Academic journal article Academy of Accounting and Financial Studies Journal

Defined-Benefit Pension Plan Earnings: Employee Stakeholder Benefit or Corporate Profit Center?

Academic journal article Academy of Accounting and Financial Studies Journal

Defined-Benefit Pension Plan Earnings: Employee Stakeholder Benefit or Corporate Profit Center?

Article excerpt


Elevated profits from economic and managerial trends affecting defined benefit pension plans may have influenced perceived earnings quality of various recent annual financial reports. Rising investment returns and interest rates incorporated into actuarial assumptions increased spreads between pension asset and liability balances throughout the 1990s. Hybrid programs such as cash balance pension plans further reduced pension obligations during this same period. These circumstances can provide opportunities for immediate recognition of pension income and profit reserve banks impacting future earnings under Statement of Financial Accounting Standards No. 87 guidelines. Concluding discussions center on the possible influence of past pension management decisions and negative economic conditions on pension plan financial reporting and funding requirements.


Estimates of future employee turnover, compensation levels, employment years, and remaining life expectancies contribute to funding requirements of defined-benefit (DB) retirement programs. For nearly twenty years, Statement of Financial Accounting Standards (SFAS) No. 87 has represented the accounting profession's seminal effort to report economic realities of these benefit commitments within annual financial statements.

Prior to SFAS No. 87 resolution, pension-reporting guidelines matched pension expenses with revenues. Pension liabilities reflected differences between actual funding and expense levels. Many in the financial community perceived this emphasis on expense measurement reliability as lowering the relevance of retirement obligation values on balance sheets. Significantly underfunded pension plans could appear as assets simply with increased pension funding relative to pension expense estimates.

SFAS No. 87 expanded disclosure of underfunded DB liabilities that predominated during the late 1980s and early 1990s by comparing pension fund asset and obligation market values. However, application of more reliable current compensation totals, rather than anticipated higher future salaries, for calculating pension obligations within the final version of SFAS No. 87 effectively reduces potential long-term pension amounts appearing in annual fiscal reports. SFAS No. 87 attempts to recognize pension expense under assumed economic and financial market changes in plan asset and obligation balances.

Depressed investment portfolio valuations coupled with generous benefit grants in lieu of wage increases during the early 1990s initially fashioned numerous underfunded pension liabilities under SFAS No. 87 procedures. However, ensuing above-average market returns and benefit sponsor decisions enabled some businesses to more favorably reflect pension plan financial positions under SFAS No. 87 principles throughout the second half of the same decade.

This manuscript will attempt to highlight how economic circumstances, pension funding decisions, and contractual agreements can combine to establish pension profit centers that may affect user perceptions of earnings quality. Three pension benefit topics will be predominantly examined, including:

* Creation, maintenance, and expansion of pension profit centers
under the SFAS No. 87 financial reporting framework that can
enhance operating profits and agency costs, along with methods to
extend pension income effects over multiple reporting periods;

* Financial reporting citations of the effects of various corporate
strategies on pension income and overall earnings results;

* Future implications of changing economic conditions on pension
plan financial reporting and funding.


Rising returns on plan asset investments and benefit cutbacks can widen positive spreads between pension plan assets and liabilities. These expanded ranges can instantaneously produce pension income contributions to annual earnings reported to shareholders. …

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