Mar 31 2006
Accounting Standards to Expose Pension Debt More Thoroughly
From footnotes to on the balance sheet: That appears to be what the accounting standards board behind GAAP wants companies in the U.S. to report more clearly for the benefit of investors and employees.
What does that mean?
- Ford’s 2005 financial statements would reflect that they are about $20 billion more in the hole with obligations vs what is currently stated.
- For GM? That translates into a swing of $37 billion, far exceeding their 2005 stated net worth of $14.6 billion.
And what about the S&P 500 as a whole? The Wall Street Journal (and Credit Suisse) reports that at the end of 2004, the index reported $99 billion in net pension assets. Currently in the footnote there is a total shortfall of massive $165 billion.
Perhaps if we were on the cusp of the next great economic expansion, we’d not have anything to worry about regarding these shortfalls. But when consumers are saddled under record levels of debt, one wonders from where the next great blast of purchasing power will come from to restore corporate profits to help this situation — especially since it seems that the era of using the House and home equity as an ATM seems to be coming to a close.
For perspective, if the U.S. Government were to take its pension and medical obligations to the taxpayers, and account for them on the books, the annual U.S. deficit would rise from the comparatively modest $350 billion range over the last few years, and balloon into the stratosphere at about $3.5 trillion. Putting that number into perspective, you could tax all U.S. incomes 100% and have enough to fund that annual shortfall.
Reported differently or not, perhaps it is finally time that U.S. consumers restore their balance sheets, from negative savings and big debts, back to good health. And, finally, maybe this would be a good time to reign in government spending once and for all. But that will not be a painless process, and I wouldn’t hold my breath for any responsible adjustments to be made, especially since it involves the Fantasy Land that is D.C.
That said, Be Vigilant!! — you certainly don’t want all your hard work and savings to get sucked into the vortex created when these unhealthy chickens come home to roost.
[...] In a mad scramble to stem its $105 billion reported losses in 2005, GM announced today it will unload its profitable GMAC lending unit to Cerberus Capital Management LP for about $14 billion. That’s helpful to stem the bleeding, but far from the final answer on needed restructuring for GM. For example, as we reported last week, its pension obligations alone remain $35 billion under-funded, which takes their overall balance sheet from $14 billion in the black to $16 billion in the red should GAAP accounting be updated as proposed to require pensions to be fully held as the liabilities they are on the balance sheets of corporations. GM is hoping to improve its junk bond rating for borrowing going forward. [...]