Elements of "Pension Costs"

Abstract

Essential to sound accounting for pension plans is (1) recognition that cost incurrence is not necessarily coincident with cash payment, and (2) recognition that incidence of cost in income statements is not necessarily coincident with either cost incurrence or cash payment. following recommendations are made: 1. Develop an appropriate functional cost classification scheme to record activities related to the pension process. 2. Measure services received in the current period (labor cost and interest cost) by rigorous determinations of obligations assumed. 3. Treat all current payments, whether to employees or third parties, as liquidation of obligations, and make separate disclosures of gains or losses on such liquidation. 4. Decide issues of periodic allocation of costs to income statements without reference to cash payments. Accounting for pensions as an element of labor costs has been inconsistent. Recent literature, including corporate annual reports, shows that members of the accounting profession have not agreed upon a simple, generally applicable, and conceptually valid method of measuring and presenting costs associated with a pension plan. This paper will not include an examination of the reasons for such inconsistencies; rather, it is an inquiry into the nature of pension costs1 as they are experienced Joe J. Cramer, Jr., D.B.A., C.P.A., is Associate Professor of Accounting in Pennsylvania State University. Dr. Cramer is author of a monograph Accounting and Reporting Requirements of the Private Pension Trust, 1965. Other articles of his have appeared in Accounting Review, Management Accounting, Business Horizons, and Trusts and Estates. William J. Schrader, D.B.A., C.P.A., is Professor of Accounting in Pennsylvania State University. Dr. Schrader is aut-hor of A Critkal Evalution of Income Measurement by 'Products' and Periods, 1964. Other articles of his have appeared in Accounting Review. This article was presented at the A.R.I.A. 1967 Annual Meeting. this paper the phrase pension costs refers by the employer. inquiry is based upon the conviction that there is no logical reason to treat pension costs differently from other costs which influence income measurement. Accounting problems of the employer have been identified as: 1. Accruing of liabilites and funding of the plans; and 2. Choosing the manner in which costs of pension plans are charged to income.2 These problems seem to represent the financial and operating (or economic) aspects, respectively, of pension plans. In to total costs associated with establishing and maintaining a pension plan. various cost elements within this total are specified and discussed below. 2Arthur Andersen & Co., Accounting and Reporting Problems of the Accounting Profession (September, 1960), p. 13. In the second edition (October, 1962) of the same publication it is stated that The principal accounting problem relates to the timing of the charges to income, i.e., whether the charges to income should be correlated with the periods of active service of the employees covered or whether they are more in the nature of discretionary provisions to be made under certain conditions (p. 19).