guably not be “fooled” by the off-balance-sheet accounting, there is no substitute for
getting the treatment right.
(e) Pensions. Over the past couple of decades, pension plans have received a great
deal of attention from standard setters and regulators worldwide. Historically, gov-
ernment-sponsored pension plans bore the greatest burden of providing postretire-
ment benefits. However, many employees contended that these types of pension
plans did not provide sufficient retirement income. Therefore, as time passed, the suf-
ficiency of pension benefits became a prime area of importance for collective-bar-
gaining negotiations, and eventually, in many countries, firms instituted or enhanced
private pension plans. As the privately handled pension plans grew in popularity
throughout the 1980s, the accounting rule-making bodies were called upon to address
the accounting for these plans.
A pension plan is an arrangement under which an employer agrees to continue to
provide its employees with an income stream after their retirement. Accountants are
faced with the question of whether this promise should give rise to an expense and a
corresponding liability at the time an employee provides the underlying service or
whether the expense should be recorded as the pension payments are made (many
years later).
Enterprises that have defined benefit pension plans know that their promise to the
employee will ultimately result in a cost to the company; however, the enterprise
does not know the precise amount or timing of the ultimate costs. Many countries
apply the principle that, if the liability can be reasonably estimated on the basis of
various actuarial assumptions, then it should be accrued in some manner during the
period of employee service. This provides the best matching of revenues and ex-
penses. Countries where the standards require this treatment include Canada, Ger-
many, the Netherlands, the United Kingdom, and the United States. In Germany, al-
though this accounting requirement did not come into effect until 1987, many
enterprises had accrued for pension plan liabilities before that time, since they could
not take a tax deduction for such amount unless they recorded the expense for book
purposes. In Italy, a “termination indemnity,” representing a calculation of the
amount that would be payable if all employees were terminated on the balance sheet
date, is required to be shown as a liability on a company’s balance sheet.
An alternative approach is to record pension expense as the pension payments are
made. Those who support this view argue that reasonably estimating the pension li-
ability is impossible because of the many variables involved (such as years of serv-
ice, salary, and discount-rate assumptions). However, the debate in those countries
that allow, but do not require, pension expense to be accrued is now focused more on
the determination of appropriate measurement principles (actuarial methods, etc.)
than on whether there should be any accrual. IAS 19, “Employee Benefits”, has re-
cently been revised to prevent the recognition of gains solely as a result of actuarial
losses or past service cost and the recognition of losses solely as a result of actuarial
gains. This standard provides comprehensive coverage of this topic. The likelihood
exists that IAS 19 will stimulate other countries to improve their local standards in
this area.
In the United States, a troublesome area has been the requirement that each as-
sumption reflect the best estimate solely with respect to that assumption. For exam-
ple, under SFAS No. 87, “Employers’ Accounting for Pensions,” the discount rate
needs to be reassessed each year to reflect changes in current settlement rates. Set-
12 • 16 SUMMARY OF ACCOUNTING PRINCIPLE DIFFERENCES