Economic Determinants of the Decision to Voluntarily Adopt Mark-to-Market Accounting for Pension Gains and Losses
59 Pages Posted: 13 Mar 2015 Last revised: 7 Jul 2016
Date Written: June 2016
Since 2010 a number of firms have voluntarily adopted mark-to-market (MTM) accounting for the actuarial gains and losses associated with their defined benefit pension plans. While pension accounting rules have allowed such a choice since 1986, only recently have firms begun to exercise that reporting choice. Adoption of MTM requires firms to immediately report actuarial gains and losses in their income statements, which is in marked contrast to their previous policy which smoothed such gains or losses into income over time. A novel aspect of the change is that adopting firms give up a reporting alternative with a built-in smoothing mechanism in exchange for one that is expected to increase earnings volatility due to the unpredictable effect of uncontrollable market factors on their future MTM adjustments. We find that adoption of MTM pension accounting is driven by a combination of macroeconomic factors (a low interest rate environment), managerial opportunism related to bonus compensation, and firms’ use of non-GAAP earnings disclosures.
Keywords: Accounting Choice, Earnings Management, Pensions, Mark-to-Market Accounting, Fair Value, Income Statement Classification, Non-GAAP Earnings, Macroeconomic Conditions
JEL Classification: M41
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