In the absence of accounting regulation, preparers were able to select different approaches to accounting for Defined Benefit Superannuation Plans, ranging from off-balance sheet to net capitalization. For instance, many companies in the United States kept their obligations for defined benefit pension plans off-balance sheet prior to the introduction of FAS 158: Defined Benefit Superannuation Plans and other Post-retirement Pension Plans in 2006. In Australia, the adoption of the previous version of IAS 19 permitted net capitalization and alternative partial capitalization approaches.
Obviously, the use of different methods of accounting for Defined Benefit Superannuation Plans reduces the comparability of financial statements. Concerns were also raised about delays in recognition of liabilities which were perpetuated by partial capitalization methods. Untimely recognition of assets or liabilities arising under Superannuation Plans results in misleading information in the statement of financial position which is not adequately resolved by additional disclosures in the notes. There is evidence that users of financial statements did not fully understand the information provided by entities about their obligations or promises for post-employment benefits.
For example, Sengupta and Wang (2011) provide evidence that bond market participants make inadequate use of note disclosures about off-balance sheet employee benefit obligations. The IASB and the FASB jointly undertook a project to enhance the comparability and transparency of accounting for post-employment benefits (IASB 2008). The outcome of that project was a revised version of IAS 19 Employee Benefits. We will now turn to the requirements of IAS 19 for accounting for Defined Benefit Superannuation Plans.
The net capitalization approach is adopted by IAS 19. Thus, the sponsoring employer recognizes a net defined benefit liability or asset, representing its exposure to the defined benefit superannuation fund at the end of the reporting period. Contributions paid into the fund by the employer increase the assets of the fund, and thus increase a surplus or reduce any deficit of the fund.
The employer accounts for its contributions to the fund as a decrease in the net defined benefit liability, or an increase in the net defined benefit asset. The employer recognizes expenses in relation to its sponsorship of the defined benefit superannuation fund when service costs and interest costs are incurred, rather than when contributions are paid. This will become clear as we work through the revised requirements of IAS 19 for accounting for defined benefit superannuation funds.