Acounting for pensions - Essay Example

Task: Accounting for Pensions Introduction This essay presents a summary of the criticism of accounting for pension and the recommendation for improvement as per an article. The article to be summarized was prepared by staff members of the United States Security and Exchange Commission. There are two types of pension plans available to the employers. They are the defined contribution and the defined benefit. The terms of defined contribution plan require the employer to make contributions to the plan as agreed but has no authority when it comes to the provision of benefits to the employees.

On the other hand, under the defined benefits plan, the employer is obligated to pay the benefit. However, most employers invest the pensions to be managed by a separate entity. The entities that manage the pensions recognize the assets and liabilities on their net values. The accounting practices for pensions faces a lot of criticism such as lack of clarity in the disclosure of the postretirement accounting information. The accounting practices ignored the importance of full recognition of the effects of pension contracts on the company’s performance.

For this reason, a big deal of pension contract related costs are borne by the users of such information. Secondly, some investors have expressed concerns on the reporting of gains and losses. They propose the elimination of the smoothing of gains and losses as allowed under GAAP. This method should be replaced by a separate recognition of pension plan’s assets and liabilities on the balance sheet. Lastly, preparers criticize the short-term approach to accounting for pension transactions (The United States Securities and Exchange Commission 49 – 59).

In view of the above criticism, the staff members propose an improvement regarding the accounting practices. First, they suggest a long-term approach to accounting for pensions since the post retirement contract is long-lived. Second, further disclosures besides those contained in the financial statements should be provided to ensure further clarity of the contents of the financial statements. Lastly, the staff proposes that issuers should give more time the preparation of the postretirement financial information in order to facilitate the provision of more useful information to the users (The United States Securities and Exchange Commission 107 – 108).

Works CitedThe United States Securities and Exchange Commission. N.d. Report and Recommendation Pursuant to Section 401 (c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-balance sheet Implications, special purpose Entities, and Transparency of Filings by Issuers. Web. 12 March 2014 < http://www.sec.gov/news/studies/soxoffbalancerpt.pdf>.