The Earnings Implications of Pension Expense

Abstract

Recent challenges to the actuarial pension model and a movement to harmonize international accounting standards both suggest that the current Canadian standards for pension accounting, CICA 3461, may see substantial revision during upcoming years. To understand better the implications of these possible accounting changes, this paper presents the results of a stochastic analysis that quantifies how the volatility of pension expense for a sample of ten Canadian companies sponsoring defined benefit plans will be increased by the adoption of immediate recognition accounting. For certain companies this increase is significant and is shown to have a material earnings impact. The implications of this earnings volatility for the future of defined benefit pension plans are also explored.