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 ...Show more