Changes to Corporate Accounting

At first glance, I would say this is long overdue:

The board that writes accounting rules for American business is proposing a new method of reporting pension obligations that is likely to show that many companies have a lot more debt than was obvious before.

In some cases, particularly at old industrial companies like automakers, the newly disclosed obligations are likely to be so large that they will wipe out the net worth of the company.

The panel, the Financial Accounting Standards Board, said the new method, which it plans to issue today for public comment, would address a widespread complaint about the current pension accounting method: that it exposes shareholders and employees to billions of dollars in risks that they cannot easily see or evaluate. The new accounting rule would also apply to retirees’ health plans and other benefits.

A member of the accounting board, George Batavick, said, “We took on this project because the current accounting standards just don’t provide complete information about these obligations.”

***

Using information in the footnotes of Ford’s 2005 financial statements, Ms. Pegg said that if the new rule were already in effect, Ford’s balance sheet would reflect about $20 billion more in obligations than it now does. The full recognition of health care promised to Ford’s retirees accounts for most of the difference. Ford now reports a net worth of $14 billion. That would be wiped out under the new rule. Ford officials said they had not evaluated the effect of the new accounting rule and therefore could not comment.

Applying the same method to General Motors’ balance sheet suggests that if the accounting rule had been in effect at the end of 2005, there would be a swing of about $37 billion. At the end of 2005, the company reported a net worth of $14.6 billion. A G.M. spokesman declined to comment, noting that the new accounting rule had not yet been issued.

I don;t know how this would impact the overall stock market in the short run, but it appears that in the long run this would be a change towards more healthy accounting practices. You business folks can correct me if I am wrong.

Share On Facebook
Share On Twitter
Share On Google Plus
Share On Pinterest
Share On Reddit






64 replies
  1. 1
    SayUncle says:

    “the newly disclosed obligations are likely to be so large that they will wipe out the net worth of the company.”

    Actually, I’d guess they’ll be so large that companies will cancel their pensions.

  2. 2

    […] Via John Cole, comes news of proposed accounting changes: The board that writes accounting rules for American business is proposing a new method of reporting pension obligations that is likely to show that many companies have a lot more debt than was obvious before. […]

  3. 3
    Blue Neponset says:

    I don;t know how this would impact the overall stock market in the short run, but it appears that in the long run this would be a change towards more healthy accounting practices.

    The numbers have always been available in the financial statements they just haven’t been on the balance sheet. As a result, I am sure the institutional investors have been well aware of these liabilities and my guess is it won’t affect the stock market too much if at all.

    On a related note: Only a Bush apologist would ask such a question as yours. When are you going to wake up and stop supporting Dubya’s flawed Presidency?

  4. 4
    Par R says:

    “Only a Bush apologist would ask such a question as yours. When are you going to wake up and stop supporting Dubya’s flawed Presidency?”

    I presume the above statement was said with ironic intent, given Mr. Cole’s abandonment of “Dubya’s flawed Presidency” some time ago.

    As noted, these numbers have been available in the financial statement details for many years. Notwithstanding that fact, the potential impacts likely include reduced offerings of pensions by employers and reduced benefits going forward for those employed by companies who retain pensions plans. The enhanced visibility of the total costs associated with these plans, particularly the medical and post-retirement medical plans, will be too great for many companies to continue the offerings.

  5. 5
    Mr Furious says:

    Can someone get on the stick and start working on a real national health care plan now? Because we’re going to need it…

  6. 6
    Par R says:

    The obvious solution to our fiscal deficit problem is: No Health Care Plan Leads to Fewer Social Security Recipients down the Road.

  7. 7
    Blue Neponset says:

    I presume the above statement was said with ironic intent, given Mr. Cole’s abandonment of “Dubya’s flawed Presidency” some time ago.

    Sorry, I should have explained that comment a bit more. I don’t think Mr. Cole is a Bush apologist and I don’t think he supports Bush’s flawed Presidency either. I have found that Mr. Cole responds best to abuse so I have decided to heap some upon him now and again, whether I mean it or not.

  8. 8
    Dave Ruddell says:

    Can someone get on the stick…

    That was my favourite expression that I picked up from living in North Carolina. Don’t know if it’s actually southern in origin, but I always enjoyed hearing it.

    As for national health care, does anybody think it will actually happen? I’m not asking whether or not it should happen, just if there will ever be enough political will to make it happen? Would the bankruptcy of GM and Ford (along with their suppliers) be enough of a push?

  9. 9
    Blue Neponset says:

    Can someone get on the stick and start working on a real national health care plan now?

    If the Dems do recapture the House or the Senate or both I think that will be the issue they use to ride to victory in November. Dubya’s medial savings accounts are just plain stupid and that is the only plan the R’s have at the moment.

  10. 10
    Barry says:

    SayUncle Says:

    “Actually, I’d guess they’ll be so large that companies will cancel their pensions.”

    As I see it, the standards are basically showing that a large number of companies have not had a pension plan which was within a light-year of being funded. That implies that those plans were already headed for the boneyard.

  11. 11
    Punchy says:

    No chance this recommendation actually goes through. For an Admin. that has nothing good going for it save the economy–that’s their spin, not mine–there’s not a chance in hell they’ll disrupt the last lie to which they’re clinging.

    To suddenly “introduce” all this debt–yes, it’s always been there, but the layman doesn’t understand that–would crush the Bush Admin. notion that the economy is booming.

    Shorter: If Bush can hide ~200+ Bill in “emergency supplementals” from the official budget, so can corporations…

  12. 12
    ppGaz says:

    Ford and GM can survive building and selling cars. There is a possibility that they can even come back and start beating their Japanese competitors again.

    But not if the have to carry gigantic pension and retiree healthcare burdens.

    Forget your opinions about these companies, and consider the implications for the workforce at large. This country has ridden a bubble of denial and demagoguery on the subject of healthcare for a long time, and the piper is going to have to be paid. Probably, the sooner the better, but the question is when, and not if.

    Meanwhile, an accounting standard like this might accelerate the collapse of the current bubble. IMO, unless the country has the political will to tackle the larger problems, sticking a pin into that bubble without considerable preparation would be ill-advised.

  13. 13

    Would the bankruptcy of GM and Ford (along with their suppliers) be enough of a push?

    I’m not sure that it should be the “push”. Fundamentally, it’s not the direct cause of the downfall of GM and Ford. Sure, it’s currently what’s dragging down the balance sheet, but if both companies hadn’t wasted the last 30 years building sub-par vehicles, it’s highly likely that the health-care and pension funds would be fully-funded (instead of the noose around the neck that they currently are).

  14. 14
    ppGaz says:

    Sure, it’s currently what’s dragging down the balance sheet, but if both companies hadn’t wasted the last 30 years building sub-par vehicles

    There’s some truth in that, but a larger truth is that product and legacy costs are two separate issues. They interact, but not directly.

    Look at it this way. Suppose Ford, GM and Chrysler had led the quality and value improvement charge instead of following it, and made more profits … and expanded the legacy cost burden with even more pension and healthcare benefits. Would they be better off today? I don’t think so. I think they’d be companies building better cars and going bankrupt at the same time. To claim otherwise is to play into the myth of the bubble … that ignores the legacy costs and the political climate, and policies, that helped create them. These companies do not operate in a vacuum. Toyota and Honda don’t operate in a vacuum either.

  15. 15
    Bernard Yomtov says:

    As described, this is definitely a good idea, regardless of the effect, if any, on the company stock. Financial reporting should be accurate. To argue that increasing its accuracy is a bad idea because it will hurt the stocks is to get the whole relationship backwards and, in effect, to endorse what can almost be characterized as fraud.

    Company information shold drive the stock price, not the other way around.

  16. 16
    Blue Neponset says:

    To argue that increasing its accuracy is a bad idea because it will hurt the stocks is to get the whole relationship backwards and, in effect, to endorse what can almost be characterized as fraud.

    Who is arguing that?

    I derive no pleasure from defending a Bush apologist like Mr. Cole, but that isn’t how I read his comments.

  17. 17

    These companies do not operate in a vacuum. Toyota and Honda don’t operate in a vacuum either.

    The benefits to retirees that GM offered make sense in a situation where the company is growing. The problem Ford and GM have had is that over the past 30 years they’ve been shrinking. So now they have more retirees than employees.

    Perhaps this is the reality of the political climate, and maybe we were able to get by because of growth, but today that’s where we are at.

    Now look at the market. Americans have more cars than ever. They began losing market share just as families starting going from one car households to two-three car households.

    The problem is, they let the Asian and Europeans sell those cars to Americans. Now understand that there is a large amount of competition today, and not all the Asian and European companies are making money either. But I can’t help but think going from 50% marketshare to 20% was a not good thing for GM.

  18. 18
    ppGaz says:

    But I can’t help but think going from 50% marketshare to 20% was a not good thing for GM.

    Good points overall, but I have never bought into the “market-share” model of how this works. First of all market share is looking at a dynamic, not a fixed, market. Twenty percent of 20 million cars is 4 million cars. Thirty percent of 10 million cars is 3 million cars. You can sell more cars and lose market share. The market is neither fixed, nor totally expandable. So if you introduce strong competitors like Honda and Toyota to a market that is expanding, you’d expect to see the kinds of numbers we’ve seen in the last 25 years.

    It isn’t all about total units sold, either. It’s also about costs and profits. Benefits are paid for out of profits. It’s the squeeze between shrinking profits and expanding benefit costs that is really hurting Ford and GM, not market share. A company healthy at 20 percent is a helluva lot better off than on that is sick at 30 percent share.

    The whole long term benefit model is dysfunctional. If it succeeds only when the host company keeps growing, then it is doomed to fail. No host can just keep growing. Things change.

  19. 19
    KC says:

    Yeah, what is going to be the outcome of this for regular folks? Are we going to have to bail these companies out if they really sink? Is the public going to be responsible for the pensions they toss?

  20. 20
    Mr Furious says:

    Heard this on the radio on the way to work this morning…

    A big day for Delphi
    After months of trying to hammer out an agreement with unionized workers to reduce wages, auto-parts maker Delphi today may ask a federal bankruptcy judge to void its labor contracts. Tess Vigeland reports…

  21. 21
    Bernard Yomtov says:

    Who is arguing that?

    I derive no pleasure from defending a Bush apologist like Mr. Cole, but that isn’t how I read his comments.

    BP,

    I did not intend to suggest that John was arguing against the change. Clearly, he’s for it.

    Some people certainly will, however, on the grounds that it will affect stock prices. ppGaz comes close. Ask yourself why this is not already standard accounting practice if it’s so obviously correct.

  22. 22
    ImJohnGalt says:

    This all sounds so reminiscent of the whole “should we expense options?” controversy, it just makes me ill. I’m completely in the “full disclosure” camp.

    Just a reminder of exactly what that “controversy” was:
    The Emperor’s New Clothes

    I’m sure there are a lot better resources describing it, but this was the first one, and it was as good a basic explanation as any.

    ppGaz:

    Benefits are paid for out of profits.

    That’s the whole frickin’ problem in a nutshell right there. Profits should be calculated after the benefits have been expensed.
    If a company is not generating enough revenue to pay out its benefits in addition to its other expenses, it should not be able to claim it is profitable.

  23. 23

    The end of the blogosphere is nigh

    The Defeatists Join Pajamas Media!

    Quick, better stock up on duct tape and tuna

  24. 24
    Bernard Yomtov says:

    The whole long term benefit model is dysfunctional.

    It need not be. You just have to do it right. This means funding the benefit when it is earned, using conservative assumptions about discount rates and future costs, and reporting it as an expense at that time as well.

    This keeps you honest, it makes sure the benefit plan is really affordable, and it lets investors and others know what’s going on.

  25. 25
    les says:

    Neither this, form ImJohnGalt:

    That’s the whole frickin’ problem in a nutshell right there. Profits should be calculated after the benefits have been expensed.

    nor this, from ppgaz:

    Benefits are paid for out of profits.

    quite get it. Current benefits are paid out of current revenues, and are expenses reducing profits. Future benefits are liabilities; the amounts are determined under financial and tax accounting principles, which have for years allowed the liabilities to be drastically understated. You look at projected revenues, among other things, to see if the company can handle liabilities expected to come due. When they are understated, the current expense in the future does come out of profits, of which there won’t be any.

  26. 26

    The whole long term benefit model is dysfunctional. If it succeeds only when the host company keeps growing, then it is doomed to fail. No host can just keep growing. Things change.

    Great point, definately.

    les writes:

    When they are understated, the current expense in the future does come out of profits, of which there won’t be any.

    It does seem to me under the old rules, a company could fool themselves and others into looking like they were in good shape.

    Companies today look only at short term profits, and not at long term viability. That is a bad thing.

  27. 27
    ImJohnGalt says:

    Les, thanks for clarifying that. I did (and do) understand the balance sheet liability of future benefits, I was responding specifically to ppGaz’s claims that benefits are paid out of profits, when clearly the profits are only calculated after current benefits have been expensed. Benefits are not like dividends, which is what ppGaz’s statement implied.

    I’m completely in favour of moving the liability from the financial discussion section of the Annual report to the liability sheet (my old Financial Statement Analysis prof used to say “if you want to learn the important stuff about a company, skip directly to the discussion, jumping over the numbers they report”). However, you’ll still run into a problem with how each individual company calculates its future benefits.

    I couldn’t tell from the Times article cited by John, but does the FASB intend to suggest annual (or quarterly) assumptions for benefits obligations? How will these be audited? There are so many crazy assumptions that could be made about employee illness rates and mortality, as well as future performance of the pension investments that I think it’s going to be pretty easy to game them anyway.

    Still, any time to you can promote financials from the swamp that is the discussion section to the balance sheet or income statement, I’m in favour of it.

  28. 28
    Stormy70 says:

    This topic is boring!

    Where’s the Open Thread?! Who cares about taxing crap when Lost kicked so much butt this week, and a monster movie is coming out today. Sheesh, people. It’s Friday, time to knock off.

  29. 29
    Pooh says:

    ppG, I think you and the ‘Neer are talking past each other here, in that if GM didn’t make cars that the market had adjudged to suck, they’d sell more of them, and thus be more profitable, pre or post benefits.

  30. 30

    So if you introduce strong competitors like Honda and Toyota to a market that is expanding, you’d expect to see the kinds of numbers we’ve seen in the last 25 years.

    Only if the three major companies that are defending that market decide to take a 25-year-long break from actually competiting in it. Look at GE, which is similar to GM and Ford in terms of legacy costs. They aren’t having nearly the same level of problems. Are legacy costs a concern for GE? Damn straight they are, but they’re not looking to be fatal at this time.

    I agree that more profits may have brought more benefits, but come on – even as overall output dropped (ignore market share for a moment, and wake up to the fact that in a growing automotive market, all of the Big Three have DECREASED IN TERMS OF ABSOLUTE PRODUCTION!), the management of the Big Three were only happy to sign up to ever increasing benefits. Why? Because of the exact issue we’re talking about right here – they could bet away the farm at a latter date to keep their workers happy, all while maintaining healthy profits on paper.

    Despite the fact that GM was within hours of going bankrupt in ’92 because a similar accounting change related to health care wiped out $20B or so of the company’s net worth, the company is right back in the same position a mere decade and a half later. Shit, Captain Rick’s been with the company for something like 20 years now; you’d think that one brush with Chapter 11 would be enough for a career. Then again, GM has never been about looking very far forward or back.

    I know you think I’m wrong about the auto industry, ppGaz, and you’re entitled to your incorrect opinion. What amazes me is that you and I seem to generally agree that there’s a problem, but you insist on finding reasons why I’m wrong about diagnosing those issues. Whatever.

  31. 31

    I guess I forgot to explicitly state that one of the reasons GM, Ford, and many other companies have found themselves with drastically underfunded pensions is that they decided to take fat profits from healthy returns on those pension funds back when the market was healthy. You know, if the assumption is that the fund will perform at 10% on a long-term basis and profits are skimmed off the top every time the market performs better than 10%, then there’s going to be a problem as soon as the market sags.

    I lost even more faith in the market today, as GM’s stock went up 0.2% even as Delphi threatened to pull the rug out. Amazing.

  32. 32
    ppGaz says:

    you’re entitled to your incorrect opinion.

    America is great country!

  33. 33
    D. Mason says:

    American companies have steadily been selling out the American worker since the 80’s atleast(thats when i started watching). Why should this shit be any different? Their solution as usual will be to fuck their employees.

  34. 34
    ppGaz says:

    Benefits are not like dividends, which is what ppGaz’s statement implied.

    Hmm. What I mean was more on the order of “Unless they are profitable, they are not going to be paying, and particularly increasing, benefits.”

    So if building a huge entitlement base of retirees with fat benefits is a bad thing, then coasting along and making profits, blind to the ugly future that awaits them, is not a good thing.

    If there’s any truth to that, then remaining profitable is just a distraction to the hideous reality that awaits them on the day when they can’t continue to fund those entitlements (which adds cost to the products) while their competitors are able to sell similar … even better .. products without those costs. That’s the situation they are in now, unless I am missing something.

    And market share doesn’t matter in this situation, does it? What difference does it make if you have 20 percent or 30 percent of share, when the benefits-cost squeeze is on and your competitor can meet your price and deliver a better product that earns him more profit? You’re screwed at that point.

    All else being equal, you let one guy make a car for a thousand dollars less than his competitor while delivering the same or higher value, the guy with the higher costs is going to lose. That guy is GM, and Ford.

    The automobile business is not a game where the “best” manufacturer ends up with all the share, like Monopoly. There has to be room for competitors to compete.

  35. 35
    ppGaz says:

    the management of the Big Three were only happy to sign up to ever increasing benefits. Why? Because of the exact issue we’re talking about right here – they could bet away the farm at a latter date to keep their workers happy, all while maintaining healthy profits on paper.

    So it’s Bill Ford’s and Roger Smith’s fault that the American auto companies are saddled with retiree healthcare costs, for example, and Toyota isn’t?

    Toyota was just smarter?

  36. 36
    ppGaz says:

    ppG, I think you and the ‘Neer are talking past each other here

    Snicker. Yeah, that’s it.

  37. 37
    ppGaz says:

    This topic is boring!

    I know.

    John used to put up pictures of babes once in a while.

    What happened to that tradition?

  38. 38
    Rome Again says:

    I haven’t read through all the comments, but please correct me if I’m wrong. I always thought that accounting (which I’ll admit I never took) was sort of like balancing a checkbook, but only on a larger scale. You have income, and you have expenditures, that all instances of expenditures and income should be reported, and that once you add in all income and take out all expenditures, you’re left with ONE number that shouldn’t change. Hmmmmm? Am I wrong?

    Anything else is really just cooking the books (otherwise known as cheating), isn’t it?

  39. 39
    ppGaz says:

    I always thought that accounting (which I’ll admit I never took) was sort of like balancing a checkbook, but only on a larger scale

    No.

  40. 40
    Rome Again says:

    ppGaz, I have the utmost respect for you, but instead of just a simple close-ended answer, I expected at least a partial explanation. I did admit I’m not even a novice here, but it seems to me that like my family checkbook, there is one final number at the end of the reporting period.

    While I understand there are future benefits to be concerned with and calculated in, these benefits should have a definitive cost and be able to be reconciled (how they are reconciled I can understand might be a variable, but no matter how they are reconciled, at the end of x number of years, the total costs for these benefits should match, no matter what method you use, shouldn’t they? What I’m led to believe by this discussion is that the amount of money a company (that doesn’t cook the books) has left over after all income and expeditures are acknowledged is a fluctuating number? How can that be?

    The actual final amount of income, expenditures and total balance don’t change, it’s only how they are reported. Why is it acceptable to not completely report all of this?

  41. 41
    ppGaz says:

    ppGaz, I have the utmost respect for you, but instead of just a simple close-ended answer, I expected at least a partial explanation. I did admit I’m not even a novice here, but it seems to me that like my family checkbook, there is one final number at the end of the reporting period.

    Well, I doubt that I am your only source for an explanation of accounting. Tons of information about it is available for free online.

    But if the question is whether it’s a big version of balancing a checkbook, my best answer is, “no.” Nor is balancing a checkbook a small version of accounting.

    Accounting is “double entry accounting” and it is a science and practice that people have spent their lifetimes studying and practicing. There are a zillion ways and places to start your investigation like this and if you are really interested, a little research will go a long way.

    Balancing a checkbook hardly even qualifies as a miniature of “bookkeeping” and bookkeeping, to me, is not even a substantial subset of accounting.

    LBNL, I’m a contract curmudgeon here, and my job is to irritate …. righties primarily, but I’ll irritate anyone for a fee. Accounting instruction is not my department. John doesn’t pay me enough for that ;-)

  42. 42
    Rome Again says:

    LBNL, I’m a contract curmudgeon here, and my job is to irritate …. righties primarily, but I’ll irritate anyone for a fee. Accounting instruction is not my department. John doesn’t pay me enough for that

    Not asking for accounting instruction (I didn’t take it in college because I wasn’t really interested), just wondering why there are not finite numbers at the end of a reporting period, just as there would be with a checkbook? Why would the numbers fluctuate by different method, unless something wasn’t being reported correctly?

  43. 43
    Pooh says:

    John doesn’t pay me enough for that

    And how do you account for that?

    (thank you, thank you, I’ll be here all week. Try the veal.)

  44. 44
    ppGaz says:

    Why would the numbers fluctuate by different method, unless something wasn’t being reported correctly?

    Because there are different ways to treat, view, book and account for the entries. There isn’t just “one way” to look at the flows of entries into the accounting systems of a large corporation. There are accepted practices, as defined by standards and law, but there different ways to do things within the legal and accepted standards. The change hinted at at the top of this thread is just one example of many, many possible examples.

  45. 45
    ppGaz says:

    And how do you account for that?

    Supply and demand?

  46. 46
    ppGaz says:

    ppGaz, I have the utmost respect for you

    Thank you, that is very flattering.

    I see myself as a pie fighter, mainly.

  47. 47
    ImJohnGalt says:

    Rome Again, there are a number of accounting conventions which allow for a fair bit of “wiggle room” to manipulate the numbers. There are also variables of timing that can be used to manipulate profits as well. I’ll give an example of each.

    If a business goes out and buys a $1,000,000 machine, accounting convention (in America accountants use “Generally Accepted Accounting Principles”, or GAAP) dictates that the company can not “expense” the entire cost of the amount of the machine in the year it was purchased. There are a few reasons for this, but one is that it prevents a company that might otherwise show a profit (which would be taxable) from buying a big honking piece of equipment right at the end of the year, and show a loss instead. Rather, GAAP dictates that the cost of the machine should be spread out (or “depreciated”) over a period of time, which can either be equally over the projected lifetime of the machine (“straight line depreciation”), or twice as fast as that (“double-declining depreciation”). As you can imagine, which type of depreciation you choose can significantly impact the number you claim as your net income. This is why many investors focus on something called “EBITDA” (Earnings before Interest, Tax, Depreciation and Amortization), trying to get to a number that is slightly less prone to manipulation.

    Companies also have opportunity to game their financials by timing the “recognition” of their sales and expenses. That is, they make decisions about what date they can claim a sale is a sale. Some may claim the sale when a contract is signed. Another may not claim it until they get the check. Some companies that are paid in instalments may attempt to recognize the revenue as a lump sum value of the future payments, in order to bump up their short-term growth numbers.

    These are just two of the simplest ways that companies attempt to manipulate their numbers, either to avoid paying taxes, inflate their revenues for either the stock markets or their corporate incentive plans or to hide the fact that they are in serious financial trouble. There are many much more complex ploys to manipulate numbers that use shell companies (cf Enron) or reserves for litigation, but hopefully this helps a little.

    When valuing a company, probably the most common method currently used is to take all of the future cash flows (both in and out) of a company, and find the net present value of each of these cash flows so that you end up with a base number (which you can then adjust for other reasons). The further out you go, the less reliable both your projected numbers and your “discount rate” will be. Predicting what your benefit reserve should appropriately be, as well as what it might be will be highly contingent on your assumptions of the ROI of your invested benefits funds, the mortality rate of your retired employees, and inflation (assuming your pensions are indexed to inflation). Lots of room for making guesses there, and companies don’t always try to make good ones. Some, it appears, try to make the set of assumptions that lets them keep the lowest amount in the pensions possible while still staying within the law. [actually, *are* there any laws around how funded a pension plan has to be in the US?]

    Caveat: I’m not an accountant, although I do the books for my company, and have taken a few courses, so apologies in advance if I’ve made some blatant [or not so blatant] errors herein.

  48. 48
    ppGaz says:

    IJG, good job.

    (Can I call you about my taxes?)

  49. 49
    ImJohnGalt says:

    Taxes, I outsource. Nobody can stay on top of all the regs if they also want to have a life.

  50. 50
    Rome Again says:

    Thanks for the explanation IJG, and those are fair examples, it just seems to me that there’s too many ways to cheat, and make a company look profitable when it isn’t really. I personally feel that as far as pensions go, there should have never been any finagling there, and it’s going to blow up in employees’ faces just because a company wanted to look more profitable than it really was. That appears dishonest, could it be anything other than that?

    Speaking of all this, I have a situation I’d like to ask a question about, and you seem like just the person who might know the answer.

    Before I went to work for my current employer (who offers GREAT benefits) my husband was offered a chance to sign on with his employer’s benefit program. Their plan was way too expensive (about $700 a month for just the two of us), so we opted out, this was about three years ago. Now, since we didn’t go with his employer’s benefits, my employer is forcing me to pay an extra $100.00 a month, does that seem fair? Is this a normal practice and I’ve just never heard of it? Why do they do this? The difference in benefit package costs between my employer and my husband’s employer is about $450-500 a month.

  51. 51
    ImJohnGalt says:

    I’m not sure I understand your question. What do you mean an “extra” $100 a month? You declined your husband’s employers’ benefits before you started with this new employer.

    What are you paying $100 more than? Other people in the office?

  52. 52
    Rome Again says:

    What are you paying $100 more than? Other people in the office?

    One of the forms I was given in my benefits sign up packet was a statement stating that my husband was eligible for insurance with his employer (whether we took it or not), and if he was eligible (which he was, even though we declined) they are forcing me to pay an extra $100 a month. I supposed I could have lied, but I am no a liar, and really wanted both to keep this job (eligible for benefits on the thirty-second day I was employed) and this great benefits package (which would only cost about $200-250 if I weren’t paying the extra $100 a month). Have you ever heard of anything like this?

    Sorry to get anecdotal here, apologies.

  53. 53
    ImJohnGalt says:

    From Kiplingers:

    Incentives to leave

    Employers want to offer health insurance as an employee benefit because it makes them more competitive when attracting and keeping employees. But since their costs continue to rise, they’re looking for ways to encourage your family members to get their health insurance somewhere else. “When an employer is desperate to save health care costs, one way of reducing costs is to encourage spouses who have coverage elsewhere to take their own company’s coverage,” says Ruth.

    The Kaiser Family Foundation survey found that 17% of the firms offering health benefits provided additional compensation or benefits to employees who decline their offer of health insurance. They generally don’t want you to be uninsured, though, so you may need to provide proof that you’re getting health insurance through your spouse’s employer or an individual policy. “If they can demonstrate they have coverage elsewhere, they may get a cash credit of a few hundred or a few thousand dollars,” says Bill Thompson, principal and consulting actuary with Milliman, an actuarial consulting firm that does a lot of work with health insurance product design. An incentive like this may tip the scales towards switching to a policy with your spouse’s employer.

    Meanwhile, many employers are increasing the costs for family members much more than they are for employees. The Kaiser study found that 41% of the employers offering health benefits said they were very likely or somewhat likely to increase the percentage of the family premium that employees must pay in the next two years. “The argument there is that the employer has a finite amount of money to spend on health care and they’re thinking it’s their responsibility to provide more for the employee than the dependents,” says Ruth.

    And more employers are starting to add a surcharge if your family members have access to health insurance elsewhere (such as through their own employer) but choose to go on your employer’s plan instead. The Kaiser study found that 12% of the employers offering coverage were adding a surcharge like that for dependents who could have gone gotten coverage elsewhere but didn’t. Ruth says that the sRuth says that the surcharge can run as high as an extra $100 per month.

    Click the link above for the full article.

  54. 54
    Rome Again says:

    Aha, thanks. Interesting, it comes out to be the exact same amount as I’m paying. Well, I guess that extra $100 is better than switching to a horrible plan that would cost at least twice as much. LOL

    Thanks again.

  55. 55

    I see myself as a pie fighter, mainly.

    Better than being a pipe fighter, for those of on the receiving end ;)

    With regards to market share, ignore everything I’ve ever said on the topic – you’re right, it’s not important. What is important is that both Ford and GM are shrinking companies (I don’t quite know what to think of DCX yet). Regardless of the size of the car market, Ford and GM are companies that are getting smaller, not larger, and when that’s combined with some really crappy long-term handling of pension and health-care funds, it’s fatal. I find it impossible to feel sympathy for these companies when it comes to legacy costs, because proper investment practices would have allowed them to avoid the whole mess.

    Now, when it comes to health-care costs for current employees and how that affects Ford and GM vis a vis the Asians, it’s certainly an interesting topic. That’s primarily a matter of the union asking for the world and management handing it over to them. Had management stood up to the union 30, 20, or even 10 years ago, this conversation could be very different. I’ve worked in shops where management and the union have had to come to an understanding about long-term viability, and it is indeed possible for the two parties to reason with each other. Unfortunately, we’ve got these huge companies and unions that are run by guys who play high-stakes poker without having any skin in the game – guys like Ron Gettelfinger, Steve Miller, JT Battenburger, and Rick Wagoner aren’t going to lose a dime if this whole house of cards collapses tomorrow, but they’re the ones making all the decisions.

    I hope that GM and Ford shareholders really enjoyed all the profits they took from the pension fund overflow in the late 90s, because it’s about to come back and bit them in the collective ass if this new law goes into effect.

  56. 56
    ppGaz says:

    I hope that GM and Ford shareholders really enjoyed all the profits they took from the pension fund overflow in the late 90s, because it’s about to come back and bit them in the collective ass if this new law goes into effect.

    If so, definitely serves them right.

  57. 57

    […] The big problem with the new FASB rule is that it will surely be misunderstood by the media and the public at large – much like the nonsense about expensing stock options (I’ll explain that debate if anyone asks.) Just like this comment on Cole’s site about the issue: Only a Bush apologist would ask such a question as yours. When are you going to wake up and stop supporting Dubya’s flawed Presidency? […]

  58. 58
    Blue Neponset says:

    Thanks for the explanation IJG, and those are fair examples, it just seems to me that there’s too many ways to cheat, and make a company look profitable when it isn’t really.

    Aside from outright fraud, it is difficult to make a company look profitable when it actually isn’t. If you know how to analyze a financial statement you can get an accurate idea of a company’s profitability in a matter of minutes or hours.

  59. 59
    Par R says:

    Army Engineer says: “I find it impossible to feel sympathy for these companies when it comes to legacy costs, because proper investment practices would have allowed them to avoid the whole mess.”

    I am not aware of any “investment practices” available to the auto makers that would have served to mitigate this looming financial crisis. Perhaps you could explain further.

    He also says: “I hope that GM and Ford shareholders really enjoyed all the profits they took from the pension fund overflow in the late 90s, because it’s about to come back and bit them in the collective ass if this new law goes into effect.” Again, I’m not sure what is intended by these comments. Perhaps the reference to “pension fund overflow” refers to the actuarial gains that existed in a couple of years, which the SEC accounting rules required them to include ratably in income on a basis recognizing the average remaining service life of employees. At the end of the day, however, GM and Ford were following the FASB/SEC rules, and what they were doing was fully described in their financials. By the way, I’m not defending the automakers here; in fact, none of the

    cars I own were made by one of these companies.

  60. 60
    ImJohnGalt says:

    Aside from outright fraud, it is difficult to make a company look profitable when it actually isn’t. I

    BN, I fundamentally agree with you, but there are a lot of ways to make things look short-term profitable at the expense of longer term sustainability. A sophisticated investor *should* see through most attempts at hiding or deferring losses, but then, not everyone is a sophisticated investor.

    Every investor should know how to read a financial statement, but the sad fact is that, like political or other news, financial news has now become “sound bites”, where focus is on EPS on a quarter-to-quarter basis, rather than on the long term prospects of the company.

    Face it, that’s how EBITDA became so prevalent – MSNBC’s ‘Squawk Box’ et al were so caught up in the dot-com boom, they just imagined away restructuring costs or “one-time events”, and the unsophisticated investor blindly followed.

    But I digress. While I agree with you that for people who understand this crap most of these attempts to artificially inflate the stock price are transparent, there are some who make things so complex (cf Enron, again) that even the smart guys don’t understand the structure. The fact that their egos won’t let them admit that and ask more questions is a whole other discussion.

  61. 61
    Larry says:

    it just seems to me that there’s too many ways to cheat, and make a company look profitable when it isn’t really.

    Bingo!

    I investigate stock fraud Class Action suits.
    Manipulating the books is ridiculously easy, hugely lucrative, and laughably low risk.

    The Directors and Officers are covered by D&O insurance (paid by the shareholders btw) that covers the cost of defence and pays the settlement amount (in the absence of a finding of fraud).

    99% of the cases are settled pre-trial, with the perps (and that is what they are) pocketing the money.

    The surest way to make money in the market is watch for insiders exersizing options and taking profits before a Company releases a Quarterly or Year End Report. If you see this – Sell if you own, Short if you don’t, cause there’s a re-statement (re: we lied, manipulated the books, etc. to keep the stock price high so we could cash in) a comin’.

  62. 62
    tzs says:

    Wasn’t also the whole pension fund thing changed several years back, which is what got us into this mess in the first place? Originally, companies bought bonds which were expected to pay out at the time the $$ would be needed for pension costs. Then the regulations got relaxed–less and less money had to be set aside specifically, and wilder and wilder assumptions about profitability were allowed. I seem to remember the major difficulty is the “expected return” on the $$$ allocated for pension plans can be listed at the highest percentage they saw historically. Which is definitely not what they’re getting now which is why everything is turning around to bite them in the ass.

    I would have more sympathy for the US auto companies except they have been whining about legacy costs and health care stuff for 30 years now. Any company which can’t adapt over that period of time to something that is obvious and predictable is just looking for excuses for its own failures.

  63. 63
    ppGaz says:

    Any company which can’t adapt over that period of time to something that is obvious and predictable

    That’s right. Whether it’s a person, or a corporation, if you are getting fucked over, just deal with it and stop complaining.

    Now if only the Dobsonites would adopt that view.

  64. 64
    tzs says:

    ppGaz, it isn’t the fact that it’s happening, it’s the fact that it’s predictable. I used to be involved in commercial space development. What wrecked havoc in the US (it seems to have settled down now a bit) is that the rules kept getting changed back and forth. NASA wasn’t going to lauch payloads for commercial enterprises, then they were, then they weren’t again. It made it impossible for any entrepreneur to predict any potential market demand because of the changing conditions–and of course the venture capitalists look askance at bets in such volatile environments.

    What businesses want is predictability in the environment in which their companies have to run. Hearing the U.S. auto industry complain about something that was pretty obvious and calculatable doesn’t get them off the hook in my opinion. Either they had stupid management not to realize what was coming down the pike, or they thought if they howled enough they could get the U.S. gov’t to step in and rescue them. Neither do I have much respect for.

Trackbacks & Pingbacks

  1. […] The big problem with the new FASB rule is that it will surely be misunderstood by the media and the public at large – much like the nonsense about expensing stock options (I’ll explain that debate if anyone asks.) Just like this comment on Cole’s site about the issue: Only a Bush apologist would ask such a question as yours. When are you going to wake up and stop supporting Dubya’s flawed Presidency? […]

  2. […] Via John Cole, comes news of proposed accounting changes: The board that writes accounting rules for American business is proposing a new method of reporting pension obligations that is likely to show that many companies have a lot more debt than was obvious before. […]

Comments are closed.