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A few weeks back, the WSJ ran this article about the SEC Staff’s push for more companies to disclose their restatements under Item 4.02 of Form 8-K. Apparently, a lot of companies are restating without filing a Item 4.02 8-K – rather these companies are including the new financials in their next 10-Q or 10-K, despite the fact that FAQ 1 of the SEC’s 8-K FAQs says you can’t do that.

The Staff is busy issuing comment letters to companies who have not filed the Item 4.02 8-K, because investors rely on seeing a 8-K to signal that a restatement has taken place. The comments often ask the reasons why a Form 8-K wasn’t filed – rather than demand that one be made – because Item 4.02 isn’t triggered for every restatement, just “material” ones. So companies get an opportunity to argue why a 8-K wasn’t necessary.

Of course, companies aren’t going to always win this argument. Apparently, Inter-Tel (a company quoted in the WSJ article) apparently didn’t file the 8-K because they determined that the changes made in the restatement were immaterial to any prior quarter or reporting period, but the Staff reportedly asked that they go back and highlight the restatement in a specific filing.

How Does SAB 108 Work Here?

Juxtapose these stealth restatement situations to newly-issued SAB 108 which states, as noted in this press release: “The Staff will not object if a registrant records a one-time cumulative effect adjustment to correct errors existing in prior years that previously had been considered immaterial – quantitatively and qualitatively – based on appropriate use of the registrant’s previous approach.” SAB 108 describes the circumstances where this would be appropriate as well as the required disclosures that must be made.

I guess the bottom line here is to go ahead and clean up the balance sheet to correct those immaterial errors – but if you determine that you need to restate, don’t skip the 4.02 8-K filing.

New FAS 158 on Pension Plan Accounting

On Friday, the FASB issued FAS 158 on “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” Here is a summary of FAS 158. This is quite a complex statement that covers retiree health care benefits in addition to pension plans. The impact on companies will vary – and could be quite significant for some. The resulting balance sheet changes could have effects on contractual provisions (e.g. loan agreements) and measurements for other purposes, such as net worth or shareholder’s equity.

FAS 158 requires employers to recognize the overfunded or underfunded status of a defined benefit post-retirement plan (other than a multi-employer plan) in the statement of financial position, measured as the difference between plan assets at fair value (with limited exceptions) and the benefit obligation. It also would recognize – as a component of other comprehensive income, net of tax – the gains or losses and prior service costs or credits that arise during the period, but pursuant to FAS 87 and 106 are not recognized as components of net periodic benefit cost. There also are disclosure requirements.

The recognition and disclosure requirements are effective for fiscal years ending after December 15, 2006 – so it will apply this year for calendar year companies. There are separate effective date and transition provisions for a new measurement date requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position.

FAS 158 is phase one of the FASB’s project on pension and other post-retirement benefit plans. Phase two will address other issues, including income statement treatment of pension plan adjustments.