Earnings Management Under Pension Accounting Standards: SFAS 87 versus APB 8

Abstract

This study presents evidence indicating a greater influence of accounting incentives on reported pension cost under the current pension accounting standard, Statement of Financial Accounting Standards Number 87 (SFAS 87), relative to the preceding standard, Accounting Principles Board Opinion Number 8 (APB 8). Accounting incentives refer to managerial incentives arising from income smoothing and contractual arrangements that use accounting numbers. This study uses the difference between the income reported under SFAS 87 and APB 8 in the adoption year as a measure that incorporates the difference between the discretionary components of pension cost under the two regimes and shows that this difference is associated with proxies for managers' accounting incentives.

This finding has important implications for accounting regulatory agencies. Even though SFAS 87 appears to have been successful in moving pension accounting away from cash basis and toward accrual basis, the increased influence of accounting incentives may have hampered the comparability across firms of the reported pension numbers and hence their usefulness.