Discretion in accounting for pensions under IAS 19: using the ‘magic telescope’?

Mark Billings*, Christopher O’Brien, Margaret Woods, Dev Vencappa

*Corresponding author for this work

Research output: Contribution to journalArticle

Abstract

We use a panel data set of UK-listed companies over the period 2005–2009 to analyse the actuarial assumptions used to value pension plan liabilities under IAS 19. The valuation process requires companies to make assumptions about financial and demographic variables, notably discount rate, price inflation, salary inflation and mortality/life expectancy of plan members/beneficiaries. We use regression analysis to analyse the relationships between these key assumptions (except mortality, where disclosures are limited) and company-specific factors such as the pension plan funding position and duration of pension liabilities. We find evidence of selective ‘management’ of the three assumptions investigated, although the nature of this appears to differ from the findings of US authors. We conclude that IAS 19 does not prevent the use of managerial discretion, particularly by companies whose pension plan funding positions are weak, thereby reducing the representational faithfulness of the reported pension figures. We also highlight that the degree of discretion used reflects the extent to which IAS 19 defines how the assumptions are to be determined. We therefore suggest that companies should be encouraged to justify more explicitly their choice of assumptions.

Original languageEnglish
Pages (from-to)123-143
JournalAccounting and Business Research
Volume47
Issue number2
Early online date11 Jul 2016
DOIs
Publication statusPublished - 23 Feb 2017

Fingerprint

Pensions
Discretion
Pension plans
Funding
Inflation
Liability
Mortality
Salary
Demographic variables
Listed companies
Disclosure
Life expectancy
Financial variables
Panel data
Specific factors
Managerial discretion
Discount rate
Regression analysis

Bibliographical note

This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 11/07/16, available online: http://www.tandfonline.com/0.1080/00014788.2016.1205967

Keywords

  • actuarial assumptions
  • IAS 19
  • liability valuation
  • managerial discretion

Cite this

Billings, Mark ; O’Brien, Christopher ; Woods, Margaret ; Vencappa, Dev. / Discretion in accounting for pensions under IAS 19 : using the ‘magic telescope’?. In: Accounting and Business Research. 2017 ; Vol. 47, No. 2. pp. 123-143.
@article{84f6a2d92dc34af9bd257ba2cc41ec6e,
title = "Discretion in accounting for pensions under IAS 19: using the ‘magic telescope’?",
abstract = "We use a panel data set of UK-listed companies over the period 2005–2009 to analyse the actuarial assumptions used to value pension plan liabilities under IAS 19. The valuation process requires companies to make assumptions about financial and demographic variables, notably discount rate, price inflation, salary inflation and mortality/life expectancy of plan members/beneficiaries. We use regression analysis to analyse the relationships between these key assumptions (except mortality, where disclosures are limited) and company-specific factors such as the pension plan funding position and duration of pension liabilities. We find evidence of selective ‘management’ of the three assumptions investigated, although the nature of this appears to differ from the findings of US authors. We conclude that IAS 19 does not prevent the use of managerial discretion, particularly by companies whose pension plan funding positions are weak, thereby reducing the representational faithfulness of the reported pension figures. We also highlight that the degree of discretion used reflects the extent to which IAS 19 defines how the assumptions are to be determined. We therefore suggest that companies should be encouraged to justify more explicitly their choice of assumptions.",
keywords = "actuarial assumptions, IAS 19, liability valuation, managerial discretion",
author = "Mark Billings and Christopher O’Brien and Margaret Woods and Dev Vencappa",
note = "This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 11/07/16, available online: http://www.tandfonline.com/0.1080/00014788.2016.1205967",
year = "2017",
month = "2",
day = "23",
doi = "10.1080/00014788.2016.1205967",
language = "English",
volume = "47",
pages = "123--143",
journal = "Accounting and Business Research",
issn = "0001-4788",
publisher = "Routledge",
number = "2",

}

Discretion in accounting for pensions under IAS 19 : using the ‘magic telescope’? / Billings, Mark; O’Brien, Christopher; Woods, Margaret; Vencappa, Dev.

In: Accounting and Business Research, Vol. 47, No. 2, 23.02.2017, p. 123-143.

Research output: Contribution to journalArticle

TY - JOUR

T1 - Discretion in accounting for pensions under IAS 19

T2 - using the ‘magic telescope’?

AU - Billings, Mark

AU - O’Brien, Christopher

AU - Woods, Margaret

AU - Vencappa, Dev

N1 - This is an Accepted Manuscript of an article published by Taylor & Francis in Accounting and Business Research on 11/07/16, available online: http://www.tandfonline.com/0.1080/00014788.2016.1205967

PY - 2017/2/23

Y1 - 2017/2/23

N2 - We use a panel data set of UK-listed companies over the period 2005–2009 to analyse the actuarial assumptions used to value pension plan liabilities under IAS 19. The valuation process requires companies to make assumptions about financial and demographic variables, notably discount rate, price inflation, salary inflation and mortality/life expectancy of plan members/beneficiaries. We use regression analysis to analyse the relationships between these key assumptions (except mortality, where disclosures are limited) and company-specific factors such as the pension plan funding position and duration of pension liabilities. We find evidence of selective ‘management’ of the three assumptions investigated, although the nature of this appears to differ from the findings of US authors. We conclude that IAS 19 does not prevent the use of managerial discretion, particularly by companies whose pension plan funding positions are weak, thereby reducing the representational faithfulness of the reported pension figures. We also highlight that the degree of discretion used reflects the extent to which IAS 19 defines how the assumptions are to be determined. We therefore suggest that companies should be encouraged to justify more explicitly their choice of assumptions.

AB - We use a panel data set of UK-listed companies over the period 2005–2009 to analyse the actuarial assumptions used to value pension plan liabilities under IAS 19. The valuation process requires companies to make assumptions about financial and demographic variables, notably discount rate, price inflation, salary inflation and mortality/life expectancy of plan members/beneficiaries. We use regression analysis to analyse the relationships between these key assumptions (except mortality, where disclosures are limited) and company-specific factors such as the pension plan funding position and duration of pension liabilities. We find evidence of selective ‘management’ of the three assumptions investigated, although the nature of this appears to differ from the findings of US authors. We conclude that IAS 19 does not prevent the use of managerial discretion, particularly by companies whose pension plan funding positions are weak, thereby reducing the representational faithfulness of the reported pension figures. We also highlight that the degree of discretion used reflects the extent to which IAS 19 defines how the assumptions are to be determined. We therefore suggest that companies should be encouraged to justify more explicitly their choice of assumptions.

KW - actuarial assumptions

KW - IAS 19

KW - liability valuation

KW - managerial discretion

UR - http://www.tandfonline.com/10.1080/00014788.2016.1205967

UR - http://www.scopus.com/inward/record.url?scp=84978105949&partnerID=8YFLogxK

U2 - 10.1080/00014788.2016.1205967

DO - 10.1080/00014788.2016.1205967

M3 - Article

AN - SCOPUS:84978105949

VL - 47

SP - 123

EP - 143

JO - Accounting and Business Research

JF - Accounting and Business Research

SN - 0001-4788

IS - 2

ER -