GASB versus FASB – Clumsy

via Daily Prompt: Clumsy

Sorry, but I don’t understand how our powers that be can support two different accounting standards for valuing a defined benefit plan’s liabilities.  The International Accounting Standards Board requires pension liabilities to be valued at a risk free market rate.  However, in the U.S. we have two governing bodies that oversee pension accounting with one supporting public and multi-employer plans (GASB) and the other supporting private sector plans (FASB).

In the case of GASB, a DB pension plan can value their liabilities at a discount rate equivalent to the return on asset assumption (ROA), which for most plans is in the 7.5% to 7.75% range.  Under FASB, a private sector plan must use a blended AA corporate rate, which will be much lower in this environment, but still significantly inflated versus the risk free rate (Treasury security). Why does this situation exist?  Not sure, but it seems to be creating a stir for actuaries, too.

The Society of Actuaries has been stating for a long time that liabilities should be valued at a true economic rate, and not one predicated on a guess as to how much a plan is going to earn (ROA) over time.  Having two different accounting standards is very clumsy, and it creates uncertainty in the marketplace.  At KCS, we remain strong advocates for DB plans, but we believe that these plans will only continue to be viable if there is an honest assessment of their liabilities.  Without this transparency, how can a sponsor truly know whether or not they are winning the pension game.



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