The Evolution Trend Of British Pension Accounting

British accounting has always emphasized objectivity and fairness, while prudent and conservative English tradition has made its accounting thoughts lack of conservatism. This feature has also been fully reflected in the pension accounting problem.

For a long time, the cost of pensions has always been one of the most predictable projects in many enterprises in the UK.

Whether the stock market's stock prices are changing rapidly, the cost of pension for employees after retirement is relatively stable.

However, in recent years, new theories and new methods of pension accounting have been emerging in the field of international accounting, especially the introduction of fair value theory.

All this means: because of the fluctuation of market value, the new accounting mode will be affected by many uncertain factors. The determination of the pension cost of enterprises has great variability.

This trend of development has made British Accounting authority and accounting experts pay more attention to pension issues, and has continued to study and explore them in order to find a British model that is consistent with international trends and strives for stability.

The 1. guideline for pension accounting is SSAP24, ASB of the United Kingdom (the accounting standards board), which has been required by enterprises to conduct accounting on the basis of SSAP24 (standard accounting practice statement No. twenty-fourth) guidelines on the retirement cost of employees after retirement. The criterion is based on the theory that enterprises pay their employees' pension after retirement is essentially a kind of deferred payment of labor remuneration. Therefore, enterprises should use the accrual basis principle to account for this.

The basic requirement of the guidelines is that enterprises should set long-term plans to set up pension plans and confirm the expected cost of pension according to a reasonable and systematic way when they create economic benefits during their employees' incumbency.

There are two main aspects of the pension plan in the accounting sense: one is the pension benefits provided by employees to the employees in the future (after retirement), that is, the obligation to pay, namely the pension liabilities of the enterprises; the other is the pension fund that the enterprise is going to pay for debts in the future, that is, the pension assets.

As the accounting main body of enterprises, pension accounting mainly solves the problem of how to reasonably estimate the future pension payment obligation of the enterprise, and to calculate the cost of the current period in order to match the income created by the employee.

For the determination of the obligation of pension payment, that is, the amount of fund-raising, the typical practice is: first, consider the various factors that affect the future pension changes. By adopting some long-term assumptions, we can reasonably estimate the present value of the pension payment obligation of the enterprise in the future as the pension cost of the enterprise in the current period. Second, by rationalizing the fluctuation of the market value of the pension assets, the profits and losses arising from the pension will be apportioned over the long term in the future, and the apportionment period is usually 10 to 15 years.

However, the problem of determining the cost of pensions by using this model is that the results largely depend on the assumptions adopted, such as the rate of return on the assets of the fund. If the more optimistic assumptions replace the prudent assumptions, a completely different result will be produced. This variability will affect the firm's recognition of liabilities and pension costs, resulting in the untruthfulness of the operating results and financial situation disclosed by the enterprise's financial statements.

This kind of defect makes it difficult for British shareholders and financial analysts to understand the exact cost and the future change of pension in a suitable way.

In addition, there are still some deficiencies in the current SSAP 24, which need to be improved, mainly in two aspects: (1) there are more options to be allowed in the guidelines, which lead to inconsistency in accounting practice between enterprises and affect the comparability of accounting statements.

(2) there is a lack of sufficient requirements for the disclosure of pension accounting information.

To this end, ASB intends to strictly revise the regulations in SSAP 24 so that it has less space to lead to instability in the pension cost accounting of enterprises.

In June 1995, ASB released a draft discussion on the disclosure of pension accounting information in corporate financial statements as an important step towards improving SSAP24.

The main contents of the proposal include: (1) the pension cost should be determined by the accrued duty law, i.e. the present value of pension benefits payable in the future according to the future wage level calculated to a specific date, and the expected payment obligation law should be abandoned.

(2) if the instability of pension costs continues to the future, the alternative methods should be limited.

(3) there should be more detailed accounting information disclosure on the balance sheet, including various assumptions and sources of information used in the determination of pension costs, and accounting treatments for surplus or insufficient pension.

The proposal of this discussion paper has made up for the deficiency of SSAP 24 to a certain extent. The main findings are as follows: (1) the accrued duty law can better reflect the economic reality of the enterprise.

Because of the time value of money, the pension benefits provided by employees to employees increase with the approaching employees' retirement. Therefore, accruals can accurately reflect the present value of pension benefits created by employees themselves in the balance sheet date.

(2) if the pension accounting method has fewer options and the relevant information can be fully disclosed, the comparability and objectivity of the financial statements will greatly increase.

However, there are still some unresolved problems in the revised draft: (1) due to the law of accrued duty is based on the future wage level, and the future wage level has many uncertainties, it directly affects the future cash flow of enterprises, resulting in greater variability of corporate profits.

(2) the cost of an enterprise's improved pension plan may be capitalized, which is not conducive to efforts to improve the pension plan.

ASB began to explore new research, hoping to further improve the accounting standards. However, before the promulgation of the new guidelines, ASB's behavior has long been surpassed by the internationalization trend of the pension problem.

In October 1996, IASC (International Accounting Standards Board) issued an E draft guideline on pension accounting guidelines, which is mainly based on market value - fair value theory. This model is very similar to that provided by the US SFAS 87 (financial accounting standards eighty-seventh Bulletin) in 3. (54).

SFAS 87 is mainly related to the guidance of enterprise pension accounting. It emphasizes: (1) pension accounting should be measured by fair value; (2) the pensions cost is reflected in net amount, some of which should be deferred recognition; (3) pension assets and liabilities should be offset each other, and their surplus or deficiency should be listed on the current balance sheet.

British Accounting authority can not fully agree with the pension accounting method provided in E 54.

They hold that: (1) adopting the E 54 method is likely to make the pension cost of enterprises more unstable because of the fluctuation of market value; (2) most of the pension funds in the UK are mainly invested in the stock market, while the prices in the stock market are unpredictable, so that the pension liabilities of enterprises have to be estimated by corporate bonds.

Therefore, once the market value method is adopted, it means that the assets and liabilities of pension will fluctuate in the unsynchronized market price, which will cause unreasonable proportions between the pension liabilities and the assets of the fund, thus increasing the uncertainty of the pension cost, while the surplus (excess provision) or insufficient (insufficient) of the pension fund will be immediately recognized and reflected on the current balance sheet.

This will obviously affect the authenticity of information disclosure in financial statements.

4.ASB determines the basic goal of a smooth pition, as a member of IASC. Britain hopes to make every effort to ensure that the accounting statements provided by British enterprises comply with the relevant requirements of the international accounting standards.

Therefore, after IASC released the proposal to establish a pension accounting model based on the market value method, the British ASB decided to keep abreast of the international trend and abandon the original plan to strictly modify the SSAP 24 plan and begin drafting its own guidelines.

The new guidelines will tend to be consistent with those proposed by IASC.

As for ASB, it may be more attractive to choose other methods, but considering the trend of international development, they still accept the market value method which was not mentioned before.

However, they still expressed reservations about the way to discount pension liabilities by means of bond reward, and they also disagreed with the accounting treatment method of surplus or insufficient pension in E 54.

For this reason, ASB decided to establish new criteria based on market value. However, they hope to discount pension liabilities through the expected remuneration of similar securities with reasonable proportions of pension assets.

The question is: how to find an objective way to calculate the future expected remuneration of securities.

ASB has considered the use of Phnom Penh's remuneration to set up a pension plan.

The so-called gilt edged securities are a kind of securities issued by the government that guarantee fixed interest in Britain. This kind of securities is usually considered by the investors as the most outstanding securities without any financial risk and has a relatively long term remuneration.

If this method is adopted, it can avoid the artificially manipulating space in accounting, but there are still some variability that ASB is trying to avoid and has not been adopted.

The basic idea proposed by ASB is to strive to objectively and fairly reflect the pension plans of enterprises, reduce the variability of pension costs, and smooth the pition to the track of market value.

In order to get a better understanding of the basic goals of ASB, some experts use computer simulation to design E 54 and ASB proposals in a company's pension plan.

In order to make the problem more interesting, they assume that time reflow and repeat the whole 70s of twentieth Century. It can be seen from the figure that although the ASB proposal is significantly different from the E 54 large and down fluctuations, it is relatively stable.

It has relative stability.

According to the evolution of pension accounting model in Britain, the market value law is irresistible in a dominant market economy.

The operation of enterprise pension is the same as other economic things, and ultimately will be on the track of market value.