With Pension Accounting Change, AT&T Leaves $17 Billion in Losses Behind Them

(January 14, 2011) — AT&T, the largest US phone company, has said it will slash $17 billion from retained earnings, changing the way it handles accounting for its pension fund.

In a regulatory filing, the telephone operator said gains and losses from its pension and other post-retirement benefits will now be recognized in the year in which they are incurred instead of amortizing them over a number of years, leading to simpler, more transparent financial results and providing a better view of actual performance, Bloomberg reported. As part of a move to tie the plan’s expected return to market fluctuations, the phone company is slashing the benefit plan’s discount rate to 5.8% from 6.5%. As a result, the company will take a $0.28 per share or $2.7 billion pretax charge in its fourth quarter 2010 financial report, for which AT&T is due to report results on January 27.

Other companies aiming to mitigate the impacts of the 2008 financial crisis on their pension plans may mirror AT&T’s actions. The changes indicate that AT&T is recognizing the big losses of plan assets in 2008 at one time as opposed to over two years, and it will position the company to more quickly take advantage of pension gains if interest rates continue to climb. “This is something I’ve personally wrestled with for some time,” Rick Lindner, AT&T’s chief financial officer, said on a conference call with Bloomberg. “We were bothered somewhat by the fact that there, at any given time, could be large amounts of losses that were not recognized through the income statement and had been deferred.”

“There’s an expectation that a lot of companies are going to do this, because they all have big losses from the market crash, and they all want to put it behind them,” accounting expert Robert Willens told The Canadian Press. On the whole, industry analysts say AT&T’s pension accounting change is good news for the firm’s shareholders.

The phone company said that both AT&T and its biggest competitor, New York-based Verizon Communication, each have pension obligations of approximately $30 billion. AT&T asserted that it does not expect a need to contribute more funding to the pension in 2011.