THE DETERMINANTS OF ACTUARIAL ASSUMPTIONS UNDER PENSION ACCOUNTING DISCLOSURES

Abstract

Corporate managers make several assumptions such as the discount rate and the rate of salary progression in calculating the periodic pension expense and pension liabilities. The choice of these assumptions can pose significant problems for financial reporting. This paper examines the following two questions concerning the choice of these assumptions. First, what factors drive these assumptions? and second, are these assumptions dependent on each other? Based on a sample of 300 observations, we find that leverage and pension plan funding play important roles in the choice of these assumptions. More importantly, it appears that these choices are related. The results of our study have important implications for analysts and accounting standard setters.