There are two basic pension arrangements – defined contribution and defined benefit plans. Defined benefit arrangements can further be looked at regarding their economic substance or their legal form. With defined contribution plans, the employer invests a specified amount on behalf of the employee. Benefits are paid out on both the accumulated contributions and the investment income. There is an ongoing expense for a defined contribution plan, as noted by Miller (1987). This is simply the amount the employer is obligated to contribute to the pension fund.
             Much looks the same as a defined contribution for the legal form of defined benefits plans. The only surface difference is that the agreement defines the amounts paid out, as opposed to contributing. The economic substance category of defined benefit plans finds the pension trust fund legally separate from the employer, but connected in economic substance, with the employer as the real beneficiary, not the employees. Fund assets are only pledged against the debt to employees, not surrendered. And, any excess funds belongs to the employer, with any deficit eventually being made up (Miller, 1987).
             After six years of debate about pension accounting, the Financial Accounting Standards Board (FASB) issued Statement no. 87, Employer's Accounting for Pensions, in 1985. Those who felt that Accounting Principles Board Opinion no. 8, Accounting for the Cost of Pension Plans was adequate, were strongly opposed to the new standard. And, still today, there are concerns with SFAS 87's inconsistencies with how items are typically treated under GAAP. The net worth of the pension fund should be fully consolidated into the employer's balance sheet, according to the corporate finance perspective. For this reason, the pension fund's net surplus or deficit, as determined by the fair market value of plan assets minus the ABO, should be recognized on the employer's balance sheet. As Klumpes (2001)...