Evidence on the Representational Faithfulness of Estimated Returns in Pension Plan Accounting Judgments

67 Pages Posted: 28 Aug 2014

See all articles by Ulrich Menzefricke

Ulrich Menzefricke

University of Toronto - Rotman School of Management

Wally Smieliauskas

University of Toronto - Rotman School of Management

Date Written: May 26, 2014

Abstract

This study empirically analyzes over 3300 judgments on the long term and short term usefulness of individual firm pension accounting estimates over ten consecutive years (2001-2010). We find that the point estimates allowed by GAAP create challenges for auditors and do not appear to be useful for economically rational decision making. Moreover, we find that the additional note disclosures of the estimation process may not compensate for the bad accounting that arises from reliance on a faulty estimation process. These findings do not support recent changes to the conceptual framework of financial reporting proposed in the IASB’s July 2013 Discussion Paper. Specifically, de-emphasizing the importance of verifiability and reliability can reduce the usefulness of financial reporting by adding material inaccuracies to accounting estimates of pension costs.

Keywords: judgments on expected returns, audits of accounting estimates, pension asset returns, reliability of discretionary accounting estimates, forecast error, ranges of estimates

JEL Classification: M40, M41, M49

Suggested Citation

Menzefricke, Ulrich and Smieliauskas, Wally, Evidence on the Representational Faithfulness of Estimated Returns in Pension Plan Accounting Judgments (May 26, 2014). Rotman School of Management Working Paper No. 2487527, Available at SSRN: https://ssrn.com/abstract=2487527 or http://dx.doi.org/10.2139/ssrn.2487527

Ulrich Menzefricke

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Wally Smieliauskas (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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