The logic of pension accounting

Abstract

Accounting for pensions has been a problem for standard setters for over 30 years. Early attempts to develop accounting standards were based on a cost orientation and reflected funding considerations. More recently, a balance sheet focus has led to issues over identification and measurement of pension liabilities and assets. Accounting standards that permit enterprises to ignore, spread or segregate elements of pension cost, or to create artificial cost measures, are open to criticism and are gradually disappearing. The aim of a principle-based pension accounting will be to ‘tell it as it is’, fairly reflecting the rights and obligations of employers, employees and funding vehicles. This means, though, that these complex rights and obligations must be properly understood. By focusing on pension liabilities, this paper illustrates how accounting standards translate rights and obligations into numbers in financial statements.