What’s on International Treasurer’s radar screen.
The International Treasurer editorial meeting this week produced a few topics that will be fleshed out in the coming weeks. Topics included companies changing pension accounting; a fresh take on whether a company is better off buying back shares or issuing dividends; as well as a look at global impact of QE2, including on new developments surrounding the Chinese renminbi and its future role in FX markets.
Pension accounting
News that Honeywell plans to change the way it accounts for pension expenses to marked-to-market accounting raised questions about what other companies might plan for their pensions. It also raised questions about companies readying their accounting styles for IFRS, which is on track to introduce marked-to-market accounting for pensions over the next two years (see related story here).
Critics claim that current accounting measures, which smooth asset returns and amortizes deferred gains and losses over a period of time, distorts the true conditions of the balance sheet. On the other hand, switching to fair value ahead of expected gains will speed up an improving pension liability picture.
Dividends vs. buybacks
With cash levels on corporate balance sheets growing, boards are increasingly faced with the decision on the best way to return that cash to shareholders. Usually this means deciding which is better, buying back shares or initiating/increasing a dividend.
Among the considerations are the tax implications for shareholders, which means knowing how many are taxable, or are incented to invest for after-tax returns. Indeed, tax uncertainty and the potential for a tax hike in the US with Bush tax cuts being allowed to expire has helped spark renewed dialogue—as well as consideration of special dividend payouts before year end. And beyond the tax implications, will cash income or capital gains please the class of shareholders invested in your company stock now and is this the kind of shareholder you want going forward?
QE2 impact and an offshore renminbi
The weakening impact of QE2 on the US dollar, while boosting the translated value of foreign earnings, does not help the value of cash on the sidelines. Even though a lot of corporate cash is offshore, most US MNCs keep their cash in dollar-denominated assets. Here, they are much like the Chinese central bank that is opposed to QE2 due in part to the impact it is having on its dollar reserves. Reports are that QE2 has redoubled China’s interest in promoting an offshore RMB as a reserve currency. Treasurers should watch this trend carefully for any signs that China can be successful in gaining acceptance for such a dollar-asset alternative. It could have big implications for onshore RMB convertibility, too and, with it, getting money in and out of China.