Financial Reporting and Economic Implications of Statements of Financial Standards No. 132(R) and No. 158

Abstract

Purpose – The purpose of this paper is to address two questions: (1) Did adoption of Statements of Financial Accounting Standards No. 132(R) and No. 158 affect neutrality of the financial reporting with regard to the disclosed expected rate of return on pension assets assumptions, and (2) Did pension asset allocations change in response to the new recognition and disclosure requirements?Design/methodology/approach – The author uses several measures of association between reported expected return and pension assets allocations to assess neutrality of the reported expected rate of return. The series of tests explores changes in correlations between asset allocations and expected rates of return and changes in the implied risk premiums following adoption of Statements No. 132 (R) and No. 158. Granger causality analysis is used to explore the second research question: did pension asset allocations change in response to the new recognition and disclosure requirements?Findings – The empirical results are consistent with improved correspondence between actual portfolio allocations and reported expected rates of return following adoption of Standard No. 132 (R). There were no incremental changes to this correspondence following adoption of Standard No. 158. While the data are consistent with equity allocations changing to a greater extent than expected rates of return following Statement No. 132 (R) adoption, the effect appears short-lived.Originality/value – The overall results suggest that adopting Standard 132(R) may have improved neutrality of the reported expected rate of return. Also, there is no evidence of persistent and systematic structuring of transactions around preferred financial reporting outcomes.