Capitalization approach to pensions:
- Employer has the full liability for benefits attached to service already rendered.
- Expense incurred as employees work, therefore the liability increases.
- Custody, not ownership, of assets has shifted to third party (in substance employer assets).
- Pension liability reduced through payments to retirees.
- Assets of the plan are considered pledged, collateral against a liability.
- Underfunding does not increase the liability and overfunding does not create prepaid expense (asset).