A New Reality Ahead for Pension Accounting?

The Recession's Aftermath and IAS 19R Prompt Changes in Accounting Practices

James M. Fornaro, DPS, CPA, CMA, CFE

The accounting for defined benefit pension plans has been the subject of contentious debate for nearly three decades. Disparate stakeholders—regulators, academics, analysts, investors, preparers, and others—have criticized the complex assumptions, arcane rules, and techniques used to minimize the inherent volatility of pension assets and obligations. Many claim that these practices produce an opaque and misleading portrayal of a sponsor's true obligations and negatively impact the quality of reported earnings. Many companies that sponsor defined benefit plans have long advocated for the delayed recognition techniques and other mechanisms to reduce earnings volatility. In Statement of Financial Accounting Standards (SFAS) 87, Employers' Accounting for Pensions (par. 177–178), FASB acknowledged that particular conclusions on these issues were “pragmatic” and “without conceptual basis.” Most now agree that an overhaul of existing accounting practice is long overdue, and FASB is proceeding with a phased approach, in tandem with the International Accounting Standards Board (IASB).