More and more Swiss enterprises are using international accounting standards, according to Geneva-based Buck Consultants, which has published a report on pension costs accounting.
Mike McShee, managing director, of the consultants’ Swiss office, commenting at a recent seminar for Swiss funds in Geneva, said it is a “goal of the new evolving accounting standards to find uniformity between different business. Two businesses in a similar situation, with similar sets of employees and similar pension programmes should have similar pension costs and they won’t have them unless they measure costs in the same way. So it is a goal for accounting standards to find the formula.”
The tradition in Switzerland has been to do what the law says: put the right amount of money in your pension fund “to meet the legal requirement of keeping it healthy, and this has been the tradition pretty much everywhere,” he said.
McShee pointed to several anomalies in the Swiss market. “A company may make a pre-payment into its pension fund as a special contribution to the established future contribution. Traditional Swiss accounting practice is that that payment is accounted as current cost, but actually it is not. It is a prepayment for the future cost.”
The second anomaly was the ‘patronal’ foundation. “The classical structure is a welfare foundation established and funded by the employer but which does not have specific liabilities. The tradition in Switzerland is that the payment of cash into the patronal foundation has been considered as a current cost, but it is not a current cost because there is not a current liability.
“The foundation has a legal right to receive certain contributions from the company. These contributions are part of the labour contract that exists between the employee and the company,” he said. “As a result of these anomalies we have a significant lack of comparability between financial statements of different businesses.”
The solution to reduce these anomalies began in the US in 1966. “The Accounting Practices Board (APB) established the principle that accrual cost method must be applied to pension cost accounting. It says that it does not matter what the cash contribution policy is, somehow the cost you recognise has to be based on measurement,” said McShee.
At that time it was not very specific about how to do that measurement, but the situation changed in the early 1980s, when the APB implemented statements 87/88, which defined in considerable detail how that cost must be measured. “It defined one single cost measure and the fundamental basis on which interest rate, salary growth and demographic assumptions should be established,” McShee told the seminar. Soon after it added FAS 106, 112 and 132, which pick up other kind of benefits. “The general principle in any case is that somehow you have to attribute cost of benefits to the time of performing the service.”
Meanwhile, the European multinational companies have increasingly been adopting a different sort of accounting standard. The IAS19 standard was implemented in 1993, substantially revised in 1998 and brought into effect in 1999. It differs from the US approach in the sense that, instead of having one standard for each different kind of benefit, it is a comprehensive standard covering all elements of employee benefits and compensation.
IAS19 aims to achieve two goals in employers’ accounting for pensions. One is consistency, based on the fact that company reports should be comparable with each other. When two statements reflect costs of similar pension plans, the two should follow a consistent treatment. The other one is reality, so the costs recognised should reflect the true situation.
McShee said: “In general, standards have been trying to tell us the most precise way to measure our costs. Every year, when you make the evaluation, you realise that what happened is not exactly what you had planned. These differences need to be rectified and you have to recognise the cost those corrections involve.
“If you want to start trading on the London stock exchange or in Frankfurt, you have to meet international accounting standards. Companies do not do this because they want to, but because it is becoming necessary part of doing business today.”

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