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Assuming the Worst: The Shifting Sands of Pension Accounting


  • Alistair BYRNE

    (Towers Watson Actuarial Consulting, London, United Kingdom)

  • Iain CLACHER

    () (University of Leeds, United Kingdom)

  • David HILLIER

    (University of Strathclyde, United Kingdom)

  • Allan HODGSON

    (University of Queensland Business School, Australia)


Accounting for defined benefit pension plans is complex, and given the magnitude of many of these schemes relative to their corporate sponsor, understanding whether pension disclosures are value relevant is key to improving the quality of financial reports. The application of fair value accounting for pensions allows for a high level of managerial discretion with respect to ex ante accounting choices. Utilizing a sample of firms that apply FRS-17, we examine the main determinants of the assumptions managers use to arrive at pension scheme valuations. We find significant differences in the stated assumptions across companies, auditors and actuaries. Further, managers display considerable variation in conservatism when implementing fair value accounting, and this variation is related to scheme-specific characteristics, such as asset allocation and pension plan solvency. Crucially, pension disclosures are found to be value relevant, therefore, managers are able to present pension disclosures in a more favorable light, and this is reflected in prices. As a result of the observed inconsistency in reporting across firms, and the value relevance of these disclosures, this brings into question the efficacy of fair value accounting for assessing pension values.

Suggested Citation

  • Alistair BYRNE & Iain CLACHER & David HILLIER & Allan HODGSON, 2013. "Assuming the Worst: The Shifting Sands of Pension Accounting," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 12(2), pages 190-212, June.
  • Handle: RePEc:ami:journl:v:12:y:2013:i:2:p:190-212

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    Pension Accounting Standards; FRS-17 Pensions Valuation; Managerial Pension Discretion; Pensions and Fair Value Accounting;

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading


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