Pension Accounting and Earnings Implications

Paul Joss

Due to the dramatic decline in global equity markets since the 1990’s, pension expense has become very material for many companies. Consequently, there has been increased attention given to the various disclosures and amortization methods called for in pension cost accounting standards (CICA 3461 in Canada and FAS 87-88 in the United States). This paper investigates the implications that changes to these accounting standards will have for the reported earnings of a sample of Canadian companies who sponsor defined benefit pension plans. The current and proposed standards will be examined through a stochastic simulation of earnings and balance sheet liabilities for a selected subset of asset allocation policies.