FASB’s New Multi-Employer Pension Plan Disclosures to Impact Contractor Financial Statements: LarsonAllen LLP

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New Multi-Employer Pension Plan Disclosures to Impact Contractors

Story Highlights

FASB is concerned with the lack of transparency about employer participation in multi-employer plans.
The exposure draft proposes new disclosure requirements on financial statements.
The proposed change affects any private entity that participates in a multi-employer pension plan.
For public companies it is effective beginning with fiscal year-end December 15, 2010, and for private companies starting December 15, 2011.

The Financial Accounting Standards Board (FASB), has undertaken a project that will significantly increase disclosures required for employers who participate in multi-employer pension plans.

FASB’s exposure draft, Proposed Accounting Standards Update—Compensation—Retirement Benefits—Multiemployer Plans (Subtopic 715-80): Disclosure about an Employer’s Participation in a Multiemployer Plan, is scheduled to be finalized in the fourth quarter of 2010, according to FASB.

Given the concentration of contractors participating in collectively bargained pension funds (often times with numerous plans), this is likely to have a significant impact on their financial statements and how they may be perceived.

“Many multi-employer plans are underfunded so the disclosures are likely to cause anxiety among credit underwriters, sureties, and other users of the financial statement,” says Jason Bakke, construction principal with LarsonAllen. “Union contractors should work to understand how these disclosures will impact them and gather the required information to discuss with their providers.”

For public companies this change is effective beginning with fiscal year-end December 15, 2010, and for private companies starting December 15, 2011.

Disclosure only

One misconception about the requirements is that the employer’s portion of the underfunded liability will be required to be accrued on their balance sheet, which could have negative impact on a company’s equity. However, these changes, while substantial, only relate to items required to be disclosed in the company’s financial statement notes. The rules that would require the liability to be booked remain unchanged; accordingly, the liability will only need to be booked if it is likely to be incurred. In most cases, this would only occur in the case of a partial or complete withdrawal from the fund.

Background
Currently, employers are not required to disclose much information regarding their participation in multi-employer plans, generally limited to the amount of contributions made during the years being reported. The recent financial crisis, the Pension Protection Act of 2006, and other factors have resulted in a newly energized interest in the funded status of pension plans. It is envisioned that expanded disclosures would increase transparency and enable users of financial statements to better assess the risks a reporting entity faces by participating in a multi-employer plan.

Probable disclosure requirements

Some of the most significant disclosure items in the exposure draft include:

Number and names of plans in which the employer participates
Narrative descriptions summarizing the risks and uncertainties arising from participating in the plan(s), including:
- The relevant terms and conditions
- The regulatory warning status and remedies being considered, including effects of any funding improvement or rehabilitation plans (if applicable, based on the funding condition)
- Consequences in the case of withdrawal
Total assets and accumulated benefit obligations
The percentage of employees covered by the agreements and the amount of contributions for the current reporting period
Estimated future cash flow from the employer’s participation, including:
- Expected contributions for the next reporting period
- Known or expected trends in future contributions
Estimated withdrawal liability, should the employer cease to participate in the plan(s)

Concerns over the withdrawal liability disclosure
The item causing the most controversy is the withdrawal liability disclosure. “Critics say disclosing this information assumes a business failure, withdrawal, or another unlikely event and is inconsistent with the going concern principle, which assumes the entity will continue to operate in the foreseeable future,” Bakke says.

The FASB believes the withdrawal liability is the best available information to allow users to ascertain the employer’s relative share of the underfunded status or the financial health of the plan(s). Presumably, the liability will have to be addressed in future years through a combination of higher return on investments, increased contributions, or reduced benefits.

Sponsors of single-employer (non-union) pension plans are already required to report the actuarially determined funded status on their balance sheets, so this disclosure is seen by many as a movement in that direction.

Availability and timeliness of information

Assuming the FASB standard moves forward as proposed, the biggest obstacle to compliance will be obtaining meaningful and timely information from the pension fund providers. Reporting this information on an annual basis will place a substantial administrative and financial burden on the pension funds, some of which have upwards of 300 participating employers. Furthermore, actuarial and financial valuations of the pension funds as a whole (much less the employer-level withdrawal liability), are typically not available at the time the employer’s financial statements are issued. Thus, the information included in the disclosure is likely to be at least 12 to 18 months old by the time it is included in the financial reports.

How to prepare

Contractors should be proactive to learn how these disclosures will affect their financial information. Under current law, companies participating in these pension funds have the right to request the information needed to complete the disclosures. Take the time to review the status of your funds to understand the information that needs to be included in financial statement note disclosures. Most importantly, this will also enable your company to talk with credit underwriters, sureties, and other users of the financial statements to ensure they are not misinterpreted or misunderstood.