Some Aspects of FASB Statement 87

This paper focuses on two aspects of Statement of Financial Accounting Standards 87: (1) the variability of the discount rate, and its consequences; and (2) the "corridor" approach to gains and losses amortization. The analysis centers on the variability of pension expense over time. A simplified model is used; its main features are a stationary population and random fluctuations of discount rates and returns on assets. The work is carried out mathematically and with the help of computer simulations. Sensitivity analyses are performed with respect to the parameters of the model (variance of discount rates, variance of returns on assets, length of amortization period and width of corridor). It turns out (under the particular scenario chosen) that the variance of discount rates and the length of the amortization period are the most important determinants of the variability of expense. It is also shown that when the plan population is mature the variability of pension expense is mostly due to the amortization of (account-ing) gains and losses, and not to the sensitivity of the service cost to the discount rate.