Greenberg: Digging Into Honeywell’s Accounting Change

Honeywell took a bold step today when it changed its pension accounting, going going to the sometimes controversial (but generally preferred by accounting types) mark-to-market accounting.

Honeywell model T87 thermostat
Source: Wikimedia
Honeywell model T87 thermostat

That means it will be accounting for pension expenses as they occur, not over a multi-year period as most other companies do.

Investors loved it, making Honeywell part of an elite club of stocks that have stayed in in the green today.

This is where it gets interesting: The reason investors loved this isn't just because of the change itself, which the company argues adds transparency, but what it does to earnings.

To make this change happen, Honeywell is going to cram $7.5 billion in losses that would have been spread over several years into this and prior years.

While that may hurt this year's earnings, taking this medicine all at once should help earnings going forward.

But beware: While earnings may be better than expected, Analyst Ken Hackel thinks this is somewhat of a smokescreen. He's the author of the book, "security valuation and risk analysis" —and he likes mark-to-market and thinks this is a good idea by Honewell.

However, he adds that plans for stepped-up contributions, which Honeywell also announced, ultimately could affect such things as cash flow and corporate budgets.

In response to my questions, the company said, “Cash contributions to the pension plan do affect cash flow from operating activities on a net of tax basis. The company intends to fund the 2011 contribution, again, by opportunistically accessing the credit markets and contribute the proceeds to the US plan.”

My take: Lots of moving parts. It’s very complicated. It’s very important. And expect more companies to follow. But until they do, and this is my personal pet-peeve, the playing field on the earnings front will be totally uneven as long as companies can account for pension expensesany which way they want.

This is especially important when you look at companies in the same peer group. Honestly, if you ask me—it’s nuts.

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