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S. HRG. 109–1047 

FASB’S PROPOSED STANDARD ON 

‘‘EMPLOYERS’ ACCOUNTING FOR DEFINED BENEFIT 

PENSION AND OTHER POST-RETIREMENT PLANS’’ 

HEARING 

BEFORE THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE 

ONE HUNDRED NINTH CONGRESS 

SECOND SESSION 

ON 

EXAMINING A FINANCIAL ACCOUNTING STANDARDS BOARD (FASB) 

PROPOSAL THAT WILL PROVIDE ENHANCED TRANSPARENCY OF CORPORATE ACCOUNTING FOR DEFINED BENEFIT PENSION AND OTHER 

POST-RETIREMENT PLANS 

JUNE 14, 2006 

Printed for the use of the Committee on Banking, Housing, and Urban Affairs 

( 

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman 

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

PAUL S. SARBANES, Maryland 

CHRISTOPHER J. DODD, Connecticut 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey 

KATHLEEN L. CASEY, Staff Director and Counsel 

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel 

JUSTIN DALY, Counsel 

STEPHEN R. KROLL, Democratic Special Counsel 

DEAN V. SHAHINIAN, Democratic Counsel 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE E. WHITTLE, Editor 

(II)

C O N T E N T S 

WEDNESDAY, JUNE 14, 2006 

Page 

Opening statement of Chairman Shelby ................................................................ 1 

Opening statements, comments, or prepared statements of: 

Senator Sarbannes ........................................................................................... 2 

Senator Allard ................................................................................................... 2 

Senator Enzi ..................................................................................................... 3 

WITNESSES 

Robert H. Herz, Chairman, Financial Accounting Standards Board .................. 5 

Prepared statement .......................................................................................... 22 

Response to written questions of: 

Senator Enzi .............................................................................................. 48 

Senator Bunning ....................................................................................... 51 

Sir David Tweedie, Chairman, International Accounting Standards Board ...... 7 

Prepared statement .......................................................................................... 36 

Response to written questions of: 

Senator Enzi .............................................................................................. 54 

Senator Bunning ....................................................................................... 56 

ADDITIONAL MATERIAL SUPPLIED FOR THE RECORD

FASB’s Proposed Standard on ‘‘Employers’ Accounting for Defined Benefit 

Pension and Other Post-Retirement Plans’’ ....................................................... * 

* Retained in Committee files 

(III)

(1) 

FASB’S PROPOSED STANDARD ON 

‘‘EMPLOYERS’ ACCOUNTING FOR DEFINED 

BENEFIT PENSION AND OTHER 

POST-RETIREMENT PLANS’’ 

WEDNESDAY, JUNE 14, 2006 

U.S. SENATE, 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, 

Washington, DC. 

The Committee met, pursuant to notice, at 10:29 a.m., in room 

SD–538, Dirksen Senate Office Building, Senator Richard Shelby 

(Chairman of the Committee) presiding. 

OPENING STATEMENT OF CHAIRMAN RICHARD SHELBY 

Chairman SHELBY. Today, the Banking Committee will examine 

a Financial Accounting Standards Board (FASB) proposal that will 

provide enhanced transparency of corporate accounting for defined 

benefit pension and other post-retirement plans. Sound and transparent accounting standards are the lifeblood of the capital markets. Financial reporting must reflect economic reality. If it does 

not, investors will lose confidence in the integrity of our markets. 

It is that simple. 

To establish high-quality accounting standards, the standard setter must have an open process to consider the views of all interested parties, and it must possess unquestioned independence. The 

FASB proposal, the first phase of a two-phase project, would require employers to recognize on their balance sheets the overfunded or underfunded status of their single employer benefit pension plans and other post-retirement benefits. This accounting 

change would make financial statements more accurate, complete, 

and reliable. 

I applaud FASB for embarking on this important project and 

offer my continued support for their independent judgment. The effort to bring transparency to pension accounting is part of a larger 

effort to not only harmonize global accounting standards, but also 

to improve their quality. The Securities and Exchange Commission, 

the FASB, and the International Accounting Standards Board, 

IASB, are working together on this important endeavor. 

This morning, we will hear testimony from two witnesses. Neither one is a stranger to the Committee. Mr. Robert Herz is Chairman of the FASB, and Sir David Tweedie is Chairman of the IASB. 

I welcome both of them back to the Committee and look forward 

to their statements. 

Senator Sarbanes. 

2 

STATEMENT OF SENATOR PAUL SARBANES 

Senator SARBANES. Well, Mr. Chairman, I want to commend you 

for your continued attention to the importance of the work of the 

Financial Accounting Standards Board and the International Accounting Standards Board. Of course, Bob Herz and Sir David 

Tweedie are no strangers to this Committee, and I am pleased to 

join with you in welcoming them back this morning. 

The statements of both of our witnesses outline potential problems with the present accounting rules for defined benefit pension 

plans. Some of those potential problems are perhaps inherent in 

the nature of defined benefit pension plans themselves, especially 

the possibility that assets will shift in value or will not be adequately matched to the maturity of pension obligations. 

Others may reflect difficulties of predicting future employment 

and industry health, difficulties not foreseen several decades ago, 

and others may reflect inconsistencies or loopholes in the statutes 

governing pension funding. But both organizations, as I understand 

it, have undertaken a serious reexamination of these issues, and 

that is now underway. 

There is, of course, debate over implementation costs, when to 

measure benefit obligations and associated assets, appropriate effective dates, transition periods, and whether special rules are 

needed for nonpublic companies, nonprofit organizations, and cooperatives. Some have expressed concern about the impact immediate balance sheet disclosure could have on companies and, hence, 

their ability to continue to fund the benefit plans. Others, of course, 

have emphasized that an accounting system for public companies 

that does not adequately disclose the size and impact of obligations 

of this nature can hardly be called transparent. So I join with you 

in looking forward to learning more about these issues today, and 

I join with you, as always, in welcoming Sir David and Bob Herz 

back before the Committee. 

Chairman SHELBY. Thank you, Senator Sarbanes. 

Senator Allard. 

STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. Well, Mr. Chairman, again, I would like to 

thank you for holding this hearing. This is a major proposal that 

will have significant implications for business, so I appreciate the 

opportunity to learn more about what FASB is doing. As part of 

this debate, we cannot lose sight of the voluntary nature of the current retirement benefit systems. Certainly it is important to have 

fair, consistent, accurate, and transparent reporting. However, we 

must also be cognizant of the potential to disincentivize employers 

from providing benefits. As with all important regulatory decisions, 

I hope that FASB is taking an appropriate amount of time and giving adequate consideration to the comments it receives. Such expansive decisions are better done right than done fast. 

I look forward to the testimony of our witnesses, and it will be 

most helpful as we continue to monitor progress on this issue. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Senator Enzi. 

3 

STATEMENT OF SENATOR MIKE ENZI 

Senator ENZI. Thank you, Mr. Chairman, and I really appreciate 

your holding this hearing today on revising our Nation’s accounting 

standards for pension plans and retirement health benefits and 

their convergence with the international accounting standards. 

This hearing could not be timelier as we approach the retirement 

of the baby-boom generation. Day after day, the newspaper headlines are filled with stories of large and small companies struggling 

with legacy costs, especially in the retirement benefits area. 

After his last appearance before the Banking Committee a couple 

years ago, Sir David Tweedie and I had the opportunity to meet in 

the Committee’s anteroom. The original topic of discussion was intended to be about the use of stock options grants in the United 

States and in Europe; however, the topic quickly changed to a discussion on accounting standards for retirement benefits. At that 

time both of us had agreed that accounting for retirement benefits 

was one of the bigger challenges for the accounting industry. We 

both thought the issue dwarfed the issue of stock options. 

Sir David spoke of his experience with companies in legacy industries and the U.K.’s pension turmoil. We both recognized that 

the problem was looming over the horizon in the United States. 

Little did we know how correct that would be. 

Mr. Chairman, as you know, last year I took over the chairmanship of the Committee on Health, Education, Labor, and Pensions. 

One of my first orders of business was to begin drafting legislation 

to revise our pension laws under ERISA to ensure that defined 

benefit pension plans are fully funded and do not become a burden 

on the Pension Benefit Guaranty Corporation, PBGC. Currently, 

we have convened a conference committee with the House to resolve the difference between the House and Senate bills. I have got 

to say this would be a whole lot easier if we were just initiating 

the policy for pensions to start, but they have been in effect for 

years and years, and any change that we make affects past actions 

as well as future actions. It is complicated because the plans already exist, so our option is not to start over. Our option is to transition so that we make sure that people that worked hard for years 

and years with the anticipation of retirement can retire and that 

the funds are made strong and complete. 

Now, while pension accounting, pursuant to the funding rules for 

ERISA and the Tax Code, are much different than generally accepted accounting practices, there are vital lessons to be learned. 

FASB is making the right decision to update retirement benefits 

accounting standards at this time. The current standards do not accurately tell the story of the true cost of liability a company may 

owe for future obligations. The first stage may appear to be a modest change, but even a modest change in this volatile area can be 

significant, particularly when you take into consideration the 

changes that the pensions bill are going to be making at the same 

time. These are not being done in opposition to each other. They 

are being done in conjunction with each other. But it is important 

that there be a lot of communication so that one is not undoing the 

process of strengthening that the other is doing. 

The real work will come when FASB engages in Phase 2 of its 

initiative to look at the methodologies behind the numbers. Today 

4 

we are on the verge of an evolution in our pension and retirement 

health care system. Companies are making the decision to no 

longer provide defined benefit plans and retirement health care due 

to escalating costs. In addition, study after study shows that Americans in general do not have enough money to live through their 

golden years. 

Now, as FASB and the International Accounting Standards 

Board consider changes to accounting rules, I would offer them 

guidance to do so in a manner that would not cause companies to 

immediately stop retirement benefits. Any significant change must 

be done with sufficient transition periods in place and time for 

companies to adjust and to plan ahead. Our employees’ retirement 

benefits are too important not to take the time to get this right the 

first time. 

I have commended FASB before for having a Small Business Advisory Committee, and I think that has helped with some significant decisions. Perhaps there could be a temporary committee that 

would also work on the retirement benefit thing to bring in the expertise of people that have been working in that for years to make 

sure that what we are doing on pensions legislation and what you 

are doing on standards will be conjunctive rather than opposing. 

Mr. Chairman, as this is a hearing on accounting standards, I 

would also like to add a comment on the recent revelations on the 

manipulation in the marketplace on stock options. If there can be 

good news out of this, it appears that the backdating scandal appears to have happened before the implementation of SarbanesOxley. Thankfully, provisions in the act require much faster disclosure of executives who exercise stock options rights. This and vigilant oversight by the SEC should put an end to it. However, I am 

very disturbed by the Enron-type shenanigans that appear to have 

gone on with stock option backdating. This is just another lessons 

that the manipulation of accounting standards is wrong. It is criminal, and those who are manipulating the markets must be punished. 

Now, when we discussed stock options and accounting a couple 

of years ago, the discussion I brought to the table was about entrepreneurship and broad-based employee stock option plans. I still 

believe that companies should have these tools available to them. 

Legislation introduced would have immediately expensed and disclosed executive stock options. Executives should not be permitted 

to manipulate executive stock options to the detriment of employees and shareholders. I fully support Chairman Cox and the SEC 

Enforcement Division to crack down on that abusive practice. 

Mr. Chairman, I thank you for holding this hearing. 

Chairman SHELBY. Senator Bunning. 

Senator BUNNING. No opening statement. Thank you. 

Chairman SHELBY. I want to welcome again both of you to the 

Committee. Sir David, I know you travel a lot. We are glad to have 

you here. Thank you. Your written testimony will be made part of 

the record. Bob, we will start with you. 

5 

STATEMENT OF ROBERT H. HERZ, CHAIRMAN, FINANCIAL 

ACCOUNTING STANDARDS BOARD 

Mr. HERZ. Thank you, Chairman Shelby and Ranking Member 

Sarbanes, and other Members of the Committee. I am here on behalf of the Financial Accounting Standards Board, and I want to 

thank you for this opportunity to discuss our current project to improve the employers’ accounting for defined benefit pension plans 

and other post-retirement benefits. 

Our ultimate goal in that project is to develop, in cooperation 

with the IASB, a high-quality principles-based global standard for 

accounting for these obligations. I am therefore very pleased that 

Sir David is also here with me today. 

As you probably know, we are working very closely with our 

international colleagues on a number of key projects, including the 

development of a common conceptual framework, topics like accounting for business combinations, financial instruments, financial 

statement presentation, revenue recognition, and a number of other 

projects designed to reduce the differences between U.S. GAAP and 

international financial reporting standards, and in the process to 

improve both of our respective standards. Sir David will elaborate 

further on these efforts to bring about high-quality global accounting standards. 

With regard to the post-retirement benefit project, we have undertaken that project because current accounting standards do not 

provide complete and transparent information about employers’ obligations and costs relating to these benefit promises. Our proposed 

changes in the first phase of our two-phase project would require 

employers to recognize the over or underfunded status of their defined benefit pension plans and other post-retirement benefit plans 

on their balance sheets. We believe these changes would more 

faithfully report the underlying economic effects of those plans and 

increase the transparency, completeness, and usefulness of financial statements for shareholders, creditors, employees, retirees, and 

others. 

The second broader phase of the project, which will begin after 

completing the first phase, will address a broad range of accounting 

and reporting issues in the area of post-retirement benefits. Before 

discussing further details about this project, I would like to provide 

you with a little bit of background on the FASB. 

We are, of course, an independent, private-sector organization. 

Our independence from enterprises, auditors, and others is fundamental to achieving our mission to establish and improve standards of financial accounting and reporting for both public and private enterprises. Through the FASB, accounting standards are set 

by an independent group of experts who carefully develop proposed 

rules through an open, public deliberative process which contributes to overall confidence in the capital markets. 

Financial reporting is meant to tell it like it is and not to allow 

distortions or the skewing of information that favors particular 

companies or industries, particular types of transactions, or particular political, social, or economic goals other than that of sound 

reporting. 

While bending standards to favor or retain a particular outcome 

may seem attractive to some, in the long run, biased accounting 

6 

standards can lead to mistakes in private and public investment 

decisions. 

Because our actions affect so many organizations, our decision 

process must be open, thorough, and as objective as possible. So 

our rules of procedure require an extensive and thorough public 

due process. It involves public meetings, public roundtables, meetings with many interested parties, and exposure of our proposed 

standards to external scrutiny and public comment, and in making 

our judgments we must balance the often-conflicting perspectives of 

various interested parties in order to make independent, objective 

decisions guided by fundamental concepts and key qualitative characteristics of financial reporting. 

In November of 2005, our Board unanimously decided to add a 

comprehensive project to our agenda to reconsider the existing accounting guidance for defined benefit pension plans and other postretirement benefits. That decision responded to many requests 

from users of financial statements, preparers and auditors, our advisory committees, the staff of the Securities and Exchange Commission, the Pension Benefit Guaranty Corporation, and many others, to remedy deficient rules that have resulted in unclear and 

misleading financial reporting for defined benefit plans and other 

post-retirement benefits. 

What are the key concerns? First, the current standards permit 

an employer sponsoring such plans to delay recognition through a 

complex series of smoothing mechanisms of the economic events 

that result in great distortions of the costs and obligations that are 

reported. Current requirements also relegate important information about the benefit plans and their status to the notes in the financial statements. Additionally, the existing reporting of benefit 

costs obscures the employers’ reported results of operations by combining the effects of compensation, investing, and financing activities. 

We decided to conduct our project in two phases. The first phase 

of the project focuses on recognizing on the employers’ balance 

sheet the overfunded or underfunded status of its post-retirement 

benefit plans. The second, broader phase of the project will address 

other more complex issues, including how best to recognize and display in reported earnings or other comprehensive income, the various elements that affect the cost of providing post-retirement benefits. A key issue to be explored there will be whether and to what 

extent should the current smoothing mechanisms relating to pension costs and other post-retirement benefit costs be allowed to continue, or should it be eliminated or at least simplified. 

We will also examine issues such as how best to measure the obligations, in particular, obligations under plans with lump sum 

benefit features, cash balance plans and multi-employer plans, and 

whether more or different guidance should be provided regarding 

measurement assumptions. 

Since our November 2005 decision, the Board and staff have held 

three public meetings to discuss the Phase 1 project. We have discussed it at meetings with our advisory committees and with other 

interested groups. We have also discussed it at numerous venues 

across the country. 

7 

So after about 4 months of public due process, in March of this 

year we unanimously agreed to issue the Phase 1 proposal for public comment. The Phase 1 proposal would require employers to recognize the overfunded or underfunded status of their post-retirement benefit plans on their balance sheets. For example, for defined benefit pension plans, the amount of what is called the projected benefit obligation would be compared to the value of the related plan assets. If the projected benefit obligation exceeds the 

plan assets, the difference would be reported as a liability on the 

employers’ balance sheet, that is, it is in an underfunded position 

with a corresponding decrease net of any tax effects to the employers’ reported equity. Conversely, if the value of the plan assets exceeds the projected benefit obligation, the difference would be reported as an asset with a corresponding increase net of any tax effects in the employers’ reported equity. 

The Phase 1 proposal would also require that employers measure 

the plan assets and obligations as of the date of their financial 

statements. In contrast, current accounting standards permit them 

to be measured at dates up to 3 months earlier. The proposed 

changes would require recognition of the overfunded or underfunded status by the end of this fiscal year for calendar year-end 

companies. For public companies, the change in the measurement 

dates to bring it to the fiscal year end would be delayed for another 

year to 2007, and for private companies, they would be given another year, to 2008. 

The comment period for the Phase 1 proposal ended on May 31. 

The Board plans to hold public roundtable meetings later this 

month on the proposal to ensure that we understand the views and 

positions of interested parties. While our staff is currently analyzing and summarizing the over 200 comment letters we have received, from my own reading of the letters, some of the key issues 

and concerns raised by respondents focus on the measurement of 

the underfunded or overfunded status, the proposed effective dates, 

and the proposed requirement to measure plan assets and liabilities as of the employers’ fiscal year end. 

After the roundtable meetings, the Board will then begin public 

redeliberations on the Phase 1 proposal. Our redeliberations will 

focus on the key issues raised by constituents, and only after carefully evaluating the input received will the Board consider whether 

to issue a final standard on Phase 1, which, of course, requires approval by a majority of our Board. Once we do that, assuming we 

do it, the Board will begin Phase 2 of the project. 

Chairman Shelby, before handing over to Sir David, I would like 

to take this opportunity to thank you and Senator Sarbanes and 

other Members of the Committee for all your efforts in recent years 

to improve the integrity of financial reporting, and for your support 

of our work. Many thanks. 

Chairman SHELBY. Sir David. 

STATEMENT OF SIR DAVID TWEEDIE, CHAIRMAN, 

INTERNATIONAL ACCOUNTING STANDARDS BOARD 

Mr. TWEEDIE. Thank you very much, Mr. Chairman, Ranking 

Member Sarbanes, Members of the Committee. May I say, as ever, 

8 

it is a great pleasure to be here in the United States, the finest 

country that anyone ever stole. 

[Laughter.] 

Mr. TWEEDIE. I must say that it is a great opportunity to discuss 

a topic that I care deeply about, as Senator Enzi reminds me. I am 

a baby boomer, and this is an issue—I may not look it—but this 

is an issue that does start to creep up on you. 

I think the real area though is the fact that between the FASB 

and the IASB, we could make real progress in changing accounting 

systems that are deficient, distort behavior, have intergenerational 

consequences, and could lead to great cost, as Senator Enzi emphasized, to taxpayers. 

We are in the process now of adding a project onto our active 

agenda. We intend to work very closely, as Bob said, with the 

FASB, and I am delighted that Bob is here with me today. He has 

been a great advocate of international standards, and has provided 

essential leadership in our convergence program with the United 

States’. 

Perhaps before I turn to post-retirement benefits, I could put 

IASB’s work into context. The FASB and the SEC helped form our 

constitution, which makes it quite clear that our objective is to 

come up with one single set of high-quality global standards. Since 

I first appeared before this Committee in February of 2002, 100 

countries now allow or require international standards to be used, 

including the European Union, which requires them for consolidated accounts of listed companies. This also includes Australasia 

and South Africa. China is starting next year. Canada is going to 

shift in a few years time. Japan, we have a major convergence program with. Israel is coming in in 2008, and Chile the following 

year. 

In all of this, the cooperation of the FASB has been essential, 

and our major objective now is to converge with the United States 

so we do indeed have one single set of standards and not two, as 

we have at present. The idea is, companies worldwide want access 

to markets on both sides of the Atlantic, and the convergence program is a major way of getting there. 

Shortly after Bob became Chairman, we signed the Norwalk 

Agreement with the FASB, whereby we were trying to remove the 

differences in our various standards. By 2010, 1,000 companies 

using international standards will be registered with the SEC, and 

we see that number growing. It was taking too long, however, to 

get rid of these differences, and with the help of Bob and the SEC, 

we produced what is known as the Roadmap, a way in which we 

can get rid of these differences rather faster, and a method by 

which we can remove the reconciliation required when you list in 

the U.S. markets, using standards from another jurisdiction, and 

that has become a source of major contention among companies 

worldwide, and probably stopping several of them coming to the 

United States. We hope we can get rid of the need for reconciliation 

in the next 2 to 3 years. 

The program is split into two parts. First there is a short-term 

phase, whereby we look at differences we know we can get rid of 

quite quickly, and we will just make a few changes to paragraphs 

in standards. FASB are doing some and we are doing some. Others, 

9 

where the standards are perhaps outdated or too complicated, 

while we could converge them, we think that would be a waste of 

resources, and we intend to write jointly a new standard. These 

cover various issues including financial instruments. If you have 

read the International Financial Instrument Standard, if you understand it, you have not read it properly. These are the sort of situations that affect, I think, probably the U.S. standard too, and 

what we want to do is write a new one. Post-retirement benefits 

fit into this class as well. 

Bob and I often hear that accounting should not affect behavior, 

but the trouble is poor accounting masks the problem and leads to 

bad behavior. The overall deficit about a year ago, and the European Union companies in the Dow Jones Stoxx Index was $146 billion at today’s exchange rates. The U.K. FTSE Index, the top 100 

U.K. companies, showed deficits of $68 billion this time last year. 

The trouble is the international standard and present U.S. GAAP 

obscures the issue. To put it very simply, if we had a pension fund 

which had assets of $40 million and liabilities of $40 million, and 

the assets fell by $10 million, you would have a deficit of $10 million. That is not how they are generally shown. 

What happens is we have smoothing mechanisms. The first 

comes in to say, well, some of that deficit will be market noise, we 

measure that at 10 percent or whatever is the higher, the liabilities 

or assets. The liabilities are the higher at 40. We take $4 million 

off the deficit of 10. We then spread that deficit of $10 million over 

the active working lives of the employees, say 10 years, and you 

end up with a deficit shown in the accounts of $600,000. 

Now, as I have often said, explain that one to your grandmother. 

You may as well take the $10 million and divide it by the cube root 

of the number of miles to the moon and multiply it by your shoe 

size. 

[Laughter.] 

Mr. TWEEDIE. It really does not mean a thing. Nor disclosure, as 

we have discovered, in the case of share auction option accounting 

does not help. It really is not taken seriously enough, and that is 

why in the United Kingdom, one of the last things I did while I 

was Chairman of the U.K. Standards Board was introduce a new 

standard on pensions, FRS 17 which actually shows a whole deficit 

on balance sheet, and this is very similar to what Bob and the 

FASB are doing just now. 

I thought it might be helpful to the Committee to explain what 

happened when we did that. When we first announced it, British 

companies split 50/50 for and against. The main argument was this 

was just a snapshot and could be distorted. We also required 

though that the trend is shown, so this deficit or surplus over the 

last 5 years is shown, and that very quickly showed that the deficits were getting worse. The problem exposed was we launched at 

not an ideal time. We launched at the beginning of the bear markets, so asset values fell. But what people did not realize was the 

effect on liabilities. 

The first thing that happened, people have developed a very bad 

habit of living longer, and it has just got to stop. 

[Laughter.] 

10 

Mr. TWEEDIE. The second factor was that interest rates fell. Now, 

that is normally a good thing, but the trouble was so did annuity 

rates. So if you promise someone a pension of 10,000 and annuity 

rates are at 10 percent, that will be a capital sum required of 

100,000. If they fall to 5 percent, you need 200,000. So what happened was assets fell and liabilities rose in the funds at the same 

time, and it was not noticed. 

The interesting thing, 2 or 3 years after we introduced the standard, the atmosphere had completely changed. As several senior executives said to me, pensions are now being discussed in the board 

room, it is no longer a hidden matter which was never revealed in 

the accounts. 

We decided, when we became the IASB, to amend our pension 

standard to allow the U.K. proposal to be one of the options. Interestingly enough, 15 major U.K. companies wrote in, all of them 

suggesting that we do allow the FRS 17 approach, and two of the 

major business groups, the Association of British Insurers and the 

Confederation of British Industry, also supported it. That is quite 

a change from a few years earlier. Companies now see what they 

can promise. 

This, as I know you are aware, is a huge issue. Our job is to 

make sure that people can make informed decisions, the question 

of the risk to the company, the question of the risk to the individual, and if the company cannot make the promises, the risk to 

the taxpayer. 

FRS 17, like the FASB’s first stage, was an incremental change. 

There are still defects that are in Phase 2 of Bob’s project in which 

we hope to join in. We still allow an assumed return on assets for 

the future, and some of these assumed returns have been heroic. 

Now we need to look at the issue in a more comprehensive manner. 

We intend to add to the agenda, and again, like Bob, we intend to 

try and do it in two phases. 

We will join in, I suspect, and do something very similar to that 

Bob has already proposed. We also intend that while the timing of 

our first phase and some of the things that we deal with may differ 

slightly from Bob’s, we will still end up with a common standard. 

It is just a case of the movement toward it. We are intending to 

look at not only the smoothing mechanisms, but can we do something on the gains and assets, the curtailments, the presentations, 

the disclosures? 

FASB is leapfrogging us at the moment, and we will catch up 

with our first phase, and then we will end up with the same standard. The work that we do will help FASB. The work FASB does 

will help us. 

Retirement income depends on state-provided pensions, private 

savings and company schemes. Our job is to make sure that companies’ schemes are on the same basis, and if they are not, people at 

least are aware of that. Good accounting will not solve the problem, 

but it makes the issues transparent. It helps the company. It 

means that they have to manage it. The problem is obvious. It is 

not an instant liability as a payable on inventory would be. It is 

simply something that has to be met. It helps investors because 

they see the cash-flow implications. It helps employees because 

11 

they now understand the risk, and it helps public officials because 

they now realize what the problem really is. 

Interestingly, we are finding British companies are now explaining the problem quite clearly. We are getting disclosures something 

like, ‘‘We have a deficit of 50 million. We intend to put an extra 

5 million a year into the fund. We intend to change the fund slightly. We expect the return on the existing assets to be in the region 

of 4 percent. If that all happens, we will be back in equilibrium in 

2010. The effect on profits, assuming they are maintained at current levels, will be 1.3 percent, and the problem is starting to disappear and be managed.’’ 

It will not be easy. I always liken standard setting to American 

football. To an outsider American football is really just a big committee meeting, punctuated by extreme moments of violence—— 

[Laughter.] 

Mr. TWEEDIE. And I expect that this process may be something 

similar. 

It is important very much to get all views. As Bob said, we have 

major due process, but this—and I very much agree with Senator 

Enzi—is one of the major issues facing us, not only in accounting, 

but in public policy too. 

Thank you, sir. 

Chairman SHELBY. Thank you both. Harmonizing international 

accounting standards is an important project and has been given 

added importance recently by the cross-border consolidation exchanges. We will start with you, Sir David. Would you just touch 

again on the major accounting issues that you see that are likely 

to present the most difficult challenges with respect to convergence 

in that context? 

Mr. TWEEDIE. I do not see them being a challenge to convergence 

because I think both boards are very keen that we do converge, and 

we have had nothing but cooperation, but I think the issues that 

are going to be controversial are certainly out there. We know, for 

example, leases is one where again we are thinking of putting that 

on our agenda right now. 

Chairman SHELBY. Leases? 

Mr. TWEEDIE. Leases, yes. One of my big ambitions is actually 

flying an aircraft that is on an airline’s balance sheet before I die. 

[Laughter.] 

Mr. TWEEDIE. Basically, the leasing standards worldwide are 

harmonized, but none of them work. There are massive off-balance 

sheet amounts that are reflected both in the rights to the asset on 

the asset side, but also liabilities that companies cannot escape 

from. These are missing. 

Financial instruments is going to be a challenge. It took our 

predecessors 12 years to come up with our present controversial 

standard. That is another one we are working actively with the 

FASB to look at. 

Consolidations, the question of special purpose vehicles, we too 

are looking at what is being done in the United States and seeing 

if that is the answer internationally, whether we can improve upon 

it, if we can. We will obviously be back discussing it with the 

FASB. The whole question of consolidation here is, when should 

you bring a company in as a subsidiary. Is it when you have 50 

12 

percent plus one of the equity or is it when you control it? And 

these are issues, big, deep, philosophical issues that we have to resolve. 

Chairman SHELBY. Bob, you want to comment on that? 

Mr. HERZ. Yes, I would add just one or two other issues that I 

think are important. One is the whole area of intangibles. We are 

doing a lot of projects on the—I call it the liability side of the balance sheet, so to speak, but on the asset side the area of intangibles is one where accounting right now does not capture the value 

drivers of many businesses in the modern era, and so figuring out 

whether or not financial statements can better capture that, or is 

there other information that can be provided, I think—— 

Chairman SHELBY. How substantial is this? 

Mr. HERZ. Well, since it is very hard to measure, what we do 

know, rightly or wrongly, is that the difference between the market 

value of many companies and their book value, there is a big gap 

there. Some of that goes up and down with the stock market, but 

there is often a big gap that remains. It depends on what type of 

company, but certainly we also know that when one company buys 

another company or when people are analyzing a company seriously to make major investments in it, they look at all these kinds 

of things, really, what are the value drivers of the business, the 

know-how, the people assets, the customer loyalty and retention, 

those kinds of things. In U.S. accounting, those are only generally 

captured when they are either purchased or there is a business 

combination. If they are internally generated, there is no accounting for that asset, whereas, actually in the international standards, 

sometimes there is some accounting where there is ability to demonstrate that it is likely to prove to be beneficial with some degree 

of certainty. I think that is a real important area. 

I think the area of fair value also, and to what degree beyond 

where you have established markets should that be used versus 

historical cost notions, is a very important one and one that we are 

going to be taking up starting later this year in our joint project 

to relook and merge our respective conceptual frameworks. 

Chairman SHELBY. Bob, I have another question. Mr. Chairman, 

I should say. The comment period for your proposal ended a couple 

of weeks ago. FASB has received more than 200 comment letters, 

I understand. Could you describe somewhat to the Committee what 

some of the more common reactions have been? 

Mr. HERZ. Yes. And, again, this is from my own reading. I read 

the letters as they come in. Our staff then produces a very comprehensive analysis of the comment letters, which they are in the 

process of doing right now. But from my own reading, some of the 

issues that commentators have focused on—well, first of all, I think 

most people agree that the current accounting model needs fixing. 

One of the issues in Phase 1 that they focused on is whether the 

measurement of the underfunded or overfunded status should be 

what is called the projected benefit obligation, or what is called the 

accumulated benefit obligation. The projected benefit obligation includes what is called a salary progression assumption for future increases in salary that would then, in effect, determine what the 

benefits—the value of the benefits that you have earned today by 

13 

current service. The accumulated benefit obligation excludes those 

future salary potential increases. 

I think a number of companies have focused also on the issue of 

what we propose that for a calendar year-end company, that they 

put these liabilities, or in some cases, assets on their balance sheet 

by the end of this fiscal reporting year, so 12/31. Some companies 

said they do not know if they have enough time to do that. I do 

not think it is the issue of making the calculations because the calculations are already made and disclosed in the footnotes, so all 

that is available, but it is the issue of things like they may have 

loan covenant issues, other plans, internal compensation plans that 

may work on book value numbers, for example. This will obviously 

change book values. That is another comment. 

A third set of comments relates to our proposal that the measurements be done as of the end of the company’s fiscal year end. 

Right now the rules allow companies to do those measurements up 

to 3 months before the fiscal year end, and people are saying that 

with tighter reporting deadlines that have been put in place in the 

last few years, that just adds an extra degree of burden. So those 

are all comments, and many other comments that we will carefully 

consider. 

Chairman SHELBY. Sir David, would you just briefly describe for 

the Committee for the record, you have the role of the Securities 

and Exchange Commission and the Roadmap, which aims to eliminate by 2009 the reconciliation requirements for foreign companies 

listed in the United States. We have talked about this before I 

think in London one time. 

Mr. TWEEDIE. Indeed, sir. The SEC has played a major role, 

along with the FASB. It has become quite clear that as we move 

on convergence, companies outside the United States are really 

saying, well, where is the reward for this? If we are doing this, do 

we still have to keep reconciling to U.S. standards? Do we have to 

wait until they are identical? We think probably by about 2011 we 

will be getting pretty well the same answers, whether it is international or U.S. standards. That is now leading I think to political 

pressure in some countries, leading to the threat that, well, if we 

have to reconcile, why shouldn’t U.S. companies across here, which 

may have debt borrowings or whatever, why should they not have 

to reconcile as well? That is a waste of resource and something that 

should not really be resorted to. 

So I think the SEC is helping us by trying to set out this Roadmap, things we can do quickly and are pretty confident we can do 

that, and also they have helped us set out the agenda of the issues 

they think are really important to them. What they are really saying is we know you do not have to complete these when we consider whether or not to remove the reconciliation, but provided the 

program is continuing and it is quite clear there is going to be a 

convergence toward the end, then we are willing to consider that, 

probably in a couple of years time. 

I think that has assuaged a lot of the concern. Internationally it 

has been a very constructive move and we are very grateful to 

them for bringing forward the idea. 

Chairman SHELBY. Thank you. 

Senator Sarbanes. 

14 

Senator SARBANES. Thank you very much, Mr. Chairman. I want 

to welcome both of our witnesses again before the Committee. It is 

very helpful to have their testimony. 

First of all, I take it there is complete agreement that the objective here is to develop a single set of international accounting 

standards that will be used worldwide? Is that correct? 

Mr. TWEEDIE. It is indeed. We, for example, think with the postretirement standard, we will end up with an almost identical 

standard. The idea is we can get it in identical words. Americans 

have a congenital inability to spell properly, but apart from that, 

we want them to be exactly the same there. 

[Laughter.] 

Senator SARBANES. What is your time frame for achieving this 

objective? 

Mr. HERZ. I will hazard a kind of a speculated, somewhat educated prognostication. 

Senator SARBANES. Well, you have got it obfuscated pretty well 

already. 

[Laughter.] 

Mr. HERZ. Yes, thank you. As Sir David said, I think that around 

the rest of the world, good parts of the world are adopting international financial reporting standards and continue to do that. You 

then look at which of the major markets that have not done that 

and what is going on. One of them is clearly us. We have our program of closely working with Sir David. Another one is Japan, 

where we have actually started to almost triangulate the effort. 

Their standards have historically been patterned more on ours, but 

they also want to move toward international standards. 

The third major market is Canada, and they have announced 

that within 5 or so years they will try and move from their standards, which again are very similar to U.S. standards, to international standards. 

So the real key has become us and Japan, I think, in terms of 

at least major global capital markets. I could foresee one chain of 

events being—and, again, this is just one possibility, but certainly 

one genuine possibility—that we continue our efforts; other things 

that are going on, including the SEC, will start to review the filings 

of international financial reporting standards filers that are coming 

into the United States now. They are going to embark on a program to look at those carefully over the next years to understand 

whether there seems to be consistency or not in their application. 

You know, are they applied relatively consistently in Greece versus 

in Australia, which I would suspect the first time around for people 

who have adopted whole new standards, is quite a challenge, and 

you cannot expect perfection to begin with. But I think effort at 

continuous improvement over the next few years would enable the 

SEC to consider and probably lifting that reconciliation requirement. 

If that happens, I think there will probably be some U.S. filers 

that in certain industries where a lot of their competitors are using 

international standards, who will say, well, why cannot we also use 

those standards? I think that will probably be studied, and then 

sometime, given that we are continuing to make them more and 

more similar and common, the SEC will say, OK, for U.S. domestic 

15 

filers, you can also use the international standards. After a couple 

years of that maybe people will say, gee, they seem like you have 

made enough progress on convergence to say why are we maintaining two sets of standards at this point? The differences are not significant enough any more. I think that will be the point at which 

we have essentially met this objective. 

I think it is still a 8- to 10-year process in my own view, even 

being optimistic. 

Senator SARBANES. Want to add anything to that, Sir David? 

Mr. TWEEDIE. I think to finalize it, looking even at this project, 

the FASB has projected an 8-year period to finally finish the pensions project. We can do a lot in the meantime. I think probably 

in 5 years time, the differences will be pretty small, we will be really getting very close. There will still be a few, but we will be working on those, and I see it in about an 8-year time frame if I had 

to say when. 

Senator SARBANES. I wanted to just follow up on that, and as 

something that Bob Herz sort of mentioned in the course of his answer just now. It is one thing to get convergence on the standards, 

it seems to me another thing to get convergence or acceptability on 

the implementation of the standards. What is your view on that 

part of the question? 

Mr. HERZ. Well, I think probably Sir David is better at answering that. I think the issue is, the one that I mentioned, is that to 

what extent and over what period will there be consistent application in different jurisdictions around the world where they are coming from? They are used to their old standards and the different 

cultural differences. 

Senator SARBANES. Do you use standards that have been adopted, which are the international standards, as I understand it, are 

they being—the International Financial Reporting Standards, are 

they being enforced or monitored by a EU organization or by separate national organizations in each of the EU countries? 

Mr. TWEEDIE. It is a mixture of the two, Senator. What is happening in Europe, there is a committee of the securities regulators 

called CESRFin, and it is really trying to pool together the national 

regulators who in fact they have a common enforcement mechanism, and there is a lot of peer review going in, views about decisions taken, interpretations and so on. So they are trying to coordinate on a European wide basis. 

I think, as Bob was hinting at—and the SEC has been very clear 

about it—that the standard setters can only provide one leg of this 

stool. We also need good auditing, because if the standards are not 

audited properly, then it will not work, as we have seen from the 

past in your work, sir on the Sarbanes-Oxley Act. We need corporate governance to make sure that their decisions are taken in 

the atmosphere of trying to produce a fair presentation, and the 

forfeit is enforcement. So all of these are going to come together. 

I suspect the SEC may well be selective, saying, well, this part of 

the world is doing it properly, this part is not, and we do not trust 

it in the meantime. And they may well decide to break on these 

bases. Even though the standards are being used, we are not quite 

sure how well they are being used, and that is what the SEC is 

going to check. 

16 

Senator SARBANES. If I could put one final question. 

Chairman SHELBY. Go ahead. 

Senator SARBANES. Senator Enzi raised this, and I think Senator 

Allard also alluded to it. In considering the pension issue, which 

is now under examination, as I understand it, how much attention 

is being paid to the fact that these business enterprises were allowed to proceed in a certain way in dealing with a pension issue. 

It is now being proposed, well, those standards are inadequate and 

they do not provide an accurate reflection, and therefore, they 

should be changed. Senator Enzi, I think, said something about, 

well, you know, there is not much problem if it had been that way 

from the very beginning, but it has not been that way. So we are 

confronted, I guess, to some extent with a transition problem, or alternatively, what the impact would be of requiring an immediate 

change on these defined benefit retirement plans, which are under 

attack for other reasons as well at the moment. 

So it does raise some difficult questions about what the impact 

would be on retirement plans that have been in effect for a substantial period of time, that people, in effect, have done all their 

planning in relation to and relied upon, and some are even saying 

that an immediate change, that some of these enterprises would go 

under. They would be catapulted into the red in a substantial manner. Now, that only to some extent underscores the nature of the 

problem that you are seeking to correct, but it does confront you 

with an important transition problem it seems to me. What is the 

thinking on that? 

Mr. HERZ. Well, I think the thinking in our Phase 1 proposal was 

limited to the balance sheet and to put that right, so to speak. 

Most of the comments we got in leading up to that was that more 

of the controversy and the notion that this will be the final straw 

that will abandon the plan, freeze the benefits. More of the commentary came around Phase 2. What are you going to do with reported earnings, which are not affected in Phase 1? 

I would also say that it is very hard to predict these kinds of 

things. What we do now is that there has been a pronounced flight 

away already over the last 20 years or so from defined benefit 

plans. I think statistics I saw from the Department of Labor were 

that over the last 20 or so years, the number of defined benefit 

plans has gone down by something like 80 percent, and that is long 

before we talked about doing anything in terms of the accounting. 

We also hear that the reactions of some companies will be, well, 

in order—if I have to present the liability, maybe I ought to do 

some more funding in order to reduce the liability or get on a program to reduce it, a` la what Sir David described as some of the 

U.K. reaction. Some of it has also been that whether it is real or 

speculation, that there may be a move by some companies to 

change the way they invest the plan assets, to more closely match 

fund the obligation. Therefore, they might switch from less equities 

to more bonds in their portfolio. 

Again, as a layman, that seems to me that increasing the funding and better matching the obligation would seem to better secure 

the benefits. I think part of the problem is that the existing accounting has gotten us to this point of masking some of the issues, 

and that may have led to over promising of benefits, and certainly 

17 

some of the accounting mechanics Sir David talked about, the assumed rate of return assumption, have in many minds led to very 

undesirable behaviors as far as the investment profile of the pension plan assets. 

A wise man told me once in this whole area—which I am sure 

you all know public policy very much—but certainly in accounting, 

that when you make changes, things will change, behavior will 

change, but it is not like a basketball, it does not bounce straight 

up and down. It is kind of like a football, it bounces side to side 

and hard to predict. 

Senator SARBANES. Did you have to deal with that problem? 

Mr. TWEEDIE. No, and I think the interesting thing, looking at 

the U.K. position—and there are others more expert than I that 

could give you details on this—but since we produced the pension 

standard, there has been a marked change in the debate. The national financial papers are full of pension issues, and many companies, I think, have now realized for the first time—and so have 

their employees. British Airways, for example, a couple of years 

ago I think its deficit was somewhere in the region of, if it was in 

dollars, it would be something like $2.4 billion, which is about 44 

percent of its market capitalization at the time. That was a huge 

deficit. And they have been in discussions with their employees. 

They have stopped paying dividends because they feel they have to 

fill this hole. They have put more money into the fund. They are 

now suggesting that their employees are going to have to work 

longer and perhaps some of the benefits might have to change, but 

they have made promises that it is very difficult to keep I think. 

So they are looking at it very carefully, how they can manage their 

way out of it. 

The advantage, I think, of showing the numbers is that we are 

talking about a long-term issue, it does not have to be funded tomorrow. So the question is how do they do it over the period in 

which they have to meet the commitments? And I think a lot of 

companies are doing it very seriously. They are taking the details 

and the problems of the schemes into account. They are trying to 

do it over a long term, but they have actually got a serious debate 

going now, and they are planning their way through it, whereas, 

the danger was that suddenly they realized they could not possibly 

meet this under any circumstances, and then bankruptcies follow 

and the pension falls to pieces. It has now become a big issue in 

the United Kingdom in takeovers, where the pension regulator is 

demanding money is put into funds to hold the deficits rather than 

just be distributed to shareholders and so on. 

So there is a lot of behavioral change which has actually safeguarded pensions. 

Chairman SHELBY. Senator Allard. 

Senator ALLARD. Thank you, Mr. Chairman. I found this hearing 

enlightening, and thank you for holding it. 

Senator Enzi, who had to leave here earlier, has asked me to 

make sure that we protected his ability to be able to submit questions. 

Chairman SHELBY. We will leave the record open. He is very interested in this issue and is a very good member of this Committee. 

We will leave the record open for his questions. 

18 

Senator ALLARD. Yes, for his questions, if you would, please. 

I have a question to Mr. Herz to start with. You said that you 

had an opportunity to look at a lot of the responses that were coming in. Were you able to assess a difference between the responses 

from large companies as opposed to medium and small companies? 

Was there any differential that you could pick up in their response? 

Mr. HERZ. I guess the one thing that I recall from some of the 

letters is that when you are dealing with smaller companies, particularly private companies, they have a lot more arrangements related to their book value. They have the book value stock plans, for 

example. Their loan covenants may be crafted differently, as well 

in some public companies. So any time you do something that will 

affect their stockholders equity, those things become a matter of 

discussion. 

Other than that, I think there were some—there are the issues 

of resource availability to change the measurement date, and I 

think we took that into account by giving the private companies a 

2-year window in order to get—recognizes there may be only so 

many actuaries to go around at a point in time. 

Senator ALLARD. This is for Sir David. You have co-ops in the 

United Kingdom like we have co-ops here. My understanding is 

that with the post-retirement kind of proposal we have here, you 

had some problems with that in the United Kingdom in the fact 

that some of those co-ops were closing; is that correct? 

Mr. TWEEDIE. Not so much because of the pension schemes. I 

think there were other reasons for that. But certainly—— 

Senator ALLARD. Go into that detail for me, how that is—— 

Mr. TWEEDIE. I would have to come back to you, Senator, really 

on the detail of that, because it did not become a huge issue when 

we did it with the co-ops, frankly. This may have emerged later, 

but—and I am not so familiar with the United Kingdom as I used 

to be—basically, the issue, a lot of the companies had actually defined contribution schemes, so they were not caught up in the benefit issue. And a lot of our smaller companies have those too. This 

may be something that I will have to ask the U.K. Standards 

Board to see what problems they have. They are coming to see us 

next week to deal with leasing and pensions, so it will be well 

worthwhile having a discussion with them, and I will raise that 

point and get back to you if I may. 

Senator ALLARD. I would appreciate that very much. I think it 

would be very helpful in our deliberations here. 

Mr. Herz, have you given us a time frame in which you intend 

to complete this project on pension funds? 

Mr. HERZ. Well, right now, we, for Phase 1, our current plan 

would be to begin redeliberations based upon the input we get 

through that over the summer, and finish probably by the end of 

the third quarter on Phase 1. Phase 2, I think, our staff has not 

drawn up a detailed project plan yet, but I think it will be a more 

than 1-year and probably 2- or 3-year exercise because there are 

a number of very complicated issues. 

Senator ALLARD. Then once you have put things into place, then 

there is going to be an implementation period after that. 

Mr. HERZ. Right. 

19 

Senator ALLARD. I gather from your comments, this is going to 

be a phased-in implementation process? 

Mr. HERZ. Well, for Phase 1, the putting of the assets and liabilities on the employers’ balance sheets, we are proposing that to be 

done at the end of the companies’ fiscal year ends that end starting 

with the December 31 fiscal year end reports. The measurement 

dates, change in the measurement date to bring it to year end, 

rather than 3 months before. By the way, a lot of companies already do it as of year end. It is probably 50/50 as to whether people 

avail themselves of that lag option. That is phased in. For public 

companies it would be phased in in 2007, or for private companies 

2008. 

As to once we look at Phase 2 and whatever we come up with, 

whether there will be a phase-in period for that, certainly there 

will be a gap between when we finalize any Phase 2 standard and 

when it would have to be implemented. 

Senator ALLARD. So you will be talking about everybody being on 

the same fiscal year; is that what you are—— 

Mr. HERZ. Not the same fiscal years. They will have to measure 

the plan assets and liabilities as of their fiscal year end. 

Senator ALLARD. I see, OK. That is going to take us a while to 

get all through this process. 

Mr. HERZ. I think by the time we have a comprehensive, reworked global standard—because we are going to be working very 

closely with the IASB on that—in place, it may be 3 or more years 

is my best guess. 

Senator ALLARD. I would like to have you just kind of go over 

some of the issues that you saw that sort of spurred you to move 

forward to address pension and other post-retirement benefit accounting, and also, when was the last time that we really addressed this issue? 

Mr. HERZ. Well, going to the second part of your question, the 

existing standard for defined benefit pension plans was issued I 

think in 1985. The existing standard for other post-retirement benefits, which are primarily retiree health care coverage, was issued 

I think in 1990 or 1991. There have been some tweaks since then. 

There has been enhanced footnote disclosures put in since then as 

well, but not a comprehensive relook at it. 

I think the issue started to really come to light at the turn of this 

century, at the turn of the Millennium with what people called the 

perfect storm of pensions. The equity values went way down because the stock market bubble, the value of the liabilities, as Sir 

David gave in his example, went up because of decreasing interest 

rates, and so the degree of underfunding became more and more 

pronounced, and, of course, in some cases was almost all the companies could take in certain industries. 

I think that coupled with that, there began to become a realization that the mechanics of the existing accounting, which borrow 

a lot from some of the actuarial approaches, particularly this assumed rate of return assumption that Sir David mentioned. And 

just to kind of give you a simple example of how this kind of works, 

if you had a billion dollars in value in a pension plan, big company, 

the current accounting says assume a long-term rate of return, and 

that depends on your asset mix. The typical asset mix in a pension 

20 

plan might be 60 percent equities and 40 percent bonds, for example, and so people would assume a long-term rate of return of, say, 

8 percent. The current accounting says take that 8 percent on the 

billion dollars, and assume that you are going to make $80 million 

this year, and you do not only assume it but you actually credit, 

you report of $80 million for that year. Let’s say the pension assets 

actually tumble by $200 million, as they did in 2001–2002. That 

difference of $280 million, first what you assume versus what actually happened, gets spread over very long periods of time. It could 

be 20 or more years. So you are reporting $80 million in earnings, and you are taking the $280 million deficit and spreading it over, say, 20 years, which 

would be a $14 million number if I am doing my math right. And 

so you would net report pension income that year of $66 million, 

even though your pension plan went down by $200 million. A lot 

of people—Sir David said, ‘‘How can this be?’’ The answer was, traditionally, the idea was that over a long period of time things 

would even out. But of course, what we found was that in a number of companies and industries it did not even out. They went over 

the cliff. 

Senator ALLARD. Thank you. 

Thank you, Mr. Chairman. 

Chairman SHELBY. Basically, what you are trying to do, as I understand it, with accounting, pension accounting reform, is get to 

the truth of the matter. That is what accounting is about, is it not? 

I know Senator Sarbanes has been very active in this whole area, 

as we all know, of corporate governance and accounting standards 

and seeking the truth and the value of something. So this puts a 

value on a company. I know we, Senator Sarbanes and I, worked 

together on making sure they did not politically try to change the 

way stock options were valued because they did have a value or 

they did not. You know the deal there. You are working on it still. 

Well, at this time, is your plan to give companies an opportunity 

to grow out of their dilemma, out of their problems, but to realistically point out they have got a real problem, as some of them do? 

Mr. HERZ. Yes. I think, as with the analogy with the United 

Kingdom example, our plan is by—— 

Chairman SHELBY. Sir David pointed out British Airways. 

Mr. HERZ [continuing]. ——Phase 1 to highlight the issue by putting the issue on the balance sheet which I think there puts it front 

and square. As I said, the issue of broader controversy is then how 

then you report the earnings, should there be any smoothing or 

not? I think people think the assumed rate of return thing that I 

just described needs to go, but the debate over whether you should 

continue any smoothing or not is a genuine debate. And I could 

say—— 

Chairman SHELBY. How prevalent is the smoothing today going 

on in corporate pension accounting, or has been? 

Mr. HERZ. Everybody does it. They do not have to do it but there 

is an election to do basically ongoing mark to market accounting 

in full. They do not have to avail themselves of all these smoothing 

mechanisms, but everybody does. 

Chairman SHELBY. But if you keep doing this, you are going to 

suffer under the illusion of problems, you maybe brush them aside, 

21 

you ignore them, and this and that, and then the workers who are 

depending on this are going to be holding the bag, will they not, 

Sir David? 

Mr. TWEEDIE. That is exactly the problem. What the FASB is 

doing now and what happened in the United Kingdom will highlight the issue. The other bits, if you like, are refinements. We are 

not saying that we have got the measurement exactly right. We 

know that there is quite a lot of controversy by the interest rates, 

whether, as Bob said, it is a projected measure of an accrued measure. All of this is up for discussion in the long-term project, but the 

fact is, they are not in equilibrium, these schemes, and they are 

showing these deficits. And what it has done, I think, as you put 

it quite rightly, Mr. Chairman, is given the company the opportunity to say, well, we do not have to pay all this out for 20–30 

years, but we had better start working on how we fund it because 

at the moment we are not funded. That is what I think it has done, 

it has given them a breathing space. 

I think this reform that Bob is bringing in will save a lot of companies that otherwise might have just gone straight into the mountainside. They would not realize until too late they could not climb 

high enough. 

Chairman SHELBY. It seems to me that a lot of pension accounting that I understand has been a joke in a sense, not really counting, no transparency, interest rates, you know, the returns what 

they say they are and all this kind of stuff. Is that not a real problem for you, Mr. Herz? 

Mr. HERZ. Yes. That is exactly why we are taking up this project. 

Chairman SHELBY. Thank you for doing it. There will be opposition in America and probably across the water to doing this, but 

ultimately, accuracy of accounting and the truth of a situation is 

what it is all about, is it not? 

Mr. HERZ. Absolutely, and that is why again I wanted to take 

this opportunity to thank the both of you for all your efforts in that 

regard and for the strong message in that regard. 

Chairman SHELBY. I think you have no other alternative but do 

it and do it right. 

We appreciate both of you appearing here today, and your input. 

Sir David, we are going to continue to work together on convergence and a lot of other things that come together because of Sarbanes-Oxley and my colleague’s legislation. 

Mr. TWEEDIE. Thank you, sir. Can I echo what Bob has said? It 

is a great pleasure to come here and to discuss things with yourself 

and Senator Sarbanes. We do very much appreciate that your idea 

is the same as ours, transparency and helping the economies, and 

that is exactly what we are after. Thank you for your support, sir. 

Chairman SHELBY. Senator Sarbanes, you have any comments? 

None? 

Thank you very much. The Committee is adjourned. 

[Whereupon, at 11:41 a.m., the Committee was adjourned.] 

[Prepared statements, response to written questions, and additional material supplied for the record follow:] 

22 

PREPARED STATEMENT OF ROBERT H. HERZ 

CHAIRMAN, FINANCIAL ACCOUNTING STANDARDS BOARD

JUNE 14, 2006 


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PREPARED STATEMENT OF SIR DAVID TWEEDIE 

CHAIRMAN, INTERNATIONAL ACCOUNTING STANDARDS BOARD

JUNE 14, 2006 


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RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM 

ROBERT H. HERZ 

Q.1. A recently released study of 100 large corporations with defined benefit pension plans found that 97 of those corporations 

would suffer a significant reduction in equity if FASB implements 

Phase 1 of the pension accounting project to move the footnote disclosure onto the balance sheet. Some analysts say that market researchers and analysts already take into account the footnote disclosure when making a recommendation on a company’s stock. I 

am very concerned about this. While it appears to be a relatively 

minor change, the additional red ink on many companies’ bottom 

line will be significant. Since our defined benefit system is a voluntary system, one could see where companies in the red would file 

bankruptcy to get rid of their pension plans. 

Has FASB looked at any additional studies to see whether this 

might be a possibility? 

A.1. The objective of Phase 1 of the FASB’s project on pensions and 

other post-retirement benefits is to improve the completeness, 

transparency, and understandability of a sponsoring employer’s reported obligations related to post-retirement benefits. At present, 

important information about the financial status of a company’s 

post-retirement benefit plans is reported in the footnotes, and not 

recognized in the basic financial statements. That makes it more 

difficult for users of financial information to assess an employer’s 

financial position as well as its ability to carry out the obligations 

of its plans. So while sophisticated investment analysts and users 

of financial statements may use the footnote disclosures to prepare 

pro forma financial information that more properly reflects the employer’s obligations related to post-retirement benefits, recognizing 

the funded status of the plans in the sponsor’s financial statements 

will make it easier for investors, employees, and others to understand and assess a company’s financial position, as well as its ability to carry out the obligations of its post-retirement benefit plans, 

including pensions. 

The FASB has long believed that disclosure is not an adequate 

substitute for recognition—a belief that is supported by studies and 

years of experience. Many investors focus on the primary financial 

statements rather than the footnotes. 


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During the course of our work on this project, we reviewed various studies quantifying the extent and magnitude of unrecognized 

liabilities for defined benefit pension and other post-retirement 

benefit plans. Commentators have expressed various views on possible actions of employers if and when such liabilities are recorded 

on the employers’ balance sheets. For example, some believe that 

certain companies, following the already well established trend 

away from defined benefit pension plans, may choose to migrate to 

defined contribution plans. Others contend that recognizing the liability for defined benefit pension and other post-retirement benefit 

plans will promote greater security of the promised benefits by increasing the incentive for companies to more fully fund such obligations and, as discussed in the response to Question 2 below from 

Senator Bunning, to adopt more sound investment policies related 

to plan assets, which might also reduce the volatility of a plan’s 

funded status. 

As I noted in my testimony at the June 14, 2006, hearing, predicting such behavioral impacts is difficult at best. In any event, 

our mission is to establish unbiased accounting standards in order 

to enable the users of financial statements to better assess the financial condition and performance of enterprises. The accounting 

standards we establish should not be deliberately skewed or biased 

toward favoring particular transactions or types of arrangements or 

toward achieving particular social, political, or economic objectives 

other than sound and transparent reporting to investors and other 

users. In that regard, the proposed requirement to recognize the 

plan surplus or deficit on the employer’s balance sheet does not 

alter the underlying economic position, but merely reflects that position in the financial statements. 

Q.2. As Chairman of the HELP Committee, we have been working 

on pension reform since the beginning of last year. It is quite apparent that accounting for pension plans is quite unique in that accountants and auditors must rely heavily on third parties, such as 

actuaries, in order to put together the accounting statements. As 

part of Phase 2 of the FASB initiative, you will be looking at how 

the pension and retirement health benefits are calculated. 

How will FASB include the actuaries in the process of the development of the Statement? Would FASB consider establishing a 

new, perhaps ad hoc, Advisory Board just to gain the expertise of 

the actuaries and other third parties? 

You established a Small Business Advisory Committee, which I 

applaud you for doing. It appears quite effective. A new temporary 

Committee for the pension accounting initiative could prove just as 

productive. 

A.2. The FASB establishes project resource groups to provide information and practical insights from knowledgeable parties on all our 

major projects. The FASB seeks information and views from project 

resource group members as needed throughout the life of a project, 

for example, to identify issues to be addressed as well as to analyze 

possible alternative approaches. Resource group members also perform reviews of Exposure Drafts and final Statements prior to finalization. 

50 

A typical project resource group comprises constituents from a 

variety of backgrounds—preparers, auditors, users of financial information, subject-matter experts, and representatives of the nonpublic, small business sectors (also mutual enterprises and not-forprofit sectors when appropriate). With regard to our pensions and 

other post-retirement benefits project, we intend to form a project 

resource group for Phase 2 of the project. Given the importance of 

actuarial information and calculations in this area, the project resource group will certainly include actuaries. Moreover, we have already and will continue an active dialogue with the actuarial community regarding the project. During Phase 1 of the project, we 

have sought and received significant input from actuaries through 

comment letters, at our public roundtables, and through various 

other discussions. 

Q.3. The debate has been going on for years among the banking 

and securities industries as to whether there should be a difference 

in accounting for the bottom line as to which assets should be 

tracked on a mark-to-market basis or whether they should be 

tracked based upon a long-term investment strategy. 

With respect to pension accounting, some have believed that pension plan sponsors are trying to build up the portfolio for the longer 

term investment and that the accounting standards should reflect 

that. 

As you move into Phase 2 of the FASB project, what criteria 

should be considered to determine whether mark-to-market accounting is appropriate? In addition, what additional costs will 

companies incur to implement mark-to-market accounting? Will 

FASB be doing a cost-benefit analysis on this? 

A.3. The FASB decided to conduct the pensions and other post-retirement benefits project in phases so that issues such as those related to measurement of benefit obligations and mark-to-market accounting could be addressed by leveraging the FASB’s projects on 

the conceptual framework and on financial statement presentation, 

which are presently ongoing. The conceptual framework establishes 

the foundation, principles, and definitions on which accounting 

standards rely. The conceptual framework, therefore, is essential in 

analyzing economic transactions in order to identify the assets, liabilities, gains, and losses that should be represented in the financial statements. The financial statement presentation project will 

establish the reporting format for reporting those gains and losses. 

Phase 2 of the FASB’s pensions and other post-retirement benefits project has no predetermined conclusions. The FASB will research, analyze, and carefully consider the timing of recognition of 

gains and losses (i.e., what some refer to as mark-to-market) but 

has not prejudged the outcome, which will be based on a thorough 

analysis of the issues. As with all FASB decisions, the Board will 

consider the costs of implementing accounting standards compared 

to the benefits to be derived by the improvement in accounting and 

reporting. 

51 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM ROBERT H. HERZ 

Q.1. I would like to ask Mr. Herz about an issue that came up in 

the Finance Committee yesterday that involves FASB. Very quickly, Mr. Herz, there was discussion yesterday in the Finance Committee about the fact that international accounting standards generally do not recognize the LIFO method. I understand that FASB 

and the IASB are involved in discussions about the possible convergence of U.S. and international accounting standards. However, I 

understand that the issue of inventory accounting generally, and 

LIFO in particular, is NOT on any current agenda. Could you 

please confirm this for me? 

A.1. Your understanding is correct. The issue of inventory accounting in general is not on any current agenda for the FASB. In 2002, 

when the IASB decided not to permit the use of LIFO internationally, we considered whether to propose eliminating its use under 

U.S. GAAP. We decided against this, noting that tax conformity 

rules would make LIFO elimination more difficult in the United 

States and that companies reporting using international financial 

reporting standards (IFRS) that file financial statements in the 

United States could avoid the need to report reconciling items relating to inventory accounting by using methods such as FIFO or 

average cost that are acceptable under both U.S. GAAP and IFRS. 

Q.2. Your written testimony indicates that some feel that the current accounting treatment provides an incentive for companies to 

invest more aggressively than might be appropriate for their pension plans. Do you feel this is a real concern? 

A.2. A number of knowledgeable commentators have expressed 

these concerns. Current accounting standards permit an employer 

that sponsors defined benefit post-retirement plans to recognize investment income based on what management assumes it will earn 

on dedicated plan assets over a long period of time, not what it actually earns each year. The period over which that assumed investment return is based is the period over which the plan assets will 

be used to pay benefits. That could span 30 or more years. Actual 

investment gains or losses need not be recognized as those gains 

or losses are incurred. 

Some believe that use of this accounting method leads plan sponsors to invest in higher risk securities. They therefore contend that 

the present accounting has a bias toward investing in higher risk 

investments that has jeopardized the security of promised defined 

benefits. Accordingly, they advocate that the present accounting be 

eliminated by requiring immediate recognition of actual market 

gains and losses as those gains and losses are incurred; potentially 

causing employers to reallocate their plan portfolios away from equity securities toward more fixed income securities. 

Q.3. What kind of feedback did you get during the open comment 

period? Are there any common concerns you have heard? 

A.3. We received approximately 240 comment letters and hosted 2 

public roundtable meetings. Most of the respondents agreed with 

the goal of making financial statements more complete, transparent, and understandable. Most auditors, investors, and many inVerDate Aug 31 2005 13:52 Mar 24, 2009 Jkt 048080 PO 00000 Frm 00055 Fmt 6621 Sfmt 6602 S:\DOCS\14JUNE06.TXT JASON
52 

vestment and credit analysts generally agreed with the Board’s 

proposal to use the projected benefit obligation (PBO). On the other 

hand, actuaries and plan sponsors generally disagreed with the 

way pension benefit obligations are proposed to be measured. They 

advocated measuring those obligations as the accumulated benefit 

obligation (ABO) versus the PBO. The difference between the two 

measures is that the PBO includes the effect of assumed future salary increases on the obligation for salary-based promised benefits 

while the ABO does not. As with each of the major components of 

the proposal, the Board carefully deliberated this issue before 

reaching a final consensus to use the PBO. 

Respondents made numerous other comments, including those 

related to retrospective application of the proposed changes and 

other features of the proposed Statement that the FASB is carefully redeliberating. 

Q.4. and Q.5. The Projected Benefit Obligation used in the proposed standard requires accounting for assumed future salary increases even though these increases are not owed under any contract between employer and employee. Do you think it is misleading to reflect such a liability as it is not yet an obligation of 

the employer? 

I am sure you are aware of discussions in the business community about the use of Accrued Benefit Obligation as the appropriate 

measure for the balance sheet instead of the Projected Benefit Obligation. Do you agree and why or why not? 

A.4. and A.5. The determination of future cash flows used to develop measures of pension obligations makes a variety of assumptions about the future based on the existing agreement between the 

employer and the employee. Examples include assumptions about 

obligations that will vest in the future, assumptions about future 

growth of cash balance and other lump-sum benefits, assumptions 

about early retirement benefits that are not fully actuarially reduced, and assumptions about employee turnover, retirement, and 

life expectancy, as well as assumptions about future inflation and 

about increases in compensation for plans that base the pension 

benefit on final or career average pay. 

As discussed in the response to Question 3, the difference between the PBO and the ABO is that the PBO includes the effect 

of assumed future salary increases in the calculation of benefits 

payable for service to date, while the ABO does not factor this into 

the determination of the obligation. 

As described below, when the Board issued Statement 87, it concluded that the PBO was the most relevant measure of the pension 

obligation. Some have suggested that because employers have discretion to grant or not to grant increases in compensation, the 

measure of a company’s pension obligation should ignore the effect 

of future salary increases on benefits earned to date. 

The FASB’s conceptual framework does not limit liabilities to 

those that are legally enforceable. Liabilities include constructive, 

equitable, and moral obligations. Furthermore, the definition of a 

liability encompasses the duty or responsibility that entails settlement by probable future transfer or use of assets and the duty or 

responsibility obligates a particular entity, leaving it little or no 

53 

discretion to avoid the future sacrifice. Current accounting standards, as well as the Board’s proposal, require employers to assume 

future increases in compensation that they expect to grant as they 

affect the benefits promised for current or past service. This is consistent with the way many other long-term liabilities are currently 

recognized in financial statements. 

The issue is whether and, if so, how to include the effects of future increases in compensation when a defined benefit plan’s formula incorporates compensation in determining the pension benefit. Some of the factors for measuring the pension obligation as 

the PBO include: 

a. The Board concluded in Statement 87 that the PBO is the 

most relevant measure of the benefit obligation after extensive debate of the issue. The Board’s current decision to retain that conclusion in Phase 1 of the project, therefore, is consistent with that 

prior conclusion. 

b. Most users of financial statements believe the PBO better reflects the employer’s economic obligation and the terms of the substantive plan. 

c. Using a measure of the obligation other than the PBO might 

necessitate changing how other assumptions are determined, specifically the discount rate, which implicitly includes the impact of 

expected inflation. Views on that issue are described in paragraphs 

140–142 of Statement 87’s basis for conclusions. 

d. Further, as noted in paragraph 139 of Statement 87’s basis 

for conclusions: 

Among those respondents who argued that obligations dependent on future compensation increases are excluded by the definition of a liability, 

very few were prepared to accept a measure of net periodic pension cost 

that was based only on compensation to date. The Board notes that under 

the double entry accounting system, recognition of an accrued cost as a 

charge against operations requires recognition of a liability for that accrued cost. Thus, excluding future compensation from the liability and including it in net periodic pension cost are conflicting positions. 

e. For most plans that provide post-retirement benefits other 

than pensions, there is no measure of the obligation that is analogous to the ABO in a pension plan. Therefore, if the Board was to 

require that the ABO be used to measure the pension obligation, 

the Board also would have to determine the equivalent measure for 

other post-retirement benefits. Thus, the issue is broader than pension plans alone. 

f. Including assumed future increases in compensation in the 

benefit obligation reflects the different employer commitment and 

employee expectation between a flat benefit plan and a final pay 

or career average pay plan. 

Some also have suggested that the ABO is the amount at which 

the obligation could be settled, assuming the employer terminates 

or freezes the plan. In considering this issue, we have noted that 

the ABO does not necessarily represent the amount at which the 

obligation could be settled in an arm’s-length transaction with an 

independent third party. That settlement amount would likely be 

affected by factors not presently reflected, or measured differently 

from those included, in the ABO as presently measured. The result 

could be a settlement amount that could be higher or lower than 

54 

the ABO. Further, we do not believe that the accounting for a presently ongoing arrangement between the employer and the employee 

should assume a different arrangement than what is presently understood between the employer and the employee. Any future event 

or transaction that alters that arrangement should be recognized 

when that event or transaction takes place. Phase 2 of our project 

will include a comprehensive examination of alternative measurement approaches. 

The Board is currently redeliberating the Phase 1 Proposal. In 

our redeliberations, we are addressing many key issues raised by 

constituents during the comment phase of the project. We expect 

to complete redeliberations soon and issue a final standard for 

Phase 1 shortly thereafter. Once the final Statement on Phase 1 is 

issued, the Board will begin Phase 2 of the project. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR ENZI FROM 

SIR DAVID TWEEDIE 

Q.1. Recently, the United Kingdom has been undertaking pension 

reform. When we met a couple of years ago, accounting reform for 

pension plans was high on your list due to the trouble of companies 

in legacy industries. 

Could you provide us with greater detail of the U.K. experience 

of having to deal with the accounting for old-line companies as 

compared to companies without legacy burdens? 

A.1. By legacy industries and old-line companies we assume that 

you are referring to industries with substantial union labor such as 

steel, mining, heavy industry, and airlines. Such companies will 

tend to have mature pension plans that are large compared to the 

company itself. For example, in the United Kingdom, the 2005 

Lane Clark and Peacock survey reported the following figures for 

2004: 

Under FRS 17, the United Kingdom accounting standard, the accounting for pension plans in such companies reflects the economic 

reality that the pension plans are large compared with the size of 

the company. However, to prevent the balance sheet of the entity 

from being overshadowed by the pension deficit, FRS 17 requires 


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the pension deficit to be presented separately after all other net assets. Similarly, the retained earnings of the entity are presented 

both before and after the impact of the pension deficit. 

A further concern was expressed that the recognition of a deficit 

in full on the balance sheet would reduce retained earnings to a 

level such that it would not be possible, under company law, to pay 

dividends. However, under U.K. company law, the availability of 

retained earnings for the payment of dividends is assessed by reference to the separate financial statements of the parent, not the 

consolidated financial statements. FRS 17 does not require recognition of group plans in the separate financial statements of the parent or the individual financial statements of the subsidiaries in the 

group if the individual companies cannot identify their share of the 

plan assets and liabilities. 

The international standard on pensions, IAS 19, permits the use 

of FRS 17 accounting as one of the permitted options. 

Q.2. The debate has been going on for years among the banking 

and securities industries as to whether there should be a difference 

in accounting for the bottom line as to which assets should be 

tracked on a mark to market basis or whether they should be 

tracked based upon a long term investment strategy. 

With respect to pension accounting, some have believed that pension plan sponsors are trying to build up the portfolio for the longer 

term investment and that the accounting standards should reflect 

that. 

As you move into Phase 2 of the FASB project, what criteria 

should be considered to determine whether mark to market accounting is appropriate? In addition, what additional costs will 

companies incur to implement a mark to market accounting? Will 

FASB be doing a cost benefit analysis on this? 

A.2. While the Senator’s question is directed to the Phase 2 of the 

FASB project, it is applies equally to the IASB’s work on pension 

accounting. FASB Statement 87 (issued in 1985) requires that the 

assets of a pension plan be measured at fair value. In 1993, revisions to IAS 19, the international standard, required plan assets to 

be measured at fair value. The U.K.’s most recent standard, FRS 

17, continued this well-established practice. The question, then, is 

not whether accounting standards should change to mandate fair 

value in this case, they already do. The question is whether the accounting standards should include devices designed to smooth the 

income-statement effect of changes in plan assets. Those same devices have been widely criticized as masking economic reality. On 

balance, I agree with many of those criticisms. 

Critics often complain that fair value is a ‘‘snapshot’’ and assert 

that they are investing pension assets ‘‘for the long term.’’ I certainly heard those criticisms at the U.K. Accounting Standards 

Board. Rather than introducing arbitrary smoothing mechanisms, 

FRS 17 requires that companies disclose 4 years of trend information. Financial statement users can form their judgements from 4 

years of real information, rather than having to untangle 4 years 

of smoothed information. 

The Senator also asks about the costs companies will incur to implement fair value measurement of plan assets. As noted above, 

56 

there is no incremental cost, nor can I see any savings from failing 

to measure plan assets at fair value. Indeed, the cost of implementing and tracking the various smoothing mechanisms, and of 

preparing the disclosures needed to explain their effects, far outweighs the cost of measuring fair value. We should also note that 

financial statement users—including analysts, shareholders, lenders, regulators, unions, suppliers, and others—incur significant 

costs in attempting to understand the effects of the smoothing 

mechanisms inherent in FASB Statement 87, IAS 19, and to a lesser degree, FRS 17. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR BUNNING 

FROM SIR DAVID TWEEDIE 

Q.1. In some cases it is appropriate for companies to close defined 

benefit plans when they become a potential liability for the taxpayer. In your testimony, you cite such closings in the United Kingdom as a positive occurrence under the same reasoning. Do you 

think that companies with otherwise viable defined benefit programs are choosing to close these programs as a result of the pension accounting standard being implemented by the U.K. Accounting Standards Board? 

A.1. We have anecdotal evidence that the accounting under FRS 17 

raised the profile of pension plans with Boards of directors. I would 

argue that FRS 17 resulted in companies becoming more aware of 

the liabilities arising from the pension plan and the associated 

risks. This, together with changes in the regulatory environment, 

may have led to companies to conclude that their pension plans 

were no longer an economically viable method of providing employee compensation. I do not think that companies that regard defined benefit plans as an economically appropriate method of providing employee compensation have closed their plans just because 

of the accounting required under FRS 17. FRS 17 simply provides 

transparent and objective information about the cost and risks of 

providing a defined benefit pension. 

Q.2. Is there an alternative accounting standard that could provide 

accountability and transparency, but not unnecessarily force employers out of pension programs? 

A.2. Standard setters often hear that accounting standards will 

change behavior. Yet, if the standard reveals information to the 

capital markets, and market participants find the information useful, why should accounting standards withhold that information? 

There may be implications. Management may change its behavior. 

But the role of the accounting standards, as I see it, is to provide 

the capital markets with the most useful and neutral information 

possible.