Simulation-Based Comparison of Existent IAS 19 Accounting Options

ABSTRACT

We focus on accounting for unfunded defined benefit pension plans according to IAS 19 and compare the option to recognise any actuarial gain or loss immediately outside profit or loss in a separate statement within equity (‘equity approach’) with the ‘corridor approach’. The objective is to detect systematic differences in long-term pure accounting effects, which can be seen by the different cumulated net-amounts not (yet) recognised in profit or loss. Due to the complexity and the probabilistic elements, human expectations on system behaviour often fail. Therefore, we have performed the first Monte-Carlo-simulation study of the accounting options. The assumptions concerning input data are based on official German statistics and, therefore, are representative at least for Germany and similar countries. As a result, the belief of long-term offsetting of cumulated actuarial gains and losses is not accurate. The former unforeseeable consequences are the following: if we apply the equity approach we identify a tendency for a quasi-permanent cumulated actuarial net-gain (regenerating workforce) or a permanent cumulated actuarial net-loss (degenerating workforce) recognised outside profit or loss. If the corridor approach is applied, a tendency for quasi-permanent cumulated unrecognised net-gains is reported while amortising any corridor excess in the case of a regenerating workforce.