It is essential to state that the paper "Comparing Australia and the USA - Pension Accounting Standards " is a perfect example of a finance and accounting case study. As they have developed, Pension Accounting Standards in Australia and the USA have been at the centre of political and social debate. Therefore, both the pension accounting framework/standards in the USA, i.e. SFAS 87 Employers’ Accounting for Pensions, 1985, and that of Australia before it integrated with the standards that are international [i. e. AASB 1028 Employee Benefits, 1995] (Gordon & Gallery, 2008) contain detailed rules and accounting concessions that fit in and suit local contexts and needs.
Nonetheless, just as differences are inherently expected, there are also similarities between the two standards. In this effort, this paper will look at the standards independently, and finally, come up with a conclusion on the differences and similarities between the two. However, most of these are implicitly discussed throughout the essay. USA The Financial Accounting Standards Board (FASB) in its agenda included pension topic and release preliminary perceptions on what Employers’ Accounting for Pensions and Other Post-Employment Benefits (1982).
These preliminary perceptions took an approach that is of economic substance, which needed the capitalization of pension responsibilities that had been unrecorded initially (Miller, 1987). Initially, the US accounting profession took the principle-based approach to recording the economic substance of transactions stipulated in the Preliminary Views. But standard-setting has since become such a political process that its requirements have been watered down. As a result, SFAS 87 contains accounting concessions and compromises that can also be found in rules-based methods of setting standards (Daley & Tranter, 1990; Wallison, 2007). The SFAS 87 compromises include what Gordon and Gallery (2008) refer to as ‘ corridor’ method (i. e.
delayed smoothing and recognition technique aimed at reducing the reporting of huge unexpected pension expenditures) for the amortization of actuarial benefits and losses as well as the acknowledgement of ‘ minimum’ accountability. In order to reduce the instability of pension costs caused by instabilities in actuarial profits and losses as a result of market movements, the US standard setters are generally for the ‘ corridor’ method (Revsine, et al. , 2002; Bennett, et al. , 2006). In line with this, paragraph 87 of SFAS 87 allows the acknowledgement of actuarial profits and losses without a 10percent corridor, especially where the unrecognized net cumulative actuarial profits and losses are more than 10 percent of the expected benefit obligation or fair value of assets (Dufresne, 1993; Schipper, 2003). Besides the corridor method, another compromise is the minimum liability, i.e.
the excess above accrued benefit responsibility, not including the projection of salary and over the pension asset fair value for every plan. This minimum liability stands for a direct-to-equity modification. In recent years, the increasing number of deficits in the US companies have been raising increasing concern that such deficits may cause minimum liability in the SFAS 87 while reducing the equity of shareholders.
According to The Wall Street Journal (2002 cited in Gordon & Gallery, 2008) reports, some companies that had debt covenants that were responsive to pension accounting sought to estimate the consequences of pension liabilities debt levels. Some of these companies (such as Kellogg Co. and Delta Air Lines) cut their debts so as to amend their lending agreements as a means to get rid of the impacts of pension funding.
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