Pension plans assumptions: the case of discount rate

2019 ◽  
Vol 32 (1) ◽  
pp. 36-49 ◽  
Author(s):  
Ana Isabel Morais ◽  
Inês Pinto
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Pension Plan ◽  
Pension Plans ◽  
Rate Of Return ◽  
International Accounting ◽  
Defined Benefit ◽  
Accounting Standard ◽  
Content Type ◽  
Defined Benefit Plans

Purpose In 2009, the International Accounting Standards Board started revising International Accounting Standard (IAS) 19 to improve the requirements for managing the annual expense of a pension plan. The revised standard became effective in 2013. The purpose of this paper is to investigate what effect this revision had on managerial discretion. The paper also examines the implications of the revision on the value relevance of accounting information. Design/methodology/approach The authors use a sample of 72 firms listed on the FTSE 100 that have defined benefit plans for the period between 2009 and 2015. The authors use a regression discontinuity design to analyse the effect from the revision of IAS 19 on the choice of managers regarding the expected rate of return-on-plan assets. The paper also investigates whether firms with higher pension sensitivity are more likely to manage earnings upward before the revision of IAS 19. Further, the paper studies the value relevance of earnings after the revision of the accounting standard. Findings Consistent with predictions, the results show that the adoption of the revised IAS 19 limits the use of the expected rate of return on assets to manage the annual expense of defined benefit plans. This finding shows a sharp increase in the value relevance of earnings. Practical implications This finding is useful for users and preparers of financial statements and regulatory bodies as it identifies not only the influence of a change in the accounting standard for earnings management but also provides evidence on the consequences of managers’ discretion. Originality/value This paper provides direct evidence on the relationship between regulation and financial reporting discretion. It also provides evidence to accounting standard setters that the revision of IAS 19 improves the value relevance of financial information, which gives additional justification to the changes introduced by regulators.

The Potential for Inflating Earnings through the Expected Rate of Return on Defined Benefit Pension Plan Assets

2011 ◽  
Vol 25 (3) ◽  
pp. 443-464 ◽  
Author(s):  
Brian Adams ◽  
Mary Margaret Frank ◽  
Tod Perry
Keyword(s):  
Financial Reporting ◽  
Asset Allocation ◽  
Cumulative Effect ◽  
Pension Plan ◽  
Pension Plans ◽  
Rate Of Return ◽  
Defined Benefit ◽  
Operating Income ◽  
Defined Benefit Pension Plan ◽  
Reported Earnings

SYNOPSIS Using a sample of firms over the period of 1991 through 2005, we examine the opportunity that exists for firms to inflate earnings through the expected rate of return (ERR) assumption associated with defined benefit pension plans. The evidence suggests that, on average, the ERR is not overstated relative to several benchmarks, including contemporaneous actual returns, historical cumulative actual returns, and expected future returns based on asset allocation within the pension. We also find that actual changes in the ERR are infrequent and typically have less than a 1 percent impact on annual operating income. We also estimate that a 0.5 percent change (50 bps) in the ERR will result in a cumulative effect on operating income over a five-year period of approximately 0.5 percent or less for the majority of firms. When we examine firms with the highest ERRs or with the greatest opportunity to inflate earnings, again, we find that the ERR is not overstated relative to several benchmarks. Although we do not observe pervasive inflating of reported income through the ERR during our sample period, we do find that for some firms, small increases in ERR can have a material impact on reported earnings. Our results provide evidence related to the pervasiveness, materiality, and impact of overstated earnings through the ERR, which helps regulators assess the costs and benefits of eliminating this discretion in financial reporting.

The outlook for pension contributions and profits in the US

2004 ◽  
Vol 3 (1) ◽  
pp. 77-97 ◽  
Author(s):  
ALICIA H. MUNNELL ◽  
MAURICIO SOTO
Keyword(s):  
Stock Market ◽  
Pension Plan ◽  
Pension Plans ◽  
Ageing Population ◽  
Defined Benefit ◽  
Bear Market ◽  
Defined Benefit Plans ◽  
Legislative Changes ◽  
Corporate Profits ◽  
The Impact

The bear market that began in 2000 focused attention on two issues – pensions and profits. The initial pension problem was the big decline in value of individual 401(k) accounts. The profit issue was misconduct and stock options. In fact, there is another compelling issue involving both pensions and profits – the impact of the bear market on defined benefit pension plans.Plan sponsors have a projected benefit liability, which until recently was covered by the rise in asset values during the extended bull market. When stock values fell by 50 percent, sponsors for the first time in decades had to contribute to their pensions. But even without the decline in the stock market, sponsors of defined benefit plans were going to face increased pension contributions in the coming decade. The reason is a host of regulatory and legislative changes in the late 1980s that slowed or limited pension contributions.Our analysis suggests that in the absence of the stock market boom and the regulatory and legislative changes that reduced funding, the average firm's contribution to its pension plan would have been 50 percent higher during the 1982–2001 period; corporate profits would have been roughly 5 percent lower.The deferred contributions are coming due. The decline in the stock market and an ageing population imply that contributions would double from their current level. As the economy emerges from recession and the bear market draws to a close, firms and investors must be prepared to contend with a strong headwind from pension funding obligations that could slow the recover.

scholarly journals The Enactment and Critique of International Accounting Standard Two

2021 ◽  
Vol 10 (6) ◽  
pp. 145
Author(s):  
Ayogeboh Epizitone ◽  
Samantha Cecilia Nxumalo
Keyword(s):  
Financial Reporting ◽  
Emerging Economies ◽  
Value Relevance ◽  
International Accounting ◽  
International Accounting Standards ◽  
Accounting Standard ◽  
Financial Reporting Standards ◽  
Current Asset ◽  
Asset Inventory ◽  
International Accounting Standard

Harmonising the International Accounting Standards/International Financial Reporting Standards (IAS/IFRS) globally has been the objective of national boards that seek to eliminate existing differences. The harmonisation project has been substantially efficient in realising the IFRS in emerging economies. However, concerning the international accounting standard two, the existence of different inventory valuation methods in literature is one of the dilemmas confronting the application of IAS 2 in many nations globally. This study through a comprehensive literature review discusses and present a critique on the international accounting standard two to afford insight that will be beneficial to both scholar and standard setters. The findings reveal a formidable contribution of the current asset inventory on companies and compliance levels in South Africa.  Furthermore, these findings supplement prevailing body knowledge on IAS two and the value relevance of accounting inventories. Highlighting key critiques on the IAS 2 prescriptions and application internationally and also revealing the standards own crucial flaws and strengths and on companies.   Received: 6 May 2021 / Accepted: 23 August 2021 / Published: 5 November 2021

scholarly journals Life After Defined Benefit Plans

2011 ◽  
Vol 4 (8) ◽  
Author(s):  
Martin A. Goldberg ◽  
Robert E. Wnek ◽  
Michael J. Rolleri
Keyword(s):  
Pension Plan ◽  
Profit Sharing ◽  
Pension Plans ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Cash Balance ◽  
Benefit Plan ◽  
Defined Contribution Plans ◽  
Defined Benefit Plans ◽  
Recent Developments

Employers have moved from traditional pension plans to cash balance and other alternative defined benefit plans. However, it may be that the best approach lies beyond defined benefit plans completely. The Employee Retirement Income Security Act of 1974 (ERISA) was enacted to protect workers. Its focus was on the defined benefit plan, which at that time meant a traditional pension plan that provided lifetime income to retired workers. Over the years traditional pension plans have declined in number, often due to their increasing costs. Many of these plans have been replaced by the 401(k) plan, a profit-sharing plan partly or wholly funded by employee contributions. There has also been a rise in hybrid plans, plans that have features of both defined benefit and defined contribution plans. Recent developments highlight the weaknesses in traditional pension plans. Replacing a traditional pension plan with a cash balance plan, a hybrid plan that qualifies as a defined benefit plan, does not fully address all the problems. It may be that there is limited advantage to the continued emphasis on defined benefit plans. Instead, defined contribution plans that contain some features of defined benefit plans may better address the current retirement-plan issues.

The state of IFRS in Africa

2019 ◽  
Vol 17 (4) ◽  
pp. 635-649 ◽  
Author(s):  
Vincent Tawiah
Keyword(s):  
Financial Reporting ◽  
Unintended Consequences ◽  
International Accounting ◽  
African Countries ◽  
Accounting Standard ◽  
Content Type ◽  
Financial Reporting Standards ◽  
Ifrs Adoption ◽  
Audit Firms ◽  
Professional Capacity

Purpose The purpose of this paper is to appraise existing literature on International Financial Reporting Standards (IFRS) in Africa. It covers all 54 African countries and their membership in regional and international accounting bodies. Design/methodology/approach This paper uses qualitative research methods, including review and synthesis of a variety of archival materials. Findings Unlike the numerous variations in IFRS adoption on other continents, IFRS countries in Africa have adopted the standards as issued by International Accounting Standard Board (IASB). However, most countries are slow to implement the ROSC (AA) recommendations for IFRS adoption due to lack of institutional and professional capacity. With regards to the unintended consequences, IFRS adoption has made international professional qualifications such as Association of Certified Chartered Accountants popular in Africa; hence, national accounting qualifications are not attractive to prospective accountants. Similarly, IFRS adoption has created a competitive advantage for the Big4 audit firms because companies in IFRS countries prefer the services of the Big4 to that of the local audit firms. Originality/value It is concluded that international organisations that recommend IFRS to Africa, such as the IFRS foundation, IMF and World Bank, should build the sustainable professional and institutional capacity of the countries before persuading them to adopt IFRS, because in Africa, adopting a law is easy but operationalising it has always been the challenge.

The value relevance and reliability of intangible assets

2014 ◽  
Vol 22 (3) ◽  
pp. 182-216 ◽  
Author(s):  
Xu-Dong Ji ◽  
Wei Lu
Keyword(s):  
Financial Reporting ◽  
Intangible Assets ◽  
Value Relevance ◽  
Relevant Information ◽  
Accounting Standard ◽  
Content Type ◽  
Listed Firms ◽  
Financial Reporting Standards ◽  
The Relationship ◽  
Relevance And Reliability

Purpose – The purpose of this paper is to examine the value relevance of intangible assets, including goodwill and other types of intangibles in the pre- and post-adoption periods of International Financial Reporting Standards (IFRS). Most importantly, this paper investigates whether the value relevance of reported intangible assets is associated with their value reliability. Furthermore, this paper reports whether the adoption of IFRS improves the value relevance of intangible assets and alters the relationship between value relevance and reliability. Design/methodology/approach – Both price and return models based on Ohlosn theory (1995) are employed to test the value relevance and value reliability of intangibles. Australian-listed firms with capitalised intangibles from 2001 to 2009 are selected in this study. The sample includes 6,650 firm-year observations. Findings – The main result shows that capitalised intangible assets are value relevant in Australia, in both the pre- and post-adoption of IFRS periods. Value relevance is higher in firms with more reliable information on intangible assets. This study finds that the value relevance of intangibles has declined in the post-adoption period of IFRS. However, the positive relationship between the value relevance and the reliability of intangibles has remained unchanged in the post-adoption period. Originality/value – The paper contributes a new measurement of value reliability of accounting information about intangibles. This paper is one of few studies on the relationship between value relevance and reliability of intangible assets. The results show that value relevance is positively associated with value reliability. This suggests that, when accounting standard setters assess whether the existing IFRS of intangibles should be improved in the future, they need to think not only in terms of whether the standard can provide more relevant information of intangibles to investors but also whether the standard can make the information of intangibles more reliable.

Is the balance sheet method of deferred tax informative?

2019 ◽  
Vol 32 (1) ◽  
pp. 20-31
Author(s):  
Kim Mear ◽  
Michael Bradbury ◽  
Jill Hooks
Keyword(s):  
Financial Reporting ◽  
Value Relevance ◽  
Balance Sheet ◽  
Accounting Standards ◽  
Share Price ◽  
Advisory Group ◽  
International Accounting ◽  
Content Type ◽  
Deferred Tax ◽  
Footnote Disclosures

Purpose This study aims to compare the value relevance of the recognised deferred tax elements under International Accounting Standard 12 (IAS 12): Income Taxes (balance sheet method) relative to the taxes payable (flow through) method. It also investigates the value relevance of the IAS 12 deferred tax disclosures. Design/methodology/approach This study used standard valuation models to examine the association between share price and the recognised amounts and footnote disclosures of IAS 12. The Vuong (1989) test is then used to assess which information set is more value relevant. The sample includes 440 firm years over the period 2008-2012. Findings The results show that deferred tax amounts recognised under the balance sheet method provide no more information to investors than the taxes payable method (TPM). Deferred tax footnote disclosures, however, are more relevant than the amounts recognised under the balance sheet method. This study investigates potential reasons for the relevance of footnote disclosures. Research limitations/implications This study has not addressed whether the deferral method of deferred tax is relevant. In addition, while footnote disclosures look promising, further research is necessary. Practical implications The results suggest, given the complexity and cost of compliance with IAS 12, that the International Accounting Standards Board (IASB) should undertake a comprehensive re-think on the relevance of the balance sheet method in IAS 12 and revert to the TPM. Originality/value The IASB and the European Financial Reporting Advisory Group have expressed concerns over the balance sheet method under IAS 12. The IASB and the Financial Accounting Standards Board also have concerns over the cost and complexity of the deferred tax disclosures. The study’s results offer a perspective by examining whether the balance sheet method is value relevant. Prior research has addressed this issue using local data (i.e. pre-International Financial Reporting Standards). This study also provides suggestions for future research into deferred tax footnote disclosures.

scholarly journals Biased Actuarial Assumptions and SFAS 132R: The Not-for-Profit Response

2021 ◽  
Author(s):  
Anubhav Gupta ◽  
Thad Calabrese
Keyword(s):  
Pension Plan ◽  
Financial Statements ◽  
Pension Plans ◽  
Defined Benefit ◽  
Difference In Differences ◽  
Accounting Standard ◽  
For Profit ◽  
Not For Profit ◽  
Defined Benefit Pension Plan ◽  
Asset Allocations

In 2003, the FASB issued an accounting standard (132R) requiring defined-benefit pension plan sponsors to disclose in the notes the asset allocations of their sponsored pension plans. A motivation for this requirement was to help users evaluate a plan's expected rate of return (ERR) assumption which is supposed to be determined by the allocation of plan assets to risky investments. All else being equal, the higher the assumption, the lower is the pension expense and the higher are reported profits of plan sponsors. We hypothesize that not-for-profits used the ERR to inflate these earnings by reducing pension expenses. Using a dataset of audited financial statements and a difference-in-differences design, we find that not-for-profits significantly decreased their ERRs post-SFAS 132R. The results suggest that opportunistic actuarial assumptions by not-for-profits were reduced following the implementation of SFAS 132R.

Measuring Pension Liabilities under GASB Statement No. 68

2014 ◽  
Vol 28 (3) ◽  
pp. 421-454 ◽  
Author(s):  
John W. Mortimer ◽  
Linda R. Henderson
Keyword(s):  
Financial Reporting ◽  
Risk Index ◽  
Pension Plans ◽  
Low Risk ◽  
Sensitivity Analyses ◽  
Fiscal Year ◽  
Defined Benefit ◽  
Discount Rates ◽  
Risk Rate ◽  
Pension Liabilities

SYNOPSIS While retired government employees clearly depend on public sector defined benefit pension funds, these plans also contribute significantly to U.S. state and national economies. Growing public concern about the funding adequacy of these plans, hard hit by the great recession, raises questions about their future viability. After several years of study, the Governmental Accounting Standards Board (GASB) approved two new standards, GASB 67 and 68, with the goal of substantially improving the accounting for and transparency of financial reporting of state/municipal public employee defined benefit pension plans. GASB 68, the focus of this paper, requires state/municipal governments to calculate and report a net pension liability based on a single discount rate that combines the rate of return on funded plan assets with a low-risk index rate on the unfunded portion of the liability. This paper illustrates the calculation of estimates for GASB 68 reportable net pension liabilities, funded ratios, and single discount rates for 48 fiscal year state employee defined benefit plans by using an innovative valuation model and readily available data. The results show statistically significant increases in reportable net pension liabilities and decreases in the estimated hypothetical GASB 68 funded ratios and single discount rates. Our sensitivity analyses examine the effect of changes in the low-risk rate and time period on these results. We find that reported discount rates of weaker plans approach the low-risk rate, resulting in higher pension liabilities and creating policy incentives to increase risky assets in pension portfolios.

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