Stakeholders’ Demand for Conservative Reporting: An Exploration of Accounting for Pension Liabilities

49 Pages Posted: 22 Aug 2017

See all articles by Divya Anantharaman

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems

Darren Henderson

Wilfrid Laurier University

Date Written: August 15, 2017

Abstract

We examine whether conservatism in standard setting serves the information needs of primary user groups in a setting where liability measurement is complex and uncertain. Current US GAAP on pension liability measurement straddles two competing perspectives: a going-concern perspective that incorporates future salary increases into estimates of benefit cash flows (PBO), but switches to a settlement perspective for present valuing by using a high-quality corporate bond rate (AA rate). This yields a GAAP pension liability measure that is more conservative than either a fully going-concern-based measure, which uses PBO discounted at a rate that reflects future cash flows (the expected return on pension assets—EROA), or a fully settlement-based measure, which excludes future salary increases (ABO) and discounts using the AA rate.

We find:

(1) equity investor valuations imply the use of EROA discounting;

(2) debt investor assessments imply a settlement perspective of AA rate discounting and ABO; and

(3) current GAAP proves to be overly conservative for both primary user groups. Our study highlights a cost of conservatism in pension liability measurement: it detracts from the value- and credit-relevance of financial statements.

Keywords: conservatism, pension accounting, discount rates, actuarial assumptions

JEL Classification: M41

Suggested Citation

Anantharaman, Divya and Henderson, Darren, Stakeholders’ Demand for Conservative Reporting: An Exploration of Accounting for Pension Liabilities (August 15, 2017). Available at SSRN: https://ssrn.com/abstract=3020879 or http://dx.doi.org/10.2139/ssrn.3020879

Divya Anantharaman

Rutgers, The State University of New Jersey - Accounting & Information Systems ( email )

1 Washington Park
#916
Newark, NJ 07102
United States

Darren Henderson (Contact Author)

Wilfrid Laurier University ( email )

75 University Ave W
waterloo, ontario N2L 3C5
Canada

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