Tuesday, May 25, 2021

Lots of people assume that accounting changes are boring and unworthy of one’s attention. Not true, we say! On many occasions, those changes can have a significant impact on the financial statements.

Take Pfizer (PFE) as one example (mainly because the company is so high-profile thanks to its coronavirus vaccine).

Pfizer filed its latest 10-Q report on May 13. Tucked away in the footnotes, the company disclosed that it has adopted a new accounting principle for the valuation of its pension plans. As described in Note 1(c) of the filing:

In the first quarter of 2021, we adopted a change in accounting principle to a more preferable policy under U.S. GAAP to immediately recognize actuarial gains and losses arising from the remeasurement of our pension and postretirement plans (“MTM Accounting”).

As a result of that change, the amount reported on Pfizer’s balance sheet in the 2020 10-K was revised in Q1 2021.

The important part: you can see such changes in Calcbench, since we highlight these revisions. See below:

From an accounting perspective, what happened was this: instead of deferring accumulated losses in Accumulated Other Comprehensive Income (AOCI), Pfizer recognized those losses now and decreased Retained Earnings for the corresponding amount. Therefore the amount for Accumulated Other Comprehensive Income (AOCI) was revised from an $11.7 billion loss to a $5.1 billion loss.

Let’s say that again more simply: the accounting change led to a $6 billion increase in AOCI and a corresponding decrease in retained earnings. All because Pifzer adopted a change in accounting rules.

Now that the pension and post-retirement plans are “marked to market,” their carrying amount would be subject to market fluctuations. That can introduce some volatility in the future.

Interesting side note: Pfizer released its earnings report and filed an 8-K on May 4 — but those filings included no mention of the change in accounting principle and revised numbers. Analysts had to wait for the subsequent 10-Q filing and, as always, look for the footnotes!

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