Pension Accounting: IFRS vs. US GAAP

Pension accounting is a difficult concept for students and investors to grasp. What adds to the complexity is the fact that many foreign companies with US operations report using IFRS. A pension expense or liability under IFRS could be more or less than if the company reported under US GAAP.

Add to the differences the fact that from 2007 forward, companies don't have to reconcile their IFRS earnings back to US GAAP earnings. This makes comparisons between companies reporting under US GAAP and IFRS very difficult.

Main differences in between US GAAP and IFRS are not limited to, but include these main differences in pension expense accounting:

• Under FAS 158, valuations require the use of a qualified actuary. Under IAS 19, the use of an actuary is only recommended, not required.
• Under FAS 158, the discount rate used is the rate at which obligation could be effectively settled, generally current rates of return on high-quality fixed income investments with maturities matching duration of benefits obligation. Under IAS 19 the rate used is current rates of return on high-quality corporate bonds with maturities consistent with the duration of benefit obligations.
• Under FAS 158, the rate of return on plan assets is the expected long term rates over life of the obligation. Under IAS 19, the rate is based on current market expectations over the life of obligation
• Cost recognized under FAS 158 and IAS 19 is calculated almost exactly the same way. The only difference is that under FAS 106 you can add or subtract temporary deviations from plans.

This information is also available in a graduate level research paper exploring the topic of US GAAP vs. IFRS expenses.

Limited research has been performed at the graduate level regarding the differences between US GAAP pension expenses and IFRS pension expenses. The main focus of the research was to see how the differences in accounting for pension expenses would affect earnings. Although the research was limited in scope, the conclusion reached was that companies reporting under IFRS enjoyed lower pension expenses than those reporting using US GAAP. Of course, that's not true 100% of the time, but for the most part IFRS pension expense is lower than US Pension expense.

When you are looking to invest your money and are trying to decide between a US company or a foreign company, you are going to have an increased difficulty in comparing financial statements without an IFRS to US GAAP reconciliation. If you are aware that items such as pension expenses are usually more conservative under US GAAP, you will see that US GAAP earnings may not be as bad as you think.