Possible pension accounting changes could hurt some companies’ valuations, warns a new report from Accountability Research Corporation.

The report, which analyzes the 132 companies in the TSX composite index that have defined benefit pension plans, indicates that, “the plan to bring off-balance sheet pension liabilities onto the balance sheet could see some companies’ reported equity drop by one-third or more.” Indeed, a handful of companies could see more than 50% hits to shareholder’s equity.

The report notes that the United States is taking the first step towards bringing off-balance sheet pension liabilities onto the balance sheet. These changes are not yet final, but Accountability Research indicates that Financial Accounting Standards Board is currently planning to require firms to recognize the funding status of their benefit plans on their balance sheets. The first of these changes is to apply to firms with fiscal years ending after December 15.

Assuming that this move does go ahead as currently contemplated, it will impact some firms’ balance sheet leverage, and their perceived financial risk, the report warns. Moreover, some firms may face debt covenant problems as a result, it suggests.

“Although Canada is lagging the U.S. and international reporting countries in specifying the precise nature of new pension reporting requirements, the eventual consequences cannot be overlooked,” the firm notes. “Under-estimated cash outflows, expenses, and liabilities will negatively impact market values once investors start to become more attuned to the inner workings of pension plans with the help of improvements in financial reporting standards.”

The impact will likely be felt first by Canadian companies that already report using U.S. accounting standards, it notes, adding that it believes that Canadian accounting rules will eventually follow suit. In the meantime, it counsels that investors should already be factoring in the status of pension plans to their value and risk assessments.