ACC 423 Week 4 (450 words)

Week 4 Article Summary

There is a debate on whether economics applies to pensions. In this article “Why is there debate about whether economics applies to pensions”? shows that the debate should not focus on why the economy has a part with pension funds, but about the financial picture that the economy plays with pension funds. Evaluating the economy is very important when it comes to any business that has a balance sheet, as well as businesses with allegiances to measuring the cost of new obligations. In this paper I will explain the article and its evaluation on the economy and pensions.

Economics to Pension

When it comes to the accounting rules, the value of pensions is not consistent with economic principles. Under the perception of economics, according to (Minaham, 2014), “The same principles of economics that apply to the valuation of any asset or liability apply to the valuation of pension liabilities”. Each different level of accounting will evaluate different questions that are proposed by someone who is in need of cash today. For example, a corporate fund may wish to make an offer to a bank, for a certain amount, to be paid back within an allotted amount of time. Such questions as “what the value of the promise would be if they fulfill that promise”, neither the Government Accounting Standards Board (GASB), or the Financial Accounting Standards Board, will be interested in this. The reason being is they are concerned with question such as “what would the value be if there was a discount associated with the possibility of default be, and “how much collateral would be required for a 50/50 chance that it will be enough”.

The economy and pension generally goes hand in hand because making decisions on one and being ignorant to the other will prove to be detrimental. In order for this to proceed and work in a beneficial way there needs to be an exchange in conversation between economists and financial analysts to discuss the values for path that they wish to take. This will determine if it will be progressive for the future.

Conclusion

In conclusion, unfortunately this given scenario is one of transparency and because of these underfunded pensions will not mystically get funded. But by addressing the issue at hand maybe both the economists and financial analysts can come up with a strategy to make it work for all associated. Some may think that the GASB should have listened to the economists when the proposition of incorporating the transparency came about. Only time will tell if things will change in the future.

References

Minaham, J.R., (2014). Why is there debate about whether economics applies to pensions? Journal of Investing, 23(4), 7-14.