Pension Accounting Choice in Germany: Pension Discount Rate and Actuarial Gains and Losses

Abstract

This paper analyses pension accounting choice in Germany for firms using IFRS or US GAAP. It shows that firms choose the pension discount rate and the treatment of actuarial gains and losses in order to smooth the effect of inherently volatile pension numbers. Pension discount rates for German pension plans are lower than market interest rates when interest rates rise and vice versa. The option to account for actuarial gains and losses outside profit or loss under IFRS is more likely to be adopted if a firm has actuarial losses in excess of the 10% corridor. These and further findings of the paper indicate that pension accounting choice in Germany is utilised strategically.

Keywords: pension accounting, pension discount rate, actuarial gains and losses, smoothing, IAS 19, Germany

JEL Classification: M41