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Changes In Pension Accounting Over Time Have Improved Investor Decision Making And Benefited Other Stakeholders

2188 words - 9 pages

Pensions are financial arrangements that allow individuals to receive an income stream during their retirement years (Tatum, 2011). They are found in government institutions, private businesses, professional groups and various other settings. Pensions funds can be found as a part of an institutions or as an independent plan. Pension plans are a major participant in the capital markets. For example, consider the fact that Ontario Teachers’ Pension Plan has a net asset value of $96.4 billion at the end of December 31, 2009. Due to the large stake of pension plans in the local and global economy, there is a persistent pressure to improve pension accounting. These changes have gained momentum with the recent adoption of the International Financial Reporting Standards (IFRS) in Canada and expected adoption by the United States in the near future. It is our belief that the various changes in pension accounting have improved investor decision making and benefited other stakeholders. To illustrate this, we will first explain pensions plans in greater detail and secondly, we will discuss various recent and near future expected changes to pension accounting in the Canada, in particular Section 4600 in Part IV of the CICA Handbook and International Accounting Standards (IAS) 19. These changes will be explored specifically in the context of private entity pension plans and with a particular focus on defined benefit plans. Lastly, we will provide evidence as to why these changes are necessary and how they benefit the stakeholders involved.
Pension plans have various stakeholders including but not limited to investors, employees, management (employers), creditors and analysts (Glaum, 2009). Tax payers and governments can also be added to that list of stakeholders. There are two primary types of pension plans, the defined contribution (DC) plan and the defined benefit plan (DB) (Tatum, 2011). In the DC plan, the final benefits are unknown, but there are fixed contributions whereas in the DC plan, because there is promise of a numerical benefit, the contributions vary as a result of time value of money. This fundamentally means that the risk for the final benefit payout in the DB plan is borne by the employer whereas in the DC plan, the pensioner bears this risk (Beechy & Conrad, 2008). Contributions to a pension fund are an expense for the employer, hence to describe in simple terms, on a per pay basis, an employer will credit the pension fund with amount of pension funds the employee is entitled to. This amount is the present value of the future payment stream payable to the employee upon retirement (Beechy & Conrad, 2008). The present value calculations of these obligations require estimates of factors such as: investment earnings, future salary increases, employee turnover, mortality rates, and life expectancy after retirement (Beechy & Conrad, 2008). Actuarial models are used to generate the probabilities used to calculate the pension obligation today,...

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