Pension Accounting Pension Plan Accounting:

Pension Accounting

Pension Plan Accounting: Historical Progress and Current Standing

A pension plan is essentially a form of deferred compensation, where an employee and/or employer is required (or at least allowed) to contribute to a fund that is disbursed to employees in fixed amounts following retirement. The investment of capital paid into pension funds must be substantial enough to keep pace with inflation and growing numbers of retirees, while they must also remain stable and liquid enough to allow for regular disbursements to those currently collecting pensions. This makes pension funds substantially different from other company holdings and retirement account offerings, and the rules of accounting and reporting the assets and liabilities that pension plans represent have changed significantly over the years, reflecting the complexities and difficulties the Financial Accounting Standards Board has faced in finding accurate and effective ways of listing these funds on balance sheets (Bouvier 2010; Kossov 2010). Recent attempts to make these valuations more accurate and transparent have met with significant backlash (Bouvier 2010).

Under recently adjusted guidelines published by the IASB, companies will no longer be able to deduct the expected earnings from pension plan funds from the costs of these pension plans, but instead must develop and present current real (rather than estimated) valuations (Bouvier 2010). The guidelines currently in force under U.S. GAAP allow companies to "smooth" their reporting of pension plans by using expected returns to offset current costs, as the primary purpose of pension funds held by the company is to earn interest (Fortune 2005). This creates far less volatility in the final balance sheets of companies with large pension plans (Fortune 2005).

Recording pension assets and liabilities is currently in a state of transition of some transition and substantial disagreement, with IASB-bound companies or those publicly listed in countries that support the IFRS Foundation required to perform far more complex calculations to determine the current asset value of pension plans (Bouvier 2010; Kossov 2010). Under U.S. GAAP, greater leeway in accounting is cited by some as a cause of greater accuracy in reporting, while other see the manipulation of numbers as a danger to investors, government compliance, and companies themselves (Fortune 2005; Comprix & Muller 2010). As pensions are funded almost entirely through direct employee contributions or indirectly by concessions made to labor in the form of increased employer contributions as one form of compensation, a large degree of influence is exerted on labor negotiations and overall employee benefits as well as government policy by pension accounting practices (Comprix & Muller 2010).

Specific changes have been made to the way that companies must calculate their pension liabilities according to IASB standards, and firms in the United States are also finding themselves in a period of adjustment as alternative structures have proven more advantageous in separating and reducing liabilities (Bouvier 2010; Kossov 2010). By operating separate trusts for certain benefits, companies operating under GAAP can often greatly reduce their pension liability (Kossov 2010). Pension funds must then be sued only for the payment of retirement benefits (and the earning of interest), then, rather than being combined with other benefit programs funded or operated by the company as they often are now (Kossov 2010).