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.

The strategic use of pensions by not-for-profit organizations

2018 ◽  
Vol 18 (3) ◽  
pp. 388-414
Author(s):  
THAD DANIEL CALABRESE ◽  
ELIZABETH A. M. SEARING
Keyword(s):  
Financial Management ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
For Profit ◽  
Management Objectives ◽  
Not For Profit ◽  
Net Assets ◽  
Earnings Targets ◽  
Pension Liabilities

AbstractDefined benefit pension plans are an important and unexplored aspect of not-for-profit compensation, covering between 15% and 21% of the estimated national not-for-profit workforce. Here we consider whether pension contributions and actuarial assumptions are mechanisms for achieving not-for-profit financial management objectives such as smoothing consumption, managing reported net earnings, and minimizing pension liabilities. The empirical results indicate a variety of these behaviors. Not-for-profit pension plan sponsors use accumulated net assets to smooth consumption. Further, not-for-profits manage reported profits downwards when they exceed expectations by increasing pension contributions, but both minimize contributions and liberalize actuarial assumptions when they underperform relative to their desired earnings targets.

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.

Financial health and the valuation of corporate pension plans

2019 ◽  
Vol 19 (4) ◽  
pp. 459-490
Author(s):  
Jun Cai ◽  
Miao Luo ◽  
Alan J. Marcus
Keyword(s):  
Property Rights ◽  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Financial Health ◽  
Valuation Effects ◽  
Defined Benefit Pension Plan ◽  
Corporate Pension ◽  
Standing Question

AbstractWe return to the long-standing question ‘Who owns the assets in a defined benefit pension plan?’ Unlike earlier studies, we condition the market's assessment of implicit property rights on the sponsoring firm's financial health. Valuations of financially strong firms, and those that are strengthening, are more responsive to pension plan funding. For these firms, each extra dollar of net plan assets is valued at between $0.50 and $1.00. In contrast, for weak and weakening firms, valuation effects are statistically indistinguishable from zero. This result is consistent with the higher likelihood that they will renege on their pension obligations.

Predicting cash flows related to defined benefit plan contributions

2010 ◽  
Vol 9 (4) ◽  
pp. 505-532 ◽  
Author(s):  
THOMAS D. DOWDELL ◽  
BONNIE K. KLAMM ◽  
ROXANNE M. SPINDLE
Keyword(s):  
Cash Flow ◽  
Financial Statements ◽  
Cash Flows ◽  
Pension Plans ◽  
Defined Benefit ◽  
Pension Accounting ◽  
Accounting Standard ◽  
Benefit Plan ◽  
Accounting Rules ◽  
Pension Liabilities

AbstractFuture contributions to defined benefit pension plans are a significant cash flow item that can be difficult to estimate. Funding ratios – pension assets relative to pension liabilities – have long been considered important for estimating cash flows needed for current and future pension contributions (Ballester et al., 1998). However, US GAAP or IFRS funding ratios that companies report in their financial statements may differ from funding ratios used by pension regulators. These regulatory funding ratios may be more useful for predicting future contributions.We investigate whether US regulatory and GAAP funding ratios are different and whether regulatory funding ratios provide useful information for predicting future contributions. For 3,877 firm years from 1995 through 2002, we observe that regulatory and GAAP funding ratios differ by more than 5% for 73% of our sample. We also find that predictions of future contributions are improved by using regulatory funding ratios in addition to GAAP funding ratios. Our results are relevant to accounting standard setters' ongoing review of pension accounting rules.

Missing Participants and Beneficiaries From Private-Sector Pension Plans

2021 ◽  
pp. 088636872110451
Author(s):  
John G. Kilgour
Keyword(s):  
Pension Plan ◽  
The United States ◽  
Pension Plans ◽  
Pension Benefit ◽  
Defined Benefit ◽  
Defined Contribution ◽  
Social Security Administration ◽  
Retirement Benefits ◽  
Department Of Labor ◽  
For Profit

This article examines the problem of missing and nonresponsive participants and beneficiaries from defined-benefit (DB) and especially defined-contribution (DC) pension plans, mainly in the private (for profit) sector of the United States. It focuses on the current search requirements of the three government agencies involved in finding missing participants and beneficiaries: the Pension Benefit Guaranty Corporation (PBGC), the Department of Labor (DOL) and its Employee Benefit Services Administration (EBSA), and the Internal Revenue Service (IRS). The article also reviews the efforts of the Social Security Administration (SSA) in this area. It then reviews proposed legislation, the Retirement Savings Lost and Found Act of 2020 (now S. 1730; RSLFA). The issue of missing participants and beneficiaries often becomes critical when an employer goes out of business or for some other reason stops sponsoring a pension plan. The missing participants are owed their earned retirement benefits. They, not the employer, own them.

scholarly journals Corporate Pension Plans as Takeover Deterrents

2013 ◽  
Vol 48 (4) ◽  
pp. 1119-1144 ◽  
Author(s):  
João F. Cocco ◽  
Paolo F. Volpin
Keyword(s):  
Pension Plan ◽  
Pension Plans ◽  
Defined Benefit ◽  
Announcement Effects ◽  
Defined Benefit Pension Plan ◽  
Corporate Pension ◽  
Pension Liabilities

AbstractWe use UK data to show that firms that sponsor a defined-benefit pension plan are less likely to be targeted in an acquisition and, conditional on an attempted takeover, they are less likely to be acquired. Our explanation is that the uncertainty in the value of pension liabilities is a source of risk for acquirers of the firm's shares, which works as a takeover deterrent. In support of this explanation we find that these same firms are more likely to use cash when acquiring other firms, and that the announcement of a cash acquisition is associated with positive announcement effects.

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.

scholarly journals Journal Entries As Tools For Financial Statement Disclosure Of Pension Reporting And Other Comprehensive Income

2019 ◽  
Vol 12 (3) ◽  
pp. 43-52
Author(s):  
Robert E. Jackson ◽  
L. Dwight Sneathen Jr.
Keyword(s):  
Pension Plan ◽  
Financial Statements ◽  
Financial Statement ◽  
Defined Benefit ◽  
Pension Accounting ◽  
Comprehensive Income ◽  
Defined Benefit Pension Plan ◽  
Other Comprehensive Income ◽  
Financial Disclosures ◽  
Journal Entries

This instructional tool draws a linkage between the journal entries required to record the activity of a defined benefit pension plan and the disclosures required under authoritative guidance. The quarterly and year-end adjusting entries are presented and linked to the financial statements and supplemental financial disclosures. These entries directly tie to amounts reflected in those disclosures to provide a more comprehensive analysis of the reporting process. The resulting analysis is beneficial for the understanding of pension accounting and the reporting of accumulated other comprehensive income.

Getting More from Less in Defined Benefit Plans

2018 ◽  
Author(s):  
Daniel W. Wallick ◽  
Daniel B. Berkowitz ◽  
Andrew S. Clarke ◽  
Kevin J. DiCiurcio ◽  
Kimberly A. Stockton
Keyword(s):  
Interest Rates ◽  
Pension Plan ◽  
Defined Benefit ◽  
Portfolio Risk ◽  
Defined Benefit Pension Plan ◽  
Increased Risk ◽  
Investment Returns ◽  
Defined Benefit Plans ◽  
Asset Class ◽  
Reduced Costs

As global interest rates hover near historic lows, defined benefit pension plan sponsors must grapple with the prospect of lower investment returns. We examine three levers that can enhance portfolio outcomes in a low-return world: increased contributions; reduced investment costs; and increased portfolio risk. We use portfolio simulations based on a stochastic asset class forecasting model to evaluate each lever according to two criteria: the magnitude of impact and the certainty that this impact will be realized. We show that increased contributions have the greatest and most certain impact. Reduced costs have a more modest, but equally certain impact. Increased risk can deliver a significant impact, but with the least certainty.

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