ound unrealistic. The agency expected to realize more than $660 million from its efforts, but was unable to win the first three cases it took to court.
According to Statement of Financial Accounting Standards (SFAS) 35, issued by the Financial Accounting Standards Board (FASB),
assumed rates of return shall reflect the expected rates of return during the periods for which payment of benefits is deferred and shall be consistent with returns realistically achievable on the types of assets held by the plan and the plan's investment policy.
Recognizing that these guidelines were vague and that companies could justify a wide variety of discount rates and still be in compliance, SFAS 87 determines that it is appropriate for companies to use available information about rates used in pricing current annuity contracts. SFAS 87 introduces the concept that the discount rate should effectively reflect the settlement of the obligation. It also recommends that companies use the rates of return on high-quality fixed-income investments.
In the above cases, the pension funds used a retirement age of 55 and an interest rate assumption of 5 percent. The IRS held that these were unreasonably low and that they were designed to shelter income. The agency held that reasonable assumptions for 8 percent for interest, and 65 for retirement. Federal pension laws do not specify which interest rates and retirement ages are appropriate; in these cases, the pension funds were successful in defending their assumptions. Had the court ruled against the pension funds, they would have been liable for the back taxes and penalties, plus interest. These cases illustrate the importance of designing a pension fund carefully from its inception, and point to the importance that every decision, beginning with the most fundamental, has in determining the long-term success and audit fitness of a pension program.
The two most pervasive accounting standards ...