Gaap vs Ifrs Pension Acctg
Is the Difference in Accounting Treatment of Post-Retirement Benefits under IFRS Beneficial or Detrimental to the Financial Position of a Company Currently Reporting Under US GAAP?
Megan N. Cook, CPA, CFE
Accountancy 521
Professor Lawrence
March 9, 2009
The first pension plan offered by an American employer was that of American Express in the year 1875. Amex’s plan did not resemble the plans that we see in today’s time; the first “modern” defined benefit plan was created in 1940 by the automotive behemoth General Motors. These plans of the past still do not resemble plans that we are familiar with today. In the past, employers could exercise a “pension put” option and, in essence, close the plan down at the current level of funding and turn the assets over to the retirees. This is not an optimal situation, as many plans at the time were severely under funded and retirees would be left with pennies on the dollar of what they were counting on for retirement. (Fortune, 2005) Post-retirement benefits are volatile on a couple of different fronts; up until the reforms in 1974 which created ERISA and the PBGC, employees had to put blind faith in their employers to secure their futures after their working years were over. (Fortune, 2005) On another front, these benefits pose a significant accounting problem – how should a company account for the costs and liabilities associated with these benefits they had to give their employees at a later and relatively indeterminable date? Prior to FAS 87, the only item that a company would record on their financial statements was the actual benefits paid within the accounting period. There were no footnote disclosures or any other supplemental data available. Expensing post-retirement benefits as incurred does not portray the economic reality of the transactions surrounding the pension. There is an inherent liability, as employers are required to pay their employees these benefits in the future.
Megan N. Cook, CPA, CFE
Accountancy 521
Professor Lawrence
March 9, 2009
The first pension plan offered by an American employer was that of American Express in the year 1875. Amex’s plan did not resemble the plans that we see in today’s time; the first “modern” defined benefit plan was created in 1940 by the automotive behemoth General Motors. These plans of the past still do not resemble plans that we are familiar with today. In the past, employers could exercise a “pension put” option and, in essence, close the plan down at the current level of funding and turn the assets over to the retirees. This is not an optimal situation, as many plans at the time were severely under funded and retirees would be left with pennies on the dollar of what they were counting on for retirement. (Fortune, 2005) Post-retirement benefits are volatile on a couple of different fronts; up until the reforms in 1974 which created ERISA and the PBGC, employees had to put blind faith in their employers to secure their futures after their working years were over. (Fortune, 2005) On another front, these benefits pose a significant accounting problem – how should a company account for the costs and liabilities associated with these benefits they had to give their employees at a later and relatively indeterminable date? Prior to FAS 87, the only item that a company would record on their financial statements was the actual benefits paid within the accounting period. There were no footnote disclosures or any other supplemental data available. Expensing post-retirement benefits as incurred does not portray the economic reality of the transactions surrounding the pension. There is an inherent liability, as employers are required to pay their employees these benefits in the future.