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

Abstract

SYNOPSIS Most U.S. employers sponsoring defined benefit pension plans use an accounting model that balances managers' preference for income smoothing with the FASB's belief in fair value measurement. This model, which we refer to as the deferral/reclassification model, requires current period gains/losses and costs of plan amendments to be closed to accumulated other comprehensive income (AOCI) and reclassified to earnings in subsequent periods (RECLASS). The usefulness of information produced by this model is questioned, especially RECLASS adjustments, which affect earnings in periods subsequent to the economic events that engendered them. This study examines the usefulness of information produced by the deferral/reclassification model. We find that AOCI and RECLASS amounts demonstrate predictive ability and exhibit value relevance. Additional analyses compare the usefulness of information produced by the deferral/reclassification and fair value models. Our results suggest that although the deferral/reclassification model is not conceptually defensible, the information it produces appears to be useful. JEL Classifications: M40; M41.