidence in financial markets

• The integrity of the financial reporting system cannot be subverted to a non-financial reporting purpose