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Hancock Fabrics corrects pension calculation method
19 Jun '06
4 min read
Hancock Fabrics Inc reported that its outside actuarial consultant has informed the Company that prior estimates of pension expense and benefit obligations provided to Hancock for financial reporting purposes have been incorrectly calculated for certain employees' first year of employment. Correcting for this actuarial error will result in non-cash charges to the Company's prior years' reported net income and its shareholders' equity.
Commenting on the announcement, Bruce Smith, Hancock's Executive Vice President and Chief Financial Officer, said, "Importantly, the actual calculations performed by the Company to determine each retiree's pension payment appropriately and accurately included earnings from date of hire. Therefore, benefit payments to retirees were not affected. However, there is an understatement of pension expense and the related benefit obligations for financial reporting purposes."
"The net effect of the error is an understatement in reported pension expense each year from 1988 through 2004 in annual amounts ranging from approximately $50,000 to $100,000 after tax - less than a half cent per share per year, on average. The cumulative after tax impact over the 17-year period was approximately $1.2 million, or $.06 cents per share," concluded Smith.
The error related to the methodology used to compute the portion of an employee's pension benefit that is earned during the first year of employment. A full-time employee of Hancock does not become a participant in the pension plan until completing one year of service. However, once that requirement has been fulfilled, the pension benefit is computed based on earnings from date of hire, not just from the later date the employee becomes an eligible participant.
Commenting on the announcement, Bruce Smith, Hancock's Executive Vice President and Chief Financial Officer, said, "Importantly, the actual calculations performed by the Company to determine each retiree's pension payment appropriately and accurately included earnings from date of hire. Therefore, benefit payments to retirees were not affected. However, there is an understatement of pension expense and the related benefit obligations for financial reporting purposes."
"The net effect of the error is an understatement in reported pension expense each year from 1988 through 2004 in annual amounts ranging from approximately $50,000 to $100,000 after tax - less than a half cent per share per year, on average. The cumulative after tax impact over the 17-year period was approximately $1.2 million, or $.06 cents per share," concluded Smith.
The error related to the methodology used to compute the portion of an employee's pension benefit that is earned during the first year of employment. A full-time employee of Hancock does not become a participant in the pension plan until completing one year of service. However, once that requirement has been fulfilled, the pension benefit is computed based on earnings from date of hire, not just from the later date the employee becomes an eligible participant.
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