At last week’s AICPA Conference on Current SEC and PCAOB Developments, the topic of pension accounting came up more than once. In one session, Ashley Wright, a Professional Accounting Fellow in the SEC’s Office of the Chief Accountant, discussed a recent trend of companies changing certain key assumptions used in pension accounting measurements. Particularly, a number of companies have switched from using a weighted-average method to a spot-rate method in calculating certain costs. In her remarks, Wright indicated that the Office of the Chief Accountant (OCA) “did not object to a registrant changing from the use of the single-weighted average approach to the spot rate approach.”
Beginning with AT&T in February, three companies have changed their methods for determining their discount rates used to calculate service and interest costs during 2015. With Mizuho Financial and Becton Dickinson & Co., each of these companies had been using a weighted-average method but decided a spot-rate method would better reflect their service and interest costs.
In AT&T’s fiscal 2014 10-K, the company disclosed that they “made this change to provide a more precise measurement of service and interest cost by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates.” The change was accounted for prospectively as it was classified as a “change in accounting estimate that is inseparable from a change in accounting principle.” (See ASC 250-10-45-18.) Wright noted that the OCA also “did not object to the registrant accounting for the change as either a change in estimate or as a change in estimate inseparable from a change in accounting principle.”
In a comment letter to the company, the SEC asked AT&T to describe the basis for determining that the change was preferable. AT&T responded by explaining that “the full yield curve approach, while not prevalent in practice, is a more precise measure of the components of the Company’s net periodic pension and other postretirement benefit cost.”
The spot-rate method is not currently prevalent in practice, but could a broader change be on the horizon? We would expect to see more companies making this change soon. First, AT&T might be seen as a bellwether in this regard. AT&T was one of three companies to change from the smoothing method to the mark-to-market method of accounting for pensions in fiscal 2010. Over the next two years, more than 30 companies made the same change. Second, the SEC’s comments on this matter could also influence other companies’ decision making. Back in 2014, the SEC commented on the use of Preferability Letters when changing goodwill impairment testing dates. Subsequently, the number of preferability letters issued on this matter dropped from 34 in fiscal 2014 to just 4 so far in fiscal 2015.
When a large company like AT&T makes a change to improve financial reporting and when the SEC makes comments concerning specific changes, it is not unprecedented that a broader trend emerge.