on fund at any given point in time. This type of pension plan is referred to as a defined benefit plan (Winkle voss, McGill, Allison, and Neff, 1984).
Financial accounting practices with respect to employer administered pension plans were established in the United States in the 1960s. Employers are required to administeremployee pension funds by selecting an accounting basis which permits the firm to: (1) recognize pension expense in the per iod in which employees render service; (2) provide for the accrual of pension costs over the working lives of employees; (3) apply accounting procedures consistently; and (4) incorpor ate realistic assumptions into the accounting procedures.
The requirements stated above apply to all employer admin istered pension plans. Problems which 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 pay ments were based on actuarial projections, and they appeared tomost 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 contribu tions 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 major problems areas concerned (1) the recognition of pen sion expense during the period in which services were rendered, and (2) the use of realistic assu...