WASHINGTON, April 19, 2006 - New accounting rules proposed by the Financial
Standards Accounting Board (FASB) that would require companies to include
the funding status of pension plans on their balance sheets could be
expected to cut the shareholders´ equity of the FORTUNE 1000 by a total of
10 percent, an analysis by Watson Wyatt, a global human capital consulting
firm, has found. In addition, the rules would have disparate effects on
industries, affecting manufacturers of durable goods and transportation,
communication and utility companies more than other sectors.
"These rules could have a deeper impact than just changing accounting
practices," said Alan Glickstein, national practice leader for policies and
processes in Watson Wyatt´s retirement practice. "In the long run, they
could cause many companies to rethink plan investment policies and other
pension details. As a result, companies should analyze the overall effect
these rules could have and should take advantage of the FASB´s ongoing
comment period to let the board know of all the potential ramifications."
Watson Wyatt´s analysis, which projects decreases from 2004 shareholders´
equity, found that manufacturers of durable goods would see a decrease of
25 percent, while those in the transportation, communication and utility
sectors would see a cut of 13 percent. On the other hand, financial
services firms would see cuts of only 2 percent, and mining companies would
experience declines of only 3 percent. Shareholders´ equity represents the
portion of the company that shareholders own, after liabilities are taken
into account.
Industry
Shareholders´ Equity Without New Rules
Shareholders´ Equity With New Rules
Percentage Decrease in Shareholders´ Equity
Durable Manufacturing
$576 billion
$434 billion
25%
Transportation, Communication, Utilities
$537 billion
$468 billion
13%
Services
$143 billion
$127 billion
12%
Non-Durable Manufacturing
$710 billion
$654 billion
8%
Wholesale and Retail Trade
$138 billion
$132 billion
4%
Mining
$79 billion
$76 billion
3%
Financial Services
$1.08 trillion
$1.06 trillion
2%
Durable manufacturers would be particularly hard hit because many offer
both pension and retiree health insurance plans, and both would have to be
accounted for on the balance sheet under the proposed rules. Among the
sectors likely to be most affected by the new rules are car manufacturers,
steel makers and airlines.
"Although these rules will lead to a significant reduction in the amount of
shareholders´ equity in some industries, concerns that this could prompt
significant declines in stock prices appear to be generally unfounded,"
Glickstein said. "Many companies already include information about their
postretirement benefit plans in footnotes to their financial statements,
and investors have used that information to assess a company´s value."
While FORTUNE 1000 firms as a group would lose 10 percent in shareholders´
equity, the median decrease for individual firms in the FORTUNE 1000 would
be 4.8 percent.
The FASB released a draft of its new postretirement benefit accounting
rules on March 31, 2006, as the first phase in a two-phase project designed
to more rigorously apply accounting standards to postretirement benefits.
The comment period extends through the end of May, and the board is
expected to vote on a final version this fall.
About Watson Wyatt Worldwide
Watson Wyatt (NYSE: WW) is a leading global human capital and financial
management consulting firm. The firm specializes in employee benefits,
human capital strategies, technology solutions, investment consulting, and
insurance and financial services. Watson Wyatt has 6,000 associates in 30
countries and is located on the Web at www.watsonwyatt.com.
Contact
Ed Emerman, 609/452-5967, eemerman[at]eaglepr.com
Emily Rieger, 703/258-7634, emily.rieger[at]watsonwyatt.com