Earnings Management Under IAS 19 –An analysis of the extent to which entities alter assumptions when accounting for employee benefits before and after the amendment of IAS 19

University essay from Göteborgs universitet/Företagsekonomiska institutionen

Abstract: The amendments to the existing standard IAS 19 published in 2011 changed therequirements concerning the reporting of defined benefit plans for public entitiesapplying IFRS, effective as of January 2013 with full retrospective application.The revised standard from 2011 prevent earnings management through thedeferring and concealment of some actuarial gains and losses, but still leavescope for professional assumptions concerning the determination of the discountrate. The purpose of this thesis is to study the extent to which earningsmanagement occurs when accounting for defined benefit plans, before and afterthe amendment of IAS 19. A multiple regression analysis has been carried out intwo different parts, where two different samples are used. We have limited ourscope to Nordic entities in part one, and entities from all over the world listed onmarkets regulated by ESMA in part two. The uniform criterion for the includedentities in both parts is the reporting in accordance with IFRS for defined benefitplans. Part one process the corridor approach in order to discuss circumstancesbefore the amendment of IAS 19, and part two process the discount rate in orderto discuss circumstances both before and after the amendment as well as itseffects on one of few factors still possible to manipulate. We have selected threeindependent variables that represent a selection of entities’ incentives tomanipulate earnings, namely leverage, deficits in pension plans andprofitability. Our major findings indicate that earnings management did occur toa certain extent under the previous standard, and that the amendment seems tohave decreased the use of earnings management when accounting for definedbenefit plans. Our suggestions on further research on the subject is an analysisof the standard with regard to earnings management, carried out with additionalor entirely different earnings management incentives such as ownershipstructure, management’s bonus scheme and degree of corporate governance.

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