Valuation of defined benefit pension schemes in IAS 19 employee benefits - true and fair?

Abstract

Purpose

This paper aims to argue that the accounting standards’ requirements for the valuation of defined benefit pension schemes in the financial statements of scheme sponsoring companies potentially produce 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 have largely gone unreported.

Citation

McNally, B., Garvey, A.M. and O’Connor, T. (2019), "Valuation of defined benefit pension schemes in IAS 19 employee benefits - true and fair?", Journal of Financial Regulation and Compliance, Vol. 27 No. 1, pp. 31-42. https://doi.org/10.1108/JFRC-03-2018-0048