The Impact of New Pension Disclosure Rules on Perceptions of Debt

Statement of Financial Account Standard 87 of the Financial Accounting Standards Board (FASB) requires firms to report a pension liability when the accumulated benefit obligations exceed the fair value of the pension plan asset. The FASB felt that footnote disclosure was not an adequate substitution for balance sheet recognition and concluded that footnote disclosure may be adequate for some sophisticated users but not for most users. An experiment, involving 51 bankers and 82 undergraduate accounting students, was conducted to test the FASB's contentions. When the subjects were presented with the pension fund information in the balance sheet, a significantly greater number of subjects included the pension obligation in the numerator of the debt/equity ratio than when the same information was presented as a supplemental note to the balance sheet. The FASB's assertion that supplemental information may not be as useful to less sophisticated users was not supported in the analysis.