The Usefulness of Accounting Information Resulting from Standard-Setting Compromises: The Pension Accounting Case

What is it about?

The current pension accounting model that is used by the vast majority of U.S. firms resulted from many compromises made by managers, investors, standard-setters, and other affected parties. As a result of these compromises, pension accounting standards are highly complex and have been among the most controversial standards over the past decades. One of the main criticisms of the current model is that pension-related gains/losses and the costs of other plan amendments do not affect earnings until periods subsequent to the economic events that engendered them. Researchers and standard setters question the usefulness of the information produced by this accounting model, especially "reclassification adjustments," which are the adjustments made to current period earnings that are generated by prior-period economic events. Leveraging hand-collected data, we provide empirical evidence relevant to the debate among accounting scholars and standard-setters over the continued use of a pension accounting model that resulted from standard-setting compromises.

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