So Similar, yet So Different: Comparing the US GAAP and IFRS Experience at Eliciting Greater Transparency on Pension Asset Disclosures

Abstract

We examine whether regulatory mandates intended to improve disclosure can lead to greater transparency in the absence of a change in preparer incentives to obfuscate that disclosure. We exploit a sequence of two otherwise similar regulatory changes, one under US GAAP and the other under IFRS, which have one key difference—while both changes mandate improvements to the disclosure of pension asset allocation, only the latter removes preparer incentives to disclose opaquely (by eliminating a key reporting assumption—the expected rate of return on pension assets or ERR, which can be more effectively manipulated if asset allocation remains opaque). We construct two difference-in-difference research designs to examine and compare disclosure outcomes for both changes. We find that the IFRS disclosure standard is effective at improving pension asset transparency as intended, whereas the US standard—which only mandates better disclosure while leaving unchanged preparers’ incentives to obfuscate—is not as effective at improving pension asset transparency. Further tests isolate the IFRS improvement to firms likely to have inflated their ERRs before the change. Overall, our study highlights the potential for standard-setters to learn from each other, by comparing and contrasting their regulatory experience on a specific accounting topic with clearly identifiable incentives.

Keywords: Accounting regulation, standard-setting, defined benefit pension, IAS 19R, SFAS 132R

JEL Classification: M40, M41, M48