The Financial Accounting Standards Board (FASB) recently proposed changes to its accounting standards regarding disclosures about an employer’s participation in multiemployer pension and welfare plans (Proposal). The FASB, subject to oversight by the Securities and Exchange Commission, sets standards for Generally Accepted Accounting Principles (GAAP) applicable to companies whose securities are publicly traded in the United States and to other companies obligated to follow GAAP.
Multiemployer Plans
A multiemployer plan is a benefit plan maintained pursuant to one or more collective bargaining agreements between a union or unions and employers and to which more than one employer is required to contribute. Contributions are pooled in a common fund that pays for plan benefits.
When an employer terminates its participation in a multiemployer defined benefit pension plan that has unfunded vested benefits, the employer may be assessed withdrawal liability under ERISA for its proportionate share of such unfunded vested benefits. “Complete withdrawal” from a multiemployer pension plan can occur upon the sale or closing of the covered facility or upon renegotiation of the collective bargaining agreement that terminates an employer’s obligation to contribute to the plan. Special rules apply to withdrawals from plans in the construction, entertainment and trucking industries.
In some cases, withdrawal liability can be millions of dollars. In extreme situations including very large underfunded plans, the liability can be much greater, such as the $6.7 billion withdrawal liability that United Parcel Service paid to the Central States Pension Fund in 2007.
The Pension Protection Act of 2006 imposes stricter funding requirements on multiemployer pension plans. It also requires greater disclosure concerning such plans’ funding status, along with increased contributions from employers that participate in “endangered” or “critical” plans. At the same time, the erratic stock market has taken its toll on the investment portfolios of many multiemployer plans. As a result, more attention has been given to employers’ exposure to liability from participation in multiemployer plans and the perceived lack of financial transparency concerning such liability.
Proposed FASB Standards Change
Currently, the FASB’s accounting standards require very few employer disclosures relating to multiemployer plans, unless a liability associated with such participation is at least reasonably possible.
Under the Proposal, an employer would be required to disclose additional quantitative and qualitative information about its participation in a multiemployer plan. The Proposal would not change the standards for recognition of liabilities associated with multiemployer plans (i.e., booking a charge to income on the employer’s financial statement). Instead, the Proposal would require additional narrative footnotes to the employer’s financial statement.
The FASB believes that the following additional disclosures about an employer’s participation in multiemployer plans would be valuable information to investors: the risks of participation; the employer’s relative size among other participating employers; the employer’s contractual commitments; the extent of the employer’s use of such plans; and the impact on future cash flows arising from such participation. Therefore, the Proposal would require employers to disclose the numerous details about their participation, as described below.
Context and Risks of Participating in Multiemployer Plans
To provide investors with information regarding the context of multiemployer plans and the risks an employer may face from participating in such plans, the Proposal would require an employer to disclose the number of multiemployer plans in which it participates, as well as the names of any individually material multiemployer plans. In addition, the Proposal would require narrative descriptions of any significant risks arising from the employer’s participation in each such plan, including the extent to which it may be liable to the plan for other participating employers’ obligations.
The employer would also have to describe how multiemployer plan benefit levels are determined; whether the employer is represented on the plan’s board of trustees; the consequences if the employer stops contributing to the plan; whether the plan is in critical or endangered status; and where applicable, the nature of any “funding improvement” or “rehabilitation” plans adopted by multiemployer plans in endangered or critical status.
The Proposal would also require disclosure of the total assets and the accumulated benefit obligation of the multiemployer plan as of the most recent financial statement plan year-end and those amounts for the corresponding prior periods. A description would be required of the nature and effect of any changes affecting comparability from period to period, including business combinations or divestitures. Finally, the rate of employer contributions for each period for which a statement of income is presented would have to be provided.
Relative Size, Commitments and Extent of Use
To give investors an idea of an employer’s relative size among other participating employers in a multiemployer plan, the Proposal would require disclosure of such employer’s contributions as a percentage of total contributions to the plan for the year ended, as of the most recent date available before the statement of financial position date and that percentage for the corresponding prior periods.
The Proposal would also require an employer to provide disclosure regarding its commitment to the multiemployer plan (i.e., a description of its contract requiring contributions to the plan, including its term, any minimum contributions required, and for each future year of the contract, the basis for determining contributions).
Relating to the extent to which the employer uses multiemployer plans, the Proposal would require disclosure of the percentage of its employees covered by multiemployer plans and the number of its employee participants as a percentage of total plan participants, disaggregated between active and retired participants. Also, the amount of contributions for the current reporting period would have to be disclosed. This is in addition to the currently required recognition of such amount on the employer’s financial statement.
Future Cash Flows
Perhaps most importantly, the Proposal would also require detailed information about cash-flow implications arising from an employer’s participation in a multiemployer plan. This information would include the expected contributions for the next reporting period and known trends in contributions, including the extent to which a surplus or deficit in the plan may affect future contributions.
Under the Proposal, disclosure of any agreed deficit or surplus allocation to participating employers on wind-up of the plan must also be provided. In addition, an employer must provide the amount of its potential withdrawal liability to a multiemployer pension plan, or, if that is not obtainable, information about the employer’s relative participation in the plan, including its percentage of total contributions to the plan or its percentage of participants covered by the plan.
Consequences
- If implemented, the Proposal would require substantial new disclosures by employers that participate in multiemployer plans and report financial results under GAAP.
- Although the Proposal would directly apply only to employers that report financial results in accordance with GAAP, other employers may find that their board, lenders and investors will pay increased attention to their potential withdrawal liability and may seek information similar to that required by the Proposal.
- Much of the required information is not readily available to employers, and therefore implementation costs could be significant.
- Multiemployer plan administrators will face more requests for information and more reluctance on the part of employers to participate in multiemployer plans.
- In some cases, the extensive disclosures could give the wrong impression about the financial condition and obligations of an employer participating in a multiemployer plan. For example, the Proposal would require more employers to disclose their potential withdrawal liability, which stands to be substantial for many employers, and may even exceed the assets of some. In this regard, the Proposal risks painting a misleading picture for investors reviewing the financial statements of an employer that participates in a multiemployer pension plan and has no intention of withdrawing.
- For some companies, moreover, the Proposal will call attention to liabilities that many employers have not clearly understood and often overlook.
- In the mergers and acquisitions context, the Proposal should make it easier for prospective acquirers to obtain detailed information on any multiemployer plans to which the target company contributes.
Whether or not the Proposal is adopted, employers contributing to multiemployer plans, or contemplating doing so, are well-advised for their own planning purposes to obtain the information the Proposal would require, and undertake the analysis that it contemplates.
Effective Date and Comment Deadline
For public entities, the Proposal would be effective for fiscal years ending after Dec. 15, 2010. The effective date for nonpublic entities would be one year later. Nov. 1, 2010, is the deadline for submitting comments on the Proposal to the FASB.