Recognition versus Disclosure and Managerial Discretion: Evidence from Japanese Pension Accounting

Masaki Kusano

Discussion papers from Graduate School of Economics , Kyoto University

Abstract: In Japan, the current pension accounting standard requires firms to recognize pension items— prior service costs and actuarial gains and losses—in consolidated financial statements; however, firms are still allowed to disclose them in the notes when preparing unconsolidated financial statements. Employing this unique pension accounting rule, I explore whether and how disclosed versus recognized pension liabilities influence managerial discretion regarding pension assumptions. Recognition firms, those that recognize the previously disclosed pension items on the balance sheet, choose higher discount rates than disclosure firms, those that still disclose them in their notes. In particular, in case of more debt- contracting incentives, recognition firms are more likely to exercise their discretion over discount rates than disclosure firms. Overall, my results suggest that firms underestimate pension liabilities by using pension assumptions when pension recognition rules are mandated.

Keywords: Recognition versus Disclosure; Managerial Discretion; Pension Accounting; Discount Rate (search for similar items in EconPapers)
JEL-codes: M41 M48 (search for similar items in EconPapers)
Pages: 46
Date: 2022-10
New Economics Papers: this item is included in nep-acc and nep-age
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