Valuation of defined benefit pension schemes in IAS 19 employee benefits - true and fair?

Author:Bridget McNally, Anne M. Garvey, Thomas O’Connor
Position::Maynooth University, Maynooth, Ireland
Pages:31-42
SUMMARY

Purpose This paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring companies potentially produce an artificial result which is at odds with the “faithful representation” and “relevance” objectives of these standards. Design/methodology/approach The approach is a... (see full summary)

 
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Valuation of dened benet
pension schemes in IAS 19
employee benets true and fair?
Bridget McNally
Maynooth University, Maynooth, Ireland
Anne M. Garvey
Universidad de Alcala, Madrid, Spain, and
Thomas OConnor
Maynooth University, Maynooth, Ireland
Abstract
Purpose This paper aims to argue that the accounting standardsrequirements for the valuation of
dened benet pension schemes in the nancial statements of scheme sponsoring companies potentially
produce an articial result which is at odds with the faithful representationand relevanceobjectives of
these standards.
Design/methodology/approach The approach is a theoretical analysis of the relevant reporting
standards with the use of a practical example to demonstrate the impact where trustees adopt a hedged
approachto portfolio investment.
Findings Where a pension fund engages in asset liabilitymatching and invests in risk-freeassets, the
term, quantity and duration/maturity of which is intended to match some or all of its schemeliabilities, the
required accountingtreatment potentially results in the sponsoring companysnancialstatements reporting
uctuatingsurpluses or decits each year which are potentiallyill informed and misleading.
Originality/value Pension scheme surpluses or decits reported in the nancial statements of listed
companies are potentially very signicantnumbers; however, the dangers posed by theoretical nature of the
calculationhave largely gone unreported.
Keywords Hedging, Relevance, Faithful representation, Risk free assets
Paper type Research paper
1. Introduction
This paper argues that the accounting standardsrequirement for the valuation of Dened
Benet pension schemes in the nancial statements of scheme sponsoring companies, produces
an articial result which is at odds with the faithful representationand relevanceobjectives
of these standards and the overriding objective of enabling users of Financial Statements to
receive high- quality understandable nancial reporting proportionate to the size and
complexity of the entity and usersinformation needs.
Accounting for dened benet plans in the nancial statements of the sponsoring
company is a complex matter. The complexity arises because the employer must, in each
accounting period, recognize as an expense in its income statement/prot and loss account
the cost to the employer of the retirement benets thatwill eventually be paid to employees
because of the services that they have provided during the period. Because these benets
may be payable in many yearstime and their costwill depend on a number of factors (e.g.
mortality, return on investments), which are difcult to determine in advance, the
Dened benet
pension
schemes
31
Journalof Financial Regulation
andCompliance
Vol.27 No. 1, 2019
pp. 31-42
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-03-2018-0048
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm

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