The Dow was at about 14,000 during October-November 2007 and at about 7,000 in February 2009. This resulted in losses in many companies’ pension funds. Many companies had unrealized losses exceeding the 10% corridor boundary, which meant the “excess” losses had to be gradually amortized into pension expense under U.S. GAAP.  For example, in 2009-2010 AT&T had unrecognized losses of $23 billion or 49% of their pension assets, Honeywell had $9 billion in unrecognized losses or 55% of their pension assets, and Goodyear had $9 billion in unrecognized losses or 54% of total pension assets (WSJ, March 9, 2011). 

 To mitigate the impact of amortizing the large unrealized losses to income, companies have taken at least one of at least two strategies.  First, some companies have adopted a new proforma bottom line called EBITDAP or earnings before interest, taxes, depreciation and pension income.  Examples include GenCorp (2010), YRC Worldwide (2009), NCR (2010), and J.C. Penney (2010). Furthermore, some hedge fund managers use Price-to-EBITDAP ratios for purposes of pricing and comparing companies (e.g., see Street Insider, 12/30/2009).

 Second, some U.S. companies (e.g., AT&T and Verizon) changed accounting methods and began using mark to market accounting for pension assets, taking the changes in market value through net income (i.e., eliminating the corridor approach) (e.g., see Pensions and Investments, 2/21/2011). This second approach results in retroactively applying the pension losses to the year 2008, as opposed to gradually amortizing them to pension expense over many years. This approach results in recognition of large gains as the Dow has gradually recovered from the low of 7,000 to almost 13,000 today.

 If the sample is large enough, it would be interesting to analyze the factors leading some U.S. companies to change to mark-to-market accounting for pension assets, while others continue using the corridor approach. It would be interesting also to investigate whether the market attaches higher values to companies with large pension gains (in 2009 and 2010) as a result of the switch to mark-to-market accounting, as compared to companies reporting net losses due to continued use of the corridor approach.  Any thoughts?