Increased financial statement disclosure and transparency can provide early warnings of trouble spots in corporate earnings and/or cash flow for US corporate issuers, according to Fitch Ratings.
Fitch does not expect the recently implemented accounting standards to have a material effect on corporate financial statements or be the sole cause of rating changes.
Fitch’s third annual review of corporate accounting issues evaluates recent accounting guidance, including enhanced footnote disclosures for multi-employer pensions and fair value. Changes in guidance for goodwill, changes in presentation for comprehensive income, as well as topical issues regarding pensions, taxes, and convergence are also discussed. Additionally, the report contains an appendix summarizing common accounting ‘red flags’ that may signal aggressive accounting practices.
The most informative recent enhancements to footnote disclosure relate to employers’ financial obligations to multi-employer pension and postretirement plans (MEPPs). The new disclosures go a long way toward revealing better estimates of a company’s share of its MEPP liabilities and potential impact on future cash flow.
Pension liabilities generally increased during 2011, driven by the decline in discount rates. Also, the weak equity returns in 2011 were not able to offset the increase in liabilities, causing the funding gaps to widen. This problem is likely to be most pronounced for lower-rated companies with materially underfunded pension plans and increased funding requirements. Proposed pension legislation would allow companies to use a higher discount rate for funding purposes, likely resulting in lower required contributions and potentially exacerbating funding problems in the future.
For details, see the full Fitch report Scrutinizing Topical Accounting Issues