Pension Accounting Rules Led to Overvalued Stock, Fed Says Wall Street Journal (03/28/03) Vol. 17, No. 3 p.21; Weil, Jonathan
A Federal Reserve Board study casts a negative light on the Financial Accounting Standards Board's (FASB) rules for pension accounting, which it claims led to the systematic overvaluation of stock. The study says the FASB's pension accounting rules are flawed because they allow "smoothing" mechanisms, which delay the appearance of gains or losses on a company's financial statements. These mechanisms also require companies to calculate their pension earnings using subjective estimates of future returns and discount rates. Although this method has been praised for lowering volatility, investors complain that the lower volatility also blurs reality, and sometimes corporate managers tweak these estimates to pad future quarters' earnings. The study's authors recommend that the FASB's current pension accounting system "be reexamined and revised."