FASB Decides to Give Cash-Balance Changes More Thought

FASB received “a lot of letters and e-mail from people who have these cash-balance plans” who complained about the proposal, Robert H. Herz, FASB’s chairman told Dow Jones.   “In view of that, we decided to look at this further to give it more due process, and we have directed staff to go back to see how to do that.”

The proposal would have required companies who credit interest to individual accounts in cash balance plans using a market-based, rather than a fixed rate, to value the accounting liability for their cash balance plans using different, more conservative assumptions than used by all other pension plans.   Impacted cash balance programs would be required to value their liability using a discount rate based on government yields, which are lower than the rates on high-quality long corporate bonds used by other plans.   As a consequence companies with cash-balance pensions would have had to put more money into the plans to keep funding shortfalls from growing, according to critics of the measure.

More unsettling than the proposal to some was the way in which it nearly came into effect.    The proposal was introduced by FASB’s Emerging Issues Task Force (EITF) at a May 15 meeting – but the EITF had never been asked to consider the issue.   Rather, it had been only been asked to consider whether cash balance plans should be accounted for as defined benefit plans, and whether the traditional unit credit method was the appropriate attribution method under SFAS 87 (see  FASB “Observation” Could Create Cash Balance Headache ).   

However, once word of the proposal leaked out, a number of industry advocates raised concerns, including consulting firm Watson Wyatt and employer advocacy group the ERISA Industry Council (ERIC).   The EITF is a 13-member advisory group represented by chief financial officers and other senior executives of auditing firms and other companies that work on accounting issues.