Smoothing Effects of Different Ways to Cope with Actuarial Gains and Losses Under IAS 19

Summary International accounting for pension obligations is one of the most complex issues in accounting. According to the International Accounting Standard (IAS) 19 ‘employee benefits’ the defined benefit obligation has to be measured by the projected unit credit method (IAS 19.64). Experience deviations from the expected values for future salary/wage increases, pension increases, uctuation, and mortality as well as changes in the discount rate cause actuarial gains and losses, that are explicitly considered within the IAS 19 accounting system. Actuarial gains and losses are unavoidable to a certain degree and may cause uctuations in pension costs. IAS 19 offers several ways to cope with actuarial gains and losses. The so-called corridor approach is explicitly designed to smooth pension costs (IAS 19 BC 39; see [1, p. 127]). Generally, smoothing is contrary to the overall objective to provide information that is useful for economic decision. The research question of this paper is to quantify the smoothing effects of the different ways to cope with actuarial gains and losses. Furthermore, we suggest a modification that results into a moderate smoothing, but without a loss of decision usefulness, because it avoids an artificial source of actuarial gains and losses and reduces complexity. As we are interested in pure accounting effects we focus on unfunded pension plans. Thus, the results are not inuenced by the design of the entities contributions to an external fund as well as the investment policy of such a fund.