UPS’ profits for Q4, 2011, due for release tomorrow, will be reduced by a one-off $827 millioncharge resulting from an important change in how the company accounts its pension costs.
Under the change, financial gains and losses made by a pension fund are incorporated into thatyear’s company results rather than being spread out over a longer period of time.
The new method, adopted in the fourth quarter of 2011, will result in simpler, more transparentfinancial reporting, according to the company, and is the latest example of a US firm adjusting howit accounts for pension costs. The accounting change does not affect benefits for pension planparticipants.
“This policy provides greater transparency to the company’s underlying operating results,” saidKurt Kuehn, UPS’s chief financial officer. “I want to emphasise that this change has no impacton benefits for plan participants or UPS cash flow.”
UPS said on Friday it expects to record a pre-tax $827 million charge in its fourth quarterresults for the 2011 ‘mark-to-market’ adjustment. On a GAAP basis, diluted earnings per sharefor the fourth quarter and total year will be reduced by $0.51 and $0.41, respectively which isinclusive of both the mark-to-market adjustment and the benefit resulting from the accountingchange. The accounting change is expected to add $0.03 to adjusted diluted earnings per sharefor the fourth quarter and $0.12 for the full year 2011.
The accounting change relates to expense recognition for company-sponsored pension andpost-retirement benefit plans. This improved methodology records actuarial gains and losses, on theincome statement, in the year incurred rather than amortising them over time.
A mark-to-market adjustment will be made in the fourth quarter of each year reflecting actuarialgains or losses that fall outside a recognition corridor (10% of the greater of plan assets orbenefit obligations). These gains or losses result from changes in discount rates, thereconciliation to actual return on plan assets and other actuarial assumptions, the companyexplained.
UPS said it will continue to record service costs, interest costs and expected return on assetsat the business segment level. The projected impact of these items will be included in thecompany’s annual guidance.
This methodology is fully acceptable under U.S. GAAP and is considered preferable since italigns closer with fair value principles and does not delay the recognition of gains and lossesinto future periods, the company added.
UPS has restated past financial results since the adoption of the new methodology must beapplied retrospectively to prior periods.
