Managers' use of FASB's multi-year transition periods : the case of pensions

Abstract

This dissertation investigates changes made by early and late adopters prior to adoption of SFAS No. 87: Employers' Accounting for Pensions. The research question studied is whether late adopters use the transition period provided by the Financial Accounting Standards Board (FASB) to improve the relationship between pension assets and pension obligations which must be disclosed upon adoption. Firms are identified as either early, middle, or late adopters, and the mean funding levels of the three groups are compared. As predicted, the earlier the firm adopts during the transition period, the better-funded the pension plan. Middle and late adopters also significantly increase their funding levels prior to adoption, while the funding level of the early adopters decreases slightly during the same time period. Since the financial status of the firm may, in part, determine the way in which the firm can use the transition period, the three groups of adopters are divided into two groups, financially healthy firms and financially troubled firms, to test this relationship. There is a greater percentage of troubled firms in the middle and late adoption groups than in the early adoption group. The financial health of the firm, however, does not appear to affect the pension plan funding level significantly. In addition, no significant difference is found between the changes in funding made by the healthy and troubled firms during the transition period. Next, three ways in which the firm could increase the funding level of its pension plan are investigated. There is evidence that managers use increases in the discount rate to increase the funding level of the pension plan, but no evidence is found to support the hypotheses that additional cash is added to the plan or that pension plan termination is used to reduce the liability. This dissertation uses Department of Labor data rather than financial statement information to test what occurs prior to adoption. This data provides a new view of managers' behavior during a transition period.