Question

Distinguish between the GAAP and IFRS treatment for pensions.

Answer 1

Answer

The GAAP and IFRS treatment for pensions:

Pension is treated differently under IFRS and U.S. GAAP. The standard IAS 19 (employee benefits) is applied under IFRS, whereas U.S. GAAP has more standards, FAS158 (Employer’s Accounting for Defined Benefit Pension and other Postretirement Plans)and FAS 87 (Employers’ Accounting for Pensions). The difference in pension between U.S. GAAP and IFRS is the return of assets. FAS 158 require the market value or fair value to be used to determine the return of assets, whereas IAS 19 is based on the overall expectation of the market. Under IAS 19, pension fund gains and losses differ from recognition on the balance sheet compared to FAS 87. Pension must be recognized on thebalance sheet between fair value of plan assets and benefit obligation in U.S. GAAP,whereas IFRS must recognize a liability in the balance sheet equal to the present value of benefit obligation plus or minus the actuarial gains and losses not yet recognized, minus unrecognized prior service costs, minus fair value of plan assets (“U.S. GAAP vs. IFRS,”

Pension needs to be adjusted in the reconciliation of net income because the adjustments for IFRS and U.S. GAAP pension expense need to be in line with each other.(“U.S. GAAP vs. IFRS: Pension Expenses”). The adjustments would show an increase or decrease of expense under IFRS and U.S. GAAP (“U.S. GAAP vs. IFRS: Pension Expenses”). Adjustments are made in order to make comparisons between IFRS and U.S. GAAP. Adjustments on pension will make it easier to determine the comparisons betweenIFRS or U.S. GAAP. According to article “U.S. GAAP vs. IFRS: Pension Expense”, the author mentions “negative adjustment would indicate that such expenses under US GAAP are higher than the expenses reported under IFRS.” (“U.S. GAAP vs. IFRS: Pension Expenses”). Since the majority of pension values are negative adjustments, this analysis concludes that majority of pension is reported higher under U.S. GAAP than IFRS.