Richard Schroeder, Ph.D., Belk College of Business, Department of Accounting, University of North Carolina @ Charlotte, Charlotte, NC 28223 and Suzanne Sevin, Ph., D., Accounting, University of North Carolina at Charlotte, Belk College of Business, 28223.
(1) Title:
The Economic Consequences of SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”
(2) Objective
Accounting for pension plans is undergoing significant reform. Market analysts believe that the changes in pension accounting required by SFAS No.158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” (SFAS 158) will significantly impact the balance sheets and income statements of many companies. Under SFAS 158, companies are required to treat their pension plans as liabilities because the standard defines pensions as financial obligations. Concerns have been voiced that this treatment will affect company’s leverage levels and cause their earnings to appear unstable. The purpose of this study is to conduct a preliminary evaluation of the effect of SFAS 158 on the financial statements of impacted companies.
(3) Data methods
December 31, 2006 was the effective date for compliance with SFAS 158. The financial statements of all Fortune 500 companies are being examined in order to address the following questions:
- What was the additional amount of pension expense reported by the sample of companies?
- What was the net income effect of this additional expense?
- How did this increase affect the sample of companies’ debt to assets ratios?
- How did this increase affect the sample of companies/ debt to equity ratios?
(4) Expected Results
Data is still being collected but a preliminary analysis indicates that many companies have experienced a substantial increase in their debt ratios as a result of SFAS 158