Discretionary Accounting Choices: The Case of IAS 19 Pension Accounting

Abstract

Based on a sample of 3,207 firm-year observations for the years 2005 to 2013, we investigate how stock-listed companies in France, Germany and the United Kingdom use two discretionary choices in their accounting for defined benefit pension plans under International Accounting Standard 19 Employee Benefits. We first analyse companies’ decision whether to voluntarily early adopt the equity method of accounting for actuarial gains and losses. Second, we analyse companies’ choice to present pension interest cost and expected return on plan assets, or, in 2013, net pension interest cost, in operating or financial income. Our findings provide evidence that companies’ decisions to early adopt the equity method in 2005, the first year this accounting choice was available, were motivated by short-term effects on equity. Our analyses also indicate that the choice regarding where to present interest cost and expected return on plan assets in the income statement is associated with the resulting effect on EBIT. Finally, we document country-specific differences in the use of the discretion provided under IAS 19, suggesting that discretionary pension accounting choices may impede comparability.

Keywords: IAS 19, Pension accounting, Defined benefit pension plans, Actuarial gains/losses, Accounting choice

JEL Classification: M41