Earlie
I thought I smelled a rat on this IBM pension funding issue.
First we get the "we just want to get this pension thing behind us" news release from IBM.
biz.yahoo.com
>>>NEW YORK (Reuters) - International Business Machines Corp. (NYSE:IBM - News) on Wednesday said that it would close a $3 billion gap in its underfunded pension fund by the end of 2002 instead of over the next three years.
We just wanted to put this pension issue behind us for 2003," IBM Chief Financial Officer John Joyce said during a conference call.
Armonk, New York-based IBM's decision to move the substantial cash and stock payment into 2002 may indicate that the company's fourth quarter is going well, one analyst said.>>>
Oh, including the boot licking comments from the "analyst".
Then we get the Fitch comments about IBM's ratings,
biz.yahoo.com
"NEW YORK, Dec 5 - On December 4, 2002, International Business Machines Corp. (NYSE:IBM - News; IBM) announced that it is reviewing financing alternative plans to fully fund its U.S. pension plan. While Fitch Ratings believes IBM's decision is generally positive, the method and amount of funding could pressure the company's current Stable Rating Outlook, and ultimately IBM's 'AA-' senior unsecured debt and 'F1+' commercial paper (CP). Any negative ratings implications will depend on the magnitude of the funding, the portion which will be funded with cash, and the resultant impact on the company's balance sheet and financial flexibility at current rating levels. Fitch expects to conclude its analysis in early January 2003 as IBM will finalize funding plans by year-end 2002.
IBM's U.S. pension plan is currently estimated to have a $3.0 billion difference between assets and projections of benefit obligations on an accumulated benefit obligation (ABO) basis but fluctuates due to market conditions and interest rates. IBM currently intends to fund this difference through a combination of cash raised from debt issued and stock. The company's U.S. pension represents approximately two-thirds of the company's total worldwide pension plans."
OK, if IBM is concerned about funding its Plan, why are they referencing FAS 87 accounting concepts like "accumulated benefit obligation (ABO)" instead of IRS/ERISA funding concepts? They are targeting their contribution to close some gap based on FAS 87 ABO. Why?
Ok, here is the reason. Its long and involved so take a big hit off the bong or pour yourself another glass of wine.
In pension accounting, there are two measurements of the Employer's promise of future benefits: Projected Benefit Obligation (PBO) and Accumulated Benefit Obligation (ABO). Each reflects the present value of benefits accrued based on accrued service, but PBO also includes a projection of future salary whereas ABO does not. The calculation of pension expense is driven by PBO.
However, there is an "Additional Liability" provision in FAS 87 (it happens to be paragraph 36---I know Impristine will want to know all the details!) that is geared to ABO.
If at the end of the year assets do not exceed ABO, then you need to have recorded a liability on the books to make up that difference (the unfunded ABO). Basically, the rule is saying tht you must have the entire ABO covered somehow, either with assets or a combination of assets and a booked liability. If you have some unfunded ABO and you already have a liability in the form of accrued pension expense sitting on the books greater than the Unfunded ABO, then nothing further is needed. If, like IBM, you have unfunded ABO AND have an asset (accrued pension income) sitting on the books, you must record a liability large enough to reverse the entire pension asset and cover the unfunded ABO.
For example, IBM as of 12/31/01 had a prepaid pension asset of $5.7 billion (see the 2001 Annual Report). As of 12/31/02, I would estimate they had a prepaid pension asset of $6.7 billion. IBM tells us they have trust fund assets $3 billion less than ABO. If they do nothing through the end of 12/31/02, they would have needed to record an additional liability of $9.7 billion, changing the prepaid asset of $6.7 billion to a accrued expense of $3 billion, the amount needed to cover the unfunded ABO.
Instead, they contribute $3 billion to the Plan, and lo and behold, no more unfunded ABO, and the $9.7 billion additional liability disappears.
Mike
P.S. Ok, OK. I'm short IBM. |
