Valuation of Defined Benefit Pension Schemes in IAS 19 Employee Benefits – True and Fair?

Journal of Financial Regulation and Compliance, Vol. 27, pp. 31-42, 2020

16 Pages Posted: 13 Apr 2020

See all articles by Anne M. Garvey

Anne M. Garvey

Universidad de Alcala de Henares

Bridget McNally

affiliation not provided to SSRN

Thomas O’Connor

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting

Date Written: March 17, 2020

Abstract

Purpose: This paper argues that the accounting standards’ requirement for the valuation of pension scheme liabilities, potentially produces an artificial result which is at odds with the “faithful representation” and “relevance” objectives of these standards.

Design/methodology/approach: The approach is a theoretical analysis of the relevant reporting standards with the use of a practical example to demonstrate the impact where trustees adopt a hedged approach to portfolio investment.

Findings: Where a pension fund engages in asset liability matching and invests in “risk – free” assets, the term, quantity and duration/maturity of which, is intended to match some or all of its scheme liabilities, the required accounting treatment potentially results in the sponsoring company’s financial statements reporting fluctuating surpluses or deficits each year which are potentially ill-informed and misleading.

Originality/value: Pension scheme surpluses or deficits reported in the financial statements of listed companies are potentially very significant numbers, however the dangers posed by theoretical nature of the calculation has largely gone unreported.

Keywords: faithful representation, risk free assets, hedging, relevance

JEL Classification: E41

Suggested Citation

Garvey, Anne M. and McNally, Bridget and O'Connor, Thomas, Valuation of Defined Benefit Pension Schemes in IAS 19 Employee Benefits – True and Fair? (March 17, 2020). Journal of Financial Regulation and Compliance, Vol. 27, pp. 31-42, 2020, Available at SSRN: https://ssrn.com/abstract=3555883

Anne M. Garvey

Universidad de Alcala de Henares ( email )

Plaza de San Diego s/n
E-28801 Madrid
Spain

Bridget McNally

affiliation not provided to SSRN

Thomas O'Connor (Contact Author)

National University of Ireland, Maynooth (NUI Maynooth) - Department of Economics, Finance and Accounting ( email )

County Kildare
Ireland

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