Question

Discuss the role of Other Comprehensive Income in accounting for pension, including examples of when it is used. How does the use of this account coincide with the idea of “smoothing” of income?

Answer 1

As you know that there exists acturial gains or losses in a pension plan which is the difference between the present value of future pension obligations and the expected return from the dedicated assets towards the payment of pension. This will give rise to a gain or loss to the employer. And according to GAAP's an IFRS this difference in not allowed to be treated in the income statement and therefore should form part of other comprehensive income. This will continue in the other comprehensive income until the payments are made to the employees.

From the above explanation you can conclude that this will definetly lead to smoothing of income from current year to the year of payment.