An Analysis of Critical Accounting Estimate Disclosures of Pension Assumptions

2014 ◽  
Vol 28 (4) ◽  
pp. 819-845 ◽  
Author(s):  
Mark P. Bauman ◽  
Kenneth W. Shaw
Keyword(s):  
Discount Rate ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Asset Return ◽  
Big 4 ◽  
Accounting Estimates ◽  
Regulated Industries ◽  
Funded Status ◽  
Defined Benefit Pension Plans

SYNOPSIS Accounting for defined-benefit pension plans is complex, and reported financial statement amounts are significantly impacted by a myriad of assumptions. In its interpretative release FR-72 (SEC 2003), the SEC called for more informative and transparent Management Discussion and Analysis (MD&A) disclosure of critical accounting estimates (CAE), including those regarding pension plans. This paper uses a random sample of 147 firms with relatively large defined-benefit pension plans to analyze firms' MD&A pension-related critical accounting estimate disclosures. We find that 60 (61) percent of our sample firms quantify the effect on pension measurements—primarily pension expense—of a given change in discount rates (expected asset returns). The median effect on earnings per share of these CAE-disclosing firms is between two and three cents. Firms rarely disclose the effects of potential changes in future salary assumptions or other estimates on pension measurements. While FR-72 encourages MD&A disclosure of information to assess the past accuracy of or predict future changes in critical accounting estimates, few firms provide such information with respect to their pension plans, suggesting avenues for improvement in disclosures. Finally, we use logistic regression to analyze the determinants of firms' decisions to disclose the sensitivity of pension expense to pension discount rate or expected asset return assumptions. Results indicate that the likelihood of providing a discount rate or expected asset return CAE is positively related to firm size, having a Big 4 auditor, and the variability of pension plan funded status, and is lower for firms operating in regulated industries and for firms with better-funded pension plans.

scholarly journals Pension Funding and the Actuarial Assumption Concerning Investment Returns

2003 ◽  
Vol 33 (02) ◽  
pp. 289-312 ◽  
Author(s):  
M. Iqbal Owadally
Keyword(s):  
Discount Rate ◽  
Asset Allocation ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Return On Assets ◽  
Investment Return ◽  
Investment Returns ◽  
Pension Liabilities

An assumption concerning the long-term rate of return on assets is made by actuaries when they value defined-benefit pension plans. There is a distinction between this assumption and the discount rate used to value pension liabilities, as the value placed on liabilities does not depend on asset allocation in the pension fund. The more conservative the investment return assumption is, the larger planned initial contributions are, and the faster benefits are funded. A conservative investment return assumption, however, also leads to long-term surpluses in the plan, as is shown for two practical actuarial funding methods. Long-term deficits result from an optimistic assumption. Neither outcome is desirable as, in the long term, pension plan assets should be accumulated to meet the pension liabilities valued at a suitable discount rate. A third method is devised that avoids such persistent surpluses and deficits regardless of conservatism or optimism in the assumed investment return.

Opinions Of Financial Analysts On Accounting For defined Benefit Pension Plans

2011 ◽  
Vol 11 (3) ◽  
pp. 65 ◽  
Author(s):  
Kenneth E. Stone ◽  
David W. Joy ◽  
Cynthia J. Thomas
Keyword(s):  
Balance Sheet ◽  
Financial Analysts ◽  
Pension Plan ◽  
Fair Value ◽  
Pension Plans ◽  
Defined Benefit ◽  
Service Cost ◽  
Prior Service ◽  
Gains And Losses ◽  
Defined Benefit Pension Plans

Responding financial analysts preferred pension plan accounting which contrasts with requirements of SFAS No. 87. The preferred model included: (1) Plan assets and accumulated benefit obligations are on the balance sheet. (2) Prior service cost is recognized in the year of plan adoption or amendment. (3) Gains and losses are recognized when they occur. (4) Annual pension expense is computer by netting the change in fair value of plan assets, deposits to the pension plan, and the change in accumulated benefit obligations.

Pension plan risk-taking: does it matter if the sponsor is publicly-traded?

2012 ◽  
Vol 12 (2) ◽  
pp. 218-249 ◽  
Author(s):  
CHRISTINA ATANASOVA ◽  
EVAN GATEV
Keyword(s):  
Risk Taking ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Publicly Traded ◽  
Public And Private ◽  
Publicly Traded Firms ◽  
Main Determinants ◽  
Funded Status ◽  
Pension Liabilities

AbstractWe use a large sample of defined benefit (DB) pension plans to document economically significant differences in the risk-taking of plans sponsored by privately-held versus publicly-traded firms. The magnitude and the main determinants of pension plan risk-taking are different for public and private firms. The effect of pension liabilities’ funded status on risk-taking is two and a half times higher for plans with publicly-traded sponsors than for plans with private sponsors. In contrast, changing sponsor contributions has more than four times higher effect on risk-taking for plans with private sponsors. The results suggest that the alignment of incentives for the stakeholders in a pension contract is different for plans sponsored by private versus publicly-traded firms.

scholarly journals Measuring Pension Liabilities: An Examination Of The Funding Levels Of Defined Benefit Pension Plans

2011 ◽  
Vol 11 (2) ◽  
pp. 73 ◽  
Author(s):  
Alan I. Blankley ◽  
Rober Y. W. Tang
Keyword(s):  
Interest Rate ◽  
Discount Rate ◽  
Pension Plan ◽  
Fortune 500 ◽  
Pension Plans ◽  
Economic Conditions ◽  
Defined Benefit ◽  
Discount Rates ◽  
Chi Square ◽  
Pension Liabilities

We examine pension funding measures and interest rate disclosures for 223 firms from the Fortune 500. Three different liability measures are used to develop funding ratios, which indicate sample firms funding condition. We then examine firms discount rate estimates and compare these estimates with their funding levels. Using chi-square tests to examine dependence between rates and funding, we determine whether over (under) funding is simply an artifact of the choice of discount rates or the result of authentic economic conditions surrounding the pension plan.

scholarly journals Pension Funding and the Actuarial Assumption Concerning Investment Returns

2003 ◽  
Vol 33 (2) ◽  
pp. 289-312 ◽  
Author(s):  
M. Iqbal Owadally
Keyword(s):  
Discount Rate ◽  
Asset Allocation ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Return On Assets ◽  
Investment Return ◽  
Investment Returns ◽  
Pension Liabilities

An assumption concerning the long-term rate of return on assets is made by actuaries when they value defined-benefit pension plans. There is a distinction between this assumption and the discount rate used to value pension liabilities, as the value placed on liabilities does not depend on asset allocation in the pension fund. The more conservative the investment return assumption is, the larger planned initial contributions are, and the faster benefits are funded. A conservative investment return assumption, however, also leads to long-term surpluses in the plan, as is shown for two practical actuarial funding methods. Long-term deficits result from an optimistic assumption. Neither outcome is desirable as, in the long term, pension plan assets should be accumulated to meet the pension liabilities valued at a suitable discount rate. A third method is devised that avoids such persistent surpluses and deficits regardless of conservatism or optimism in the assumed investment return.

Optimal ALM strategies for defined benefit pension plans

2000 ◽  
Vol 2 (2) ◽  
pp. 47-69 ◽  
Author(s):  
Arun Muralidhar ◽  
Ronald van der Wouden
Keyword(s):  
Pension Plans ◽  
Defined Benefit ◽  
Defined Benefit Pension Plans
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