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Unformatted text preview: 1 OPINIONS OF FINANCIAL ANALYSTS ON ACCOUNTING FOR DEFINED BENEFIT PENSION PLANS INTRODUCTION Corporate managements have generally chosen to smooth earnings as much as possible because investors perceive companies with smooth, constantly increasing earnings as the best investments. Volatile earnings from year to year are perceived as less desirable by investors. If annual earnings reflect considerable volatility, creditors and investors may conclude their investments are subject to higher levels of risk and require higher rates of return for the use of their capital. Therefore, creditors and investors may prefer financial statements which reflect the true volatility of annual earnings as opposed to financial statements which report smoother earnings of lower quality. Financial reporting of the economic consequences of providing a defined benefit pension plan in the period when those consequences occur could cause considerable volatility in reported annual income. Current GAAP for defined benefit pension plans is stated in SFAS No. 87 which was issued in December, 1995, the same time as SFAC No. 6. The FASB would have preferred to follow the basic principles stated in the SFAC's, including placement of the fair value of the plan assets and projected benefit obligations on the balance sheet; however, because of the political nature of the promulgation process, the final draft of SFAS No. 87 was considerably different and more preparer oriented than what the FASB originally proposed. In this research project, Certified Financial Analysts (CFA's) were asked to express their opinions about various procedures for financial reporting of defined benefit pension plans. They 2 were also asked to express a preference for either the current GAAP for pension accounting or an alternative method of accounting proposed in this paper. Accounting for defined benefit pension plans was chosen as the subject of this research because current GAAP does not appear to be in agreement with accounting theory expressed in the SFAC's; the consistent application of accounting principles recommended in the SFAC's would very likely cause greater volatility in the annual earnings reported by companies maintaining these plans. RESEARCH DESIGN Without knowledge of the FASB's original intent, the accounting principles articulated in the SFAC's and a process of deductive reasoning were used to develop an accounting method for defined benefit pension plans. The method developed closely resembled the accounting treatment originally proposed by the FASB (Miller and Redding, 1992) before adopting SFAS No. 87 in its final form. A major difference is the use of accumulated benefit obligations rather than projected benefit obligations for the reporting of pension expense and liabilities. The primary differences between the requirements of SFAS No. 87 and the proposed accounting model used in this research project are: 1. Total accumulated benefit obligations are presented as a liability on the balance...
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This note was uploaded on 09/08/2010 for the course ACCT 3600 taught by Professor Stone during the Spring '10 term at UCM.
- Spring '10