Abstract
A study, covering the period 1974-1979, of 387 companies having data on Compustat tape consisting of total assets, total liabilities, net income before extraordinary items, and vested and nonvested unfunded pension liabilities, examined whether theoretical and economic justifications for classifying unfunded pension costs as liabilities exist and analyzed the financial and economic consequences of such classification. Unfunded pension liabilities are the legal obligations of the fund itself and the sponsor-employer is not liable for them. On the socio-philosophical level, pensions are regarded either as a ''right'' by the employee or as a form of ''social contract'' by both labor and management. Some of the reasons for not showing unfunded actuarial values as liabilities are political. In terms of economic reasons, 2 options relating to the debit side of the transactions are: 1. debit retained earnings or an expense for the whole amount, or 2. debit a deferred asset and amortize it over a given time period. The analysis of the results of the survey when subsumed under the financial ratios of debt/equity, return on equity, debt/equity (option 2), and return on assets (option 2) shows that the differences are statistically significant across-the-board when option 2 is substituted for the present pension accounting procedures.