Market-Related Values and Pension Accounting

53 Pages Posted: 2 Feb 2005

See all articles by Paquita Y. Davis-Friday

Paquita Y. Davis-Friday

Zicklin School of Business; City University of New York - Stan Ross Department of Accountancy

Jeffrey S. Miller

University of Notre Dame - Department of Accountancy

H. Fred Mittelstaedt

University of Notre Dame

Date Written: January 2005

Abstract

Statement of Financial Accounting Standards No. 87 - Employers' Accounting for Pensions (SFAS No. 87) and Statement of Financial Accounting Standards No. 106 - Employers' Accounting for Postretirement Benefits other than Pensions (SFAS No. 106) allow firms to compute the expected return on plan assets by multiplying rate of return assumptions by fair values or smoothed fair values (moving averages of fair values) of plan assets. In an equity market with large price changes, the smoothed fair value of plan assets can differ considerably from the fair value. For example, during the strong bull market of the late 1990s, fair values exceeded smoothed fair values by more than 20 percent for some firms. This study examines the financial statement effect of using smoothed fair values instead of fair values and whether the market adjusts for these different accounting choices. We find that a majority of our sample uses some form of smoothed fair value to compute expected returns. Further, smoothing reduces earnings per share by more than 4.0% (9.8%) for the upper quarter (tenth) of our firms depending on the year. We find limited evidence that the market adjusts equity prices for income differences caused by firms using smoothed fair values instead of fair values.

Keywords: Disclosure, Valuation, Pensions and Postretirement Benefits

JEL Classification: M41, M44, G14, J32

Suggested Citation

Davis-Friday, Paquita Y. and Miller, Jeffrey S. and Mittelstaedt, H. Fred, Market-Related Values and Pension Accounting (January 2005). Available at SSRN: https://ssrn.com/abstract=656462 or http://dx.doi.org/10.2139/ssrn.656462

Paquita Y. Davis-Friday (Contact Author)

Zicklin School of Business ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States
646-312-3048 (Phone)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3048 (Phone)
646-312-3161 (Fax)

Jeffrey S. Miller

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States

H. Fred Mittelstaedt

University of Notre Dame ( email )

374 Mendoza College of Business
Notre Dame, IN 46556-0399
United States
574-631-5087 (Phone)
574-631-5255 (Fax)

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