Administration May 6, 2006

SEC Backs Accounting Standards Review to Beef Up Transparency

June 17, 2005 (PLANSPONSOR.com) - As part of its call for sweeping changes to certain US accounting and reporting rules, the staff at the US Securities and Exchange Commission (SEC) has recommended rethinking current accounting requirements for defined benefit pension plans and changing other financial reporting standards.
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Staff members noted, in a report issued this week, that pension trusts are currently exempt from consolidation by the companies that sponsor them, effectively resulting in the netting of balance sheet assets and liabilities. The plans can also put off recognition of gains and losses related to their retirement obligations and the assets used to fund these obligations. According to the report, there may be approximately $535 billion in pensions and other retirement obligations that are not recognized on US corporate balance sheets.

The report, issued as follow up to Sarbanes-Oxley accounting changes, recommends generally that companies preparing financial reports:

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  • discourage transactions motivated primarily by accounting and reporting considerations, rather than economics
  • expand the use of objectives-oriented standards
  • improve the consistency and relevance of disclosures
  • focus financial reporting on communication with investors, rather than just compliance with rules.

The SEC staff also backed the idea of reporting financial instruments such as derivatives at fair value. Requiring companies to value financial assets based on market prices would eliminate the need for complex hedge accounting and lessen reliance on transactions that can obscure a company’s true financial picture, the staff said.

“The report identifies improvements that have occurred in financial reporting since passage of the Sarbanes-Oxley Act and, importantly, it offers recommendations for further improvements designed to increase both the transparency and usefulness of the balance sheet,” said Donald Nicolaisen, SEC chief accountant, in a news release announcing the staff report. “Greater transparency can be achieved in some areas simply by reducing accounting choices and complexity. Since the events leading to passage of the Sarbanes-Oxley Act, we have made progress in improving financial reporting to investors, but more can still be done. I’m hopeful that this report will help focus efforts on further ways to improve transparency.”

The SEC staff members also called for a reconsideration of accounting for leases, transfers of financial assets with continuing involvement, contractual obligations, contingent liabilities and derivatives, as well as special purpose entities.

The study, complied by the SEC’s Office of Chief Accountant, Office of Economic Analysis and Corporation Finance Division, was based on information from 200 US public companies, including the 100 largest. The report is here .

Compliance May 5, 2006

SC High Court Orders Return of Contributions to Reemployed Retirees

May 5, 2006 (PLANSPONSOR.com) - The South Carolina Supreme Court ruled unanimously that the state wrongly forced thousands of retirees in a retention incentive program to pay contributions toward their pensions.
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The State newspaper  reports that the ruling requires the state to refund the contributions, with interest, to employees who signed up for the Teacher and Employee Retention Incentive (TERI) program before July 1, 2005. Participants enrolled in the program after this date will continue to have contributions deducted from their paychecks.

The ruling affects more than 13,000 participants, most of whom are teachers, according to the news report.   The high court did not decide on the issue for another 9,000 or so employees, sending their claims to a lower court for review.

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The TERI program, started in 2000, let state employees retire after 25 years and then return to work for up to five years, during which time the workers would not have to contribute to the retirement system. However, the General Assembly passed a law last year requiring participants to contribute 6.25% in payroll deductions toward the state’s retirement program. 

State employees in the program brought a lawsuit challenging the new law, and South Carolina police officers and firefighters joined the suit in February (See Police Officers Join SC Retirement System Lawsuit).

The justices said the Assembly breached its contract with retirees by enforcing the contributions. They rejected the state’s argument that ruling in favor of the retirees would cause “near crisis” for the retirement system.   Estimates of the cost to the system of the court’s decision have varied between $120 million and $500 million over the next few years.

The high court’s opinion is here .

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