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

Abstract

The amendments to the existing standard IAS 19 published in 2011 changed the requirements concerning the reporting of defined benefit plans for public entities applying IFRS, effective as of January 2013 with full retrospective application. The revised standard from 2011 prevent earnings management through the deferring and concealment of some actuarial gains and losses, but still leave scope for professional assumptions concerning the determination of the discount rate. The purpose of this thesis is to study the extent to which earnings management occurs when accounting for defined benefit plans, before and after the amendment of IAS 19. A multiple regression analysis has been carried out in two different parts, where two different samples are used. We have limited our scope to Nordic entities in part one, and entities from all over the world listed on markets regulated by ESMA in part two. The uniform criterion for the included entities in both parts is the reporting in accordance with IFRS for defined benefit plans. Part one process the corridor approach in order to discuss circumstances before the amendment of IAS 19, and part two process the discount rate in order to discuss circumstances both before and after the amendment as well as its effects on one of few factors still possible to manipulate. We have selected three independent variables that represent a selection of entities’ incentives to manipulate earnings, namely leverage, deficits in pension plans and profitability. Our major findings indicate that earnings management did occur to a certain extent under the previous standard, and that the amendment seems to have decreased the use of earnings management when accounting for defined benefit plans. Our suggestions on further research on the subject is an analysis of the standard with regard to earnings management, carried out with additional or entirely different earnings management incentives such as ownership structure, management’s bonus scheme and degree of corporate governance.