Financial reporting standards for pensions: The relationship between financial reporting and cash flow variables and changes in the interest rate assumption
Duffy, Wendy Ann
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Permalink
https://hdl.handle.net/2142/19910
Description
Title
Financial reporting standards for pensions: The relationship between financial reporting and cash flow variables and changes in the interest rate assumption
Author(s)
Duffy, Wendy Ann
Issue Date
1989
Doctoral Committee Chair(s)
McKeown, James C.
Department of Study
Business Administration, Accounting
Discipline
Business Administration, Accounting
Degree Granting Institution
University of Illinois at Urbana-Champaign
Degree Name
Ph.D.
Degree Level
Dissertation
Keyword(s)
Business Administration, Accounting
Language
eng
Abstract
An issue that has long been of interest in financial accounting research is the question of whether firms take advantage of areas in which flexibility exists in financial reporting standards in order to improve reported performance in the annual financial statements. In the early 1980s, a significant number of firms changed the interest rate assumption used in the computation of pension expense as reported on the income statement, enabling many firms to report higher net income.
These changes were criticized in a number of publications that suggested that firms were motivated by the resulting financial reporting benefits and that in many cases the changes were detrimental to the financial status of the pension plan. However, a financial reporting motivation for these changes was purely speculative. Changes in the interest rate assumption have other effects, and other rationales for such changes can be advanced.
The objective of this study was to determine whether a statistical relationship existed between financial reporting variables and variables related to changes in the interest rate assumption. In addition, alternative explanations of these changes were considered. The study identified firms that reported a change in the interest rate assumption used for pension expense determination during the four year period from 1981 through 1984. Multiple regression models were used to determine whether variables that reflected the change in the interest rate assumption were associated with any of four financial reporting variables and/or any of three variables related to the cash flow implications of the change.
The results of the regression analyses were mixed in that the explanatory power of the models varied between years and the same variables were not consistently significant. Nevertheless, the models provided some support for the existence of relationships between the change variables and both financial reporting and cash flow variables. Thus, the results of the study did not refute the possibility of a financial reporting motivation for changes in the interest rate assumption. However, the significance of some of the cash flow variables indicates that financial reporting considerations were not the only factors associated with changes in the interest rate assumption.
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