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Recognition and Disclosure Reliability: Evidence from SFAS No. 106

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  • PAQUITA Y. DAVIS†FRIDAY
  • CHAO†SHIN LIU
  • H. FRED MITTELSTAEDT

Abstract

This paper examines a fundamental question of interest to researchers and regulators: Does the market treat disclosed financial statement information as if it is less reliable than information recognized in the body of the financial statements? Specifically, we compare the perceived reliability of liabilities for retiree benefits other than pensions (PRBs) disclosed prior to adoption of Statement of Financial Accounting Standards No. 106 (SFAS No. 106) with the perceived reliability of PRB liabilities subsequently recognized under SFAS No. 106. Overall, the evidence is consistent with the market treating disclosed PRB liabilities as less reliable than recognized PRB liabilities and pension liabilities. However, once PRB liabilities are recognized, they do not appear to be any less reliable than pension liabilities. These findings are inconsistent with the Choi, Collins, and Johnson 1997 conclusion that PRB liabilities are inherently less reliable than pension liabilities. The paper also investigates factors that may have contributed to the lower perceived disclosure reliability. Our results suggest that the market perceived PRB liability disclosures to be less reliable when firms provided range disclosures, had higher probabilities of reducing plan benefits, or had lower ratios of retiree to total PRB obligations. These findings suggest that reliability may have been enhanced if more supporting details had been provided in Staff Accounting Bulletin No. 74 disclosures.

Suggested Citation

  • Paquita Y. Davis†Friday & Chao†Shin Liu & H. Fred Mittelstaedt, 2004. "Recognition and Disclosure Reliability: Evidence from SFAS No. 106," Contemporary Accounting Research, John Wiley & Sons, vol. 21(2), pages 399-429, June.
    • Handle: RePEc:wly:coacre:v:21:y:2004:i:2:p:399-429
    DOI: 10.1506/T0VC-Q15Y-W5QV-4UKQ
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    Cited by:

    1. Xiaoyan Cheng & David Smith, 2013. "Disclosure versus recognition: the case of expensing stock options," Review of Quantitative Finance and Accounting, Springer, vol. 40(4), pages 591-621, May.
    2. Jannis Bischof & Ulf Brüggemann & Holger Daske, 2012. "Fair Value Reclassifications of Financial Assets during the Financial Crisis," SFB 649 Discussion Papers SFB649DP2012-010, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    3. Masaki KUSANO & Yoshihiro SAKUMA, 2019. "Recognition versus Disclosure and Audit Fees and Costs:Evidence from Pension Accounting in Japan," Discussion papers e-19-007, Graduate School of Economics , Kyoto University.
    4. Kusano, Masaki, 2020. "Does recognition versus disclosure affect risk relevance? Evidence from finance leases in Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 38(C).
    5. Robert Bloomfield & Mark W. Nelson & Eugene Soltes, 2016. "Gathering Data for Archival, Field, Survey, and Experimental Accounting Research," Journal of Accounting Research, Wiley Blackwell, vol. 54(2), pages 341-395, May.
    6. Hsieh, Su-Jane & Liu, Shuming, 2021. "The cost-of-equity implications of off-balance sheet pension liabilities," Journal of Contemporary Accounting and Economics, Elsevier, vol. 17(1).
    7. Flagmeier, Vanessa, 2017. "The information content of tax loss carryforwards: IAS 12 vs. valuation allowance," arqus Discussion Papers in Quantitative Tax Research 216, arqus - Arbeitskreis Quantitative Steuerlehre.
    8. Kusano, Masaki, 2023. "Does recognition versus disclosure of pension liabilities affect credit ratings? Evidence from Japan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 50(C).
    9. Abraham N. Fried, 2013. "An Event Study Analysis of Statement of Financial Accounting Standards No. 158," Accounting and Finance Research, Sciedu Press, vol. 2(2), pages 1-45, May.
    10. Elkins, Hamilton & Entwistle, Gary, 2018. "A commentary on accounting standards and the disclosure problem: Exploring a way forward," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 33(C), pages 79-89.
    11. Kusano, Masaki & Sakuma, Yoshihiro, 2019. "Effects of recognition versus disclosure of finance leases on audit fees and costs: Evidence from Japan," Journal of Contemporary Accounting and Economics, Elsevier, vol. 15(1), pages 53-68.
    12. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    13. Yiwei Dou & M. H. Franco Wong & Baohua Xin, 2019. "The Effect of Financial Reporting Quality on Corporate Investment Efficiency: Evidence from the Adoption of SFAS No. 123R," Management Science, INFORMS, vol. 67(5), pages 2249-2266, May.
    14. Maik Lachmann & Arnt Wöhrmann & Andreas Wömpener, 2011. "Acquisition and integration of fair value information on liabilities into investors' judgments," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(4), pages 385-410, November.
    15. Alexander, Raquel & Ettredge, Mike & Stone, Mary & Sun, Lili, 2011. "Are mandatory disclosure decisions made strategically? The case of SAB 74 estimates preceding adoption of FIN 48," Research in Accounting Regulation, Elsevier, vol. 23(2), pages 160-166.
    16. Juha Mäki & Antonio Somoza-Lopez & Stefan Sundgren, 2016. "Ownership Structure and Accounting Method Choice: A Study of European Real Estate Companies," Accounting in Europe, Taylor & Francis Journals, vol. 13(1), pages 1-19, April.

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