Magazine article The CPA Journal

Excess Pension Assets as Corporate Assets: An Unresolved Issue

Magazine article The CPA Journal

Excess Pension Assets as Corporate Assets: An Unresolved Issue

Article excerpt

In 1986, FASB issued SFAS 87, "Employers Accounting for Pensions, which made significant changes in accounting, for the effects of sponsoring a defined benefit pension plan. In addition to changes in the measurement of pension expense, FASB required an employer to recognize a liability on the statement of financial position when the accumulated benefit obligation exceeds the fair value of plan assets. However, the FASB did not require recognition of a net pension asset when the value of assets in the pension fund exceeds promised henefits. The FASB stated that an overfunded plan should be considered a corporate asset, but that requiring recognition was not expedient (SFAS 87, par. 98, 107).

Although the issue of pension liability recognition has been widely discussed, recognition of a net pension surplus as a corporate asset has not been considered in depth.

Many Plans Are Overfunded

Recognition of a net pension asset deserves serious consideration as an increasing number of corporations find themselves with overfunded plans. According to Pensions and Investment Age's survey of the 100 companies that sponsored the largest defined benefit plans in 1988, 95 companies had overfunded plans, using the accumulated benefit obligation as a measure of the firms liability. Pension funds can also be very large relative to total corporate assets. Forty-four of the surveyed 100 companies had a ratio of plan assets to total corporate assets in excess of 20%. For 29% of the companies, earnings on plan assets were large enough to offset completely the periodic cost of plan sponsorship and to generate net pension income.

Although information on the fair market value of pension plan assets can be found in footnote disclosures, disclosure cannot be considered a substitute for recognition if pension assets meet recognition requirements. While some research indicates footnote disclosures are incorporated into the market's determination of stock prices, other studies had suggested individuals do not treat footnote disclosures in the same way as balance sheet items.

Asset Recognition under SFAS 87

Under SFAS 87, an employer must recognize a liability in the statement of financial position that is at least equal to the unfunded benefit obligation, although that liability can be offset by an intangible asset under some circumstances. However, an employer with an overfunded plan does not recognize an asset. In its discussion of SFAS 87, FASB stated that pension plan assets should be attributed to the employer because the employer bears the risk and rewards associated with plan performance. FASB also noted that the freqeency of asset reversions were compelling evidence that excess plan assets belong to the employer. Despite a stated belief that recognition of a net plan asset for overfunded plans would be conceptually appropriate, FASB concluded that requiring recognition would be too great a change from past practice to be adopted at the present time.

The Conceptual Framework

The FASB never discussed explicitly whether surplus pension assets meet the definition of an asset given in Statement of Financial Accounting Concepts 6, even though its original proposal on employer accounting for pensions would have required asset recognition for overfunded plans. FASB focused on the separate presentation of pension assets when a plan was underfunded, rather than the issue of ownership of excess plan assets. However, there are significant differences in the degree to which a corporation can control pension plan assets needed to meet existing obligations and pension plan assets which aer in excess of pension plan obligations.

Assets are defined in Concept Statement 6 as "probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events." The economic benefits to a firm of pension plan assets are not disputed. Even if a corporation had no access to plan assets for other operating purposed, favorable earnings on plan assets can reduce future contributions to the plan. …

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