What effect does the use of expected returns on pension investments and the deferral of unexpected gains and losses on those investments have on income? What effect does the use of fair value accounting for pensions have on income? 

Answer:

Accounting for Pensions.

1) What effect does the use of expected returns on pension investments and the deferral of unexpected gains and losses on those investments have on income?

Expected returns on pensions determine the net income to be generated from pension investments. The expected returns depend on the expected rate of return which helps in predicting pensions returns. The same concept is then utilized to forecast future incomes to be generated from the pension investments. Alternatively, the deferral of unexpected gains and losses on pension investments affect the net income depending on the direction of the deferral. For instance, the deferral of unexpected gains on pension investments increases the net income earned on pension investments. On the other hand, the deferral unexpected losses on pension investment decrease the net income generated from pension returns. This is because such losses are amortized and treated as expenses. The expenses are charged on the income statement hence reducing the income.

2) What effect does the use of fair value accounting for pensions have on income? 

The use of fair value accounting for pension effect provides a value in use on the net assets of the company. The fair value reflects on the fair value of the pension assets as well as all the changes and adjustments made to the fair-value pension net assets flow through net income. This implies that the expense that would be amortized and charged against the income statement will reflect adjusted fair value pension net assets. Therefore, the net income is likely to be more accurate compared to the values obtained using other accounting methods. More precisely, the value of the net income is likely to be less since this approach amortizes the pension net assets at fair-value which might below the market value. Therefore, a larger expense is likely to accrue hence reducing the net income.

References;

http://w4.stern.nyu.edu/accounting/docs/speaker_papers/spring2006/Hann_Heflin_Subramanya_FVPension.pdf

https://care-mendoza.nd.edu/assets/152258/amir_and_benartzi_tar_1998.pdf