Future Pension Cost Becomes a Liability

U.S. accounting rule makers yesterday adopted a standard that will force companies to disclose the future costs of retirement benefits on their balance sheets, wiping out billions of dollars of net worth.

The new rule from the Financial Accounting Standards Board takes effect in December and is designed to give investors a more complete picture of the obligations on a company's balance sheet.

Until now, companies listed the cost of retirement benefits in the footnotes of their financial statements. Now, an unfunded benefit will be treated as a liability and an overfunded benefit will become an asset on the balance sheet.

Under the changes, companies may no longer delay recognition of pension and retiree medical plan investment gains and losses by spreading them out over several years, as is now permitted. This practice has been referred to as "smoothing."

Manufacturing companies, such as automakers and steel producers, will be among the hardest hit by the new order. General Motors Corp. said in its 2005 annual report that putting the cost of future pension and medical benefits on the balance sheet will make its liabilities greater than its assets, erasing the company's net worth.

"We truly won't know the impact of the changes until we see the changes," GM spokeswoman Renee Rashid-Merem said of the rule.

The new rule will increase balance-sheet liabilities of the largest U.S. companies by $466 billion, reducing their net worth by 7 percent, according to estimates by Howard Silverblatt, an analyst at Standard & Poor's.

The final rule makes some concessions requested by companies, such as delaying until next June the date by which privately held companies must comply.