Viridian... Accounting?

One of most important principles of the Viridian Design movement is: "Make the invisible visible." This means to pull the covers off the hidden costs and effects of things we do in everyday life to expose both the good and bad side. An example would be a thermostat that would display current electrical and gas usage and cost. Why don't they do that? If I want to know how much electricity or gas I'm using I have to go outside. Economists would call this exposing external costs.

Well, in what has to absolutely be a first for this blog, I'd like to talk about accounting. The board that writes many of the standards for accounting rules, The Financial Accounting Standards Board, has proposed a new rule on how companies calculate the obligations of their pension and retirement systems.

The proposed changes would force companies to list their pension values in the main body of their financial statements where all assets and liabilities are listed as opposed to burying the date in footnotes. The rules would also require companies to measure their pension fund values on the same date as the rest of their corporate obligations to prevent "timing the market" to make the pension funds assets look more plump than they are. The result will be a more complete and useful financial snapshot of corporate financial health.

And that's a problem for a lot of companies. Ford Motors for example. Ford currently lists net worth of $14 billion. Add (or as is more often the case subtract the unfunded portion of) the pension obligations of $20billion and Ford's corporate net worth disappears. Ditto for G.M. which lists a net worth of $14.6 billion but has pension obligations of $37 billion. As the New York Times article points out...

Many complaints about the way obligations are now reported revolve around the practice of spreading pension figures over many years. Calculating pensions involves making many assumptions about the future, and at the end of every year there are differences between the assumptions and what actually happened. Actuaries keep track of these differences in a running balance, and incorporate them into pension calculations slowly.

That practice means that many companies' pension disclosures do not yet show the full impact of the bear market of 2000-3, because they are easing the losses onto their books a little at a time. The new accounting rule will force them to bring the pension values up to date immediately, and use the adjusted numbers on their balance sheets.

Not all companies would be adversely affected by the new rule. A small number might even see improvement in their balance sheets. One appears to be Berkshire Hathaway. Even though its pension fund has a shortfall of $501 million, adjusting the numbers on its balance sheet means reducing an even larger shortfall of $528 million that the company recognized at the end of 2005.

Berkshire Hathaway's pension plan differs from that of many other companies because it is invested in assets that tend to be less volatile. Its assumptions about investment returns are also lower, and it will not have to make a big adjustment for earlier-year losses when the accounting rule takes effect. Berkshire also looks less indebted than other companies because it does not have retiree medical plans.

Despite the short term pain it will cause I cannot but think that this increased transparency in accountancy would be a good thing for corporate America and for American workers. It makes the true, terrible costs of our dysfunctional healthcare system easy to see and id also puts on full view the less than stellar management of many of the country's most respected companies who have kicked their problems down to the future instead of dealing with them in the hear and now. I guess it is okay to push mountains of debt off on your descendants as long as you get the good life in the here and now, eh?