Pension Accounting Treatment: A Review of the Literature (original) (raw)
International Business Research, 2020
In this paper, we focus on the disclosure of pension liabilities for entities referred to in Italian Legislative Decree 30 June 1994 no. 509 (also called “old funds” for professionals), which is crucial for a suitable communication. After illustrating the limits of current statutory financial statements’ in relation to the information they provide on pension benefit obligations, we propose three potential solutions to bridge the gap. Each of these proposals helps ensure the completeness and clarity of financial reporting and improves upon the informational capacity and quality of disclosure. In our opinion, one of these approaches, in particular, would be preferred because of its ease of adoption. Indeed, the disclosure in the explanatory notes allows for the quantification of pension benefit obligations, and hence a more proper evaluation of entities in the medium/long- term, with no impact on annual economic-financial results as reported in the balance sheet and the income statement.
The effect of pension accounting on corporate pension asset allocation
Review of Accounting Studies, 2009
We examine the impact of new pension disclosures and subsequent full pension recognition under FRS 17 and IAS 19 in the UK and SFAS 158 in the US on pension asset allocation. These standards require recognition of the total pension surplus/deficit on the balance sheet and periodical actuarial gains/losses in shareholders' equity. Therefore, these standards introduce a large element of volatility into company balance sheets and comprehensive income. We identify a Disclosure period during which UK companies had to disclose all the required data under FRS 17 in the notes without formal recognition. We also identify a Full Recognition period starting one year prior to until one year subsequent to the adoption of FRS 17/IAS 19 (UK) and SFAS 158 (US). We predict a shift of pension assets from equity to debt securities by UK companies during the Disclosure period due to the higher visibility of pensions in the UK and the anticipation of full recognition. We also predict a decline in pension funds allocated to equity securities during the Full Recognition period, around the adoption of FRS 17/IAS 19 and SFAS 158. We find that UK companies, on average, shifted pension assets from equity to debt securities during both the Disclosure and the Full Recognition periods. We also find that while prior to the adoption of SFAS 158 US companies maintained a stable allocation to equities and bonds, these companies, on average, shifted funds from equities to bonds around the adoption of SFAS 158. Cross-sectional analysis shows that the shift away from equities is related to changes in funding levels, shorter investment horizons, increased financial leverage and the expected impact of the new standards on shareholders' equity.
GE, IBM, Verizon, SBC Communications all boosted pre-tax earnings by hundreds of millions, if not billions, of defined-benefit pension plans 'fund earnings' while their pension funds are actually under-funded by billions. While consistent with current GAAP standards, management assumes 'expected' rates of returns to be positive at the high single digit levels (≈ +9.5 per cent) whereas actual returns are ranging from negative 10 to 15 per cent. Stakeholders are entitled to intervention at all levels through new statutes, regulations, and professional codes of ethics to eliminate the widespread practice of 'earnings management' and to restore the belief in the quality of reported corporate earnings. Various initiatives by institutions regarding 'pension expensing' -such as by the IASB, FASB, S&P, Merrill Lynch, and many other involved stakeholders are reviewed. The pros/cons of taking definedbenefit pension plan earnings into income, and issues flowing there from, afford an interesting and informative contrast to further investigate and extend the 'earnings management' literature. The paper suggests that initiatives in these regards need to be expanded to beyond mere accounting and actuarial ontology. Broader Board of Directors' driven protocol covering its pension plan fiduciary role and a keener understanding of the cause/effect interplay between executives' rationale for certain decisions in these regards and the potential for inflating their own executive compensation levels is shown to be warranted.
Cash balance pension plans: A case of standard-setting inadequacy
Critical Perspectives on Accounting, 2009
Accounting for and ownership of U.S. private employee pensions has long been a controversial and politically contested terrain. The uniqueness in the U.S. of using employers as the principal provider of pensions makes the reporting of pensions more problematic since the corporate employers providing pensions are not strictly accountable to only the pensioners. Over the last quarter century there has been a marked swing in power toward management and away from employees making it possible for increasing numbers of U.S. companies to switch from conventional defined benefit plans to cash balance plans. This paper provides a "case" study of how accounting standard-setters framed the pension reporting problem vis-à-vis how they frame the "reporting problem" in general. Utilizing various sources of commentary about the phenomenon of cash-balance conversions, we triangulate on the pension problem to demonstrate how current FASB disclosure rules fail to satisfy the condition of neutrality and how those rules have facilitated the shifting of economic risk from shareholders to employees.
International Journal of Business and Management, 2016
This study aims to assess the performance of the Pension Fund based on the perspective of Political Economy of Accounting (PEA). This study is a multiple case study analysis, with three (3) study sites, Pension Fund A, B, and C. The results showed that the financial performance of the Pension Fund A is excellent, but the hegemony and domination of the employer and the board of trustees is quite high, resulting in the detriment of the interests of pension fund in the form of delay to raise pension benefits. The financial performance of the Pension Fund B is good, yet hegemony and dominance of the employer and the board of trustees is quite high, resulting in the detriment of the interests of pension fund in the form of a decrease in the value of pension benefits. The financial performance of the Pension Fund C is not good, hegemony and domination of the employer and the board of trustees is high enough, which harms the interests of the pension fund in the form of increased pension benefits and transparency of fund management information. The situation illustrates that hegemony and domination has occurred by employers and administrators in the Pension Fund A, B, and C. The three pension funds have failed to provide justice and prosperity to the retired people. Necessary is regulations to reduce the hegemony and domination of employers and board of trustees of pension funds, so that the distribution of power and wealth is more equitable.
The international journal of accounting, 2019
In this archival study we report three main findings related to auditability of pension accounting estimates. 1 The financial note disclosures of ranges of estimated returns are miscalibrated and provide low credibility of including either the actual or expected returns. 2. The estimated returns are unreliable estimates of the firms' actual ten-year averages. 3. In some years, the estimated returns have significant risk of material misstatement arising from the uncertainty in the estimation process over the short run. The combination of these findings indicates that the estimates and estimation processes related to estimated returns in pension accounting are not auditable.
Valuation of defined benefit pension schemes in IAS 19 employee benefits - true and fair?
Journal of Financial Regulation and Compliance, 2019
PurposeThis paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring companies potentially produce an artificial result which is at odds with the “faithful representation” and “relevance” objectives of these standards.Design/methodology/approachThe approach is a theoretical analysis of the relevant reporting standards with the use of a practical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment.FindingsWhere a pension fund engages in asset liability matching and invests in “risk-free” assets, the term, quantity and duration/maturity of which is intended to match some or all of its scheme liabilities, the required accounting treatment potentially results in the sponsoring company’s financial statements reporting fluctuating surpluses or deficits each year which are potentially ill informed and misleading.Originality/valuePension s...