rummond, 1986, p. 33). 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, p. 61). Funding payments were based on actuarial projections, and they appeared to most to firms 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 in the United States. 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 standards in the United States. The major problems areas concerned (1) the recognition of pension expense during the period in which services were rendered, and (2) the use of realistic assumptions in the projection of future compensation levels for employees, which proved to be a particularly vexing problem.
The major argument in the United States against the use of funding payments as a basis for determining pension costs to be charged to profit and loss was that funding levels for any given reporting period are affected by a variety of external factors, in addition to accrued pension costs. The contention was that cash flow was not necessarily a valid reflection of accrued costs.
With respect to the incorporation of realistic assumptions in to pension accounting procedures, the central problem area in the United States involved the basis for the projection of future compensation levels for employees. Most American employers opted for a conservative ...