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January 13, 2011, 10:16 AM EST
By Amy Thomson
(Updates with analyst’s comment in third paragraph.)
Jan. 13 (Bloomberg) -- AT&T Inc., the largest U.S. phone company, said it will cut $17 billion from retained earnings and book an expense for last quarter as it changes the way it handles accounting for its pension fund.
The company will deduct $2.7 billion, or 28 cents a share, in non-cash expenses in the fourth quarter, Dallas-based AT&T said in a regulatory filing today. AT&T is changing how it recognizes gains and losses for funds that pay for pension and other post-retirement benefits.
“Investors shouldn’t lose sight of the real economics just because of the accounting,” said Craig Moffett, an analyst at Sanford C. Bernstein & Co. who rates AT&T shares “neutral” and doesn’t own them. “The real economics are based on the size of the liability regardless of how it’s accounted for, and this is a massive liability.”
AT&T is cutting the benefit plan’s discount rate, or the projected interest rate used to value the expected return on a pension fund’s assets, to 5.8 percent from 6.5 percent. The cut is part of a move to tie the plan’s expected returns more closely to movements in the market, making the accounting for the funds more transparent, AT&T said in a statement.
The cumulative effect of the change will reduce retained earnings by about $17 billion, the company said in the filing.
“So earnings are $17 billion less than what we thought they were,” said Robert Willens, president of Robert Willens LLC, who was previously a managing director in charge of tax and accounting analysis at Lehman Brothers Holdings Inc.
AT&T and Verizon
Rather than spreading out the gains and losses to funds over a period of several years, the changes in the funds will be recognized in the year that they happen, the company said.
“This is something I’ve personally wrestled with for some time,” Rick Lindner, AT&T’s chief financial officer, said on a conference call. “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.”
Moffett says that AT&T and its largest competitor Verizon Communications Inc. each have pension obligations of about $30 billion. Verizon, based in New York, and other large companies may have to make similar changes to their pension accounting, he said. Bob Varettoni, a spokesman for Verizon, didn’t have an immediate comment.
AT&T fell 6 cents to $27.98 at 9:52 a.m. in New York Stock Exchange composite trading. The stock had gained 5.2 percent in the past year before today.
(The company held a conference call at 9 a.m. New York time to discuss the change. To access the webcast, go to www.att.com/investor.)
--Editors: Peter Elstrom, Ville Heiskanen
To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net
To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net
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(Updates with analyst’s comment in third paragraph.)
Jan. 13 (Bloomberg) -- AT&T Inc., the largest U.S. phone company, said it will cut $17 billion from retained earnings and book an expense for last quarter as it changes the way it handles accounting for its pension fund.
The company will deduct $2.7 billion, or 28 cents a share, in non-cash expenses in the fourth quarter, Dallas-based AT&T said in a regulatory filing today. AT&T is changing how it recognizes gains and losses for funds that pay for pension and other post-retirement benefits.
“Investors shouldn’t lose sight of the real economics just because of the accounting,” said Craig Moffett, an analyst at Sanford C. Bernstein & Co. who rates AT&T shares “neutral” and doesn’t own them. “The real economics are based on the size of the liability regardless of how it’s accounted for, and this is a massive liability.”
AT&T is cutting the benefit plan’s discount rate, or the projected interest rate used to value the expected return on a pension fund’s assets, to 5.8 percent from 6.5 percent. The cut is part of a move to tie the plan’s expected returns more closely to movements in the market, making the accounting for the funds more transparent, AT&T said in a statement.
The cumulative effect of the change will reduce retained earnings by about $17 billion, the company said in the filing.
“So earnings are $17 billion less than what we thought they were,” said Robert Willens, president of Robert Willens LLC, who was previously a managing director in charge of tax and accounting analysis at Lehman Brothers Holdings Inc.
AT&T and Verizon
Rather than spreading out the gains and losses to funds over a period of several years, the changes in the funds will be recognized in the year that they happen, the company said.
“This is something I’ve personally wrestled with for some time,” Rick Lindner, AT&T’s chief financial officer, said on a conference call. “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.”
Moffett says that AT&T and its largest competitor Verizon Communications Inc. each have pension obligations of about $30 billion. Verizon, based in New York, and other large companies may have to make similar changes to their pension accounting, he said. Bob Varettoni, a spokesman for Verizon, didn’t have an immediate comment.
AT&T fell 6 cents to $27.98 at 9:52 a.m. in New York Stock Exchange composite trading. The stock had gained 5.2 percent in the past year before today.
(The company held a conference call at 9 a.m. New York time to discuss the change. To access the webcast, go to www.att.com/investor.)
--Editors: Peter Elstrom, Ville Heiskanen
To contact the reporter on this story: Amy Thomson in New York at athomson6@bloomberg.net
To contact the editor responsible for this story: Peter Elstrom at pelstrom@bloomberg.net
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