Evidence on the Representational Faithfulness of Estimated Returns in Pension Plan Accounting Judgments

This study empirically analyzes over 3300 judgments on the long term and short term usefulness of individual firm pension accounting estimates over ten consecutive years (2001-2010). We find that the point estimates allowed by GAAP create challenges for auditors and do not appear to be useful for economically rational decision making. Moreover, we find that the additional note disclosures of the estimation process may not compensate for the bad accounting that arises from reliance on a faulty estimation process. These findings do not support recent changes to the conceptual framework of financial reporting proposed in the IASB's July 2013 Discussion Paper. Specifically, de-emphasizing the importance of verifiability and reliability can reduce the usefulness of financial reporting by adding material inaccuracies to accounting estimates of pension costs