es with respect to employer administered pension plans were established in the United States in the 1960s. Employers are required to administer employee pension funds by selecting an accounting basis which permits the firm to: (a) recognize pension expense in the period in which employees render service; (b) provide for the accrual of pension costs over the working lives of employees; (c) apply accounting procedures consistently; and (e) incorporate realistic assumptions into the accounting procedures.
The requirements stated above apply to all employer administered pension plans. Problems arose, however, with respect to defined benefit plans (Drummond, 1986). Most employers opted for a procedure whereby the annual pension plan cost charged to profit and loss was equal to the annual funding payment for the pension plan (Buchanan, 1986). Funding payments were based on actuarial projections, and they appeared to most firms to provide an appropriate basis for pension fund charges. With respect to defined contribution plans, the approach was sound from an accounting perspective, because benefits were largely determined by a combination of contributions to the fund and fund asset value at the time of payout.
The procedure (using fund contributions as a basis for profit and loss charges) was not, however, always satisfactory, with respect to defined benefit plans. A number of different actuarial procedures were available for firms to use. None of the available actuarial procedures, however, fully satisfied all of Financial Accounting Standards Board (FASB) standards. The ma]or problems areas concerned (a) the recognition of pension expense during the period in which services were rendered, and (b) the use of realistic assumptions in the projection of future compensation levels for employees--a particularly vexing problem.
The major argument against the use of funding payments as a basis for determining pension costs to be...