Hidden liabilities, understated expenses, and discretionary management
assumptions make pension accounting controversial. Previous accounting standards
allowed companies with underfunded pension plans to accumulate pension
liabilities off the balance sheet while frequently reporting a net pension asset
on the balance sheet. A new standard improves transparency by requiring that the
pension’s funded status be reported on the balance sheet. In assessing the
impact of the new standard, this study finds that it creates profound reductions
in owners’ equity for many U.S.-listed companies. Pension cost smoothing
and three primary pension assumptions—the expected rate of return on plan
assets, discount rate, and expected rate of increase in employee
compensation—continue to be controversial.