Actuaries and Accountants: The Tower of Babel

41 Pages Posted: 14 Jan 2009

See all articles by Cameron K.J. Morrill

Cameron K.J. Morrill

University of Manitoba - Department of Accounting and Finance

Janet B. Morrill

University of Manitoba - Department of Accounting and Finance

Kevin Shand

University of Manitoba

Date Written: January 12, 2009

Abstract

Defined benefit (DB) pension accounting standards have changed substantially over the past thirty years and still vary substantially across countries today. In spite of the inter-jurisdictional differences, many observers criticize pension accounting standards for being confusing and even misleading. Our paper considers the difficulties that arise from differences between the legislative requirements regarding funding and administration of DB pension plans and the accounting requirements regarding financial statement reporting of those plans.

Specifically, we investigate the effects of: (1) accounting treatment vs. funding of actuarial gains and losses and (2) differences between the accounting and actuarial discount rates that are applied to the pension projected benefit obligation (PBO) and service cost. To analyze these issues, we simulate economic and accounting outcomes for a stable hypothetical DB pension plan over a twenty-year period. We demonstrate that current GAAP for pension plans is problematic in that, in many circumstances: (1) pension expense diverges significantly from funding cash flows; (2) pension deficits reported in the financial statements grow over time even when the pension plan is fully funded; and (3) the divergence between GAAP-reported and actuarially determined pension results is dependent, at least in part, on the allocation of pension plan assets between debt and equity investments.

Keywords: Pension accounting, simulation, pension discount rate

JEL Classification: G23, M41, M44, M47, J26

Suggested Citation

Morrill, Cameron K.J. and Morrill, Janet B. and Shand, Kevin, Actuaries and Accountants: The Tower of Babel (January 12, 2009). CAAA Annual Conference 2009 Paper. Available at SSRN: https://ssrn.com/abstract=1326656 or http://dx.doi.org/10.2139/ssrn.1326656

Cameron K.J. Morrill

University of Manitoba - Department of Accounting and Finance ( email )

Faculty of Management
Winnipeg, MB R3T 5V4
Canada
204-474-8435 (Phone)
204-474-7545 (Fax)

Janet B. Morrill (Contact Author)

University of Manitoba - Department of Accounting and Finance ( email )

Faculty of Management
Winnipeg, MB R3T 5V4
Canada

Kevin Shand

University of Manitoba ( email )

501 F.A. Bldg
Winnipeg R3T 5V4, Manitoba R3T 5V5
Canada

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