Fair Value Accounting of Pension Liabilities and Discretionary Behavior

Chapter
First Online:
Part of the Advances in Japanese Business and Economics book series (AJBE, volume 6)

Abstract

Room for discretion is allowed in setting the period for amortizing prior service costs due to a reduction in projected benefit obligation (PBO). The aim of this chapter is to clarify the amount of discretion in management’s choice and the factors influencing it. The situation is examined in which the amortization period for prior service costs is set shorter than that for actuarial gains and losses. The results are summarized as follows. (1) The amortization period for prior service costs due to a PBO decrease, in contrast to a PBO increase, tends not to be conservative. (2) Greater discretion is likely exercised in setting the length of the amortization period for prior service costs, compared with that for actuarial gains and losses. (3) These tendencies likely reflect a goal to reach target earnings quickly. (4) It is, however, possible that this behavior can be deterred through monitoring by foreign or institutional investors. The results imply that, with regard to setting the length of the amortization period for prior service costs due to a PBO decrease, there may be a trade-off between the benefit of reaching target earnings and the cost of greater accountability to shareholders.

Keywords

Amortization period of prior service cost Corporate governance Earnings management Retirement benefit 
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Copyright information

© Springer Japan 2014

Authors and Affiliations

  1. 1.Department of Law and PolicyKagoshima UniversityKagoshimaJapan

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