The bull market has provided a pleasant surprise to many companies that find themselves with surplus pension gains on their hands. That happy news for companies sometimes translates into perplexing information for investors, and the Securities and Exchange Commission is taking a hard look at broadening disclosure requirements.
Although pension surpluses are required by Financial Accounting Standards rule 87 to be identified in the footnotes of a company's annual report, the question naturally arises whether, in some cases, footnotes really get the job done. "We're looking to see if there's appropriate disclosure where the amount of earnings attributable to FAS 87 are material to a company's earnings," explains Brian J. Lane, director of the division of corporation finance for the SEC, in Washington, D.C.
Lane explains that a rules change may not be necessary to increase the visibility of the contribution of pension surpluses to a company's earnings. Currently, companies are required to reveal trends that have a significant impact on their earnings in the management discussion and analysis section of their annual reports. "If 90 percent of your earnings is attributable to profits from your pension plan, that seems to be something that should show up in the management discussion and analysis section," he says.
According to FASB research director Tim Lucas, his agency is aware of questions regarding the pension surplus, too, but it has no plans to change FAS 87. He notes that FASB has a project on the back burner to restructure how items are displayed on a company's income statement. "If we were to take that project up, we might get into some of the pension surplus questions," he says, but it's several years away from getting on the agenda.
Earlier this year, Bear Stearns & Co. released a report saying that aggregating pension items into one net benefit cost on a company's income statement, as required by FASB, "distorts earnings from core operations, growth rates, and intercompany comparisons."
"We found 15 companies in the S&P 500 that had pension income re-presenting 10 percent or more of operating income," observes Bear Stearns vice president David Zion. "For those companies, that's pretty significant."