So Similar, yet So Different: Comparing the US GAAP and IFRS Experience at Eliciting Greater Transparency on Pension Asset Disclosures

We examine whether (and to what extent) accounting regulation intended to improve disclosure can lead to higher disclosure quality in the absence of a change in preparer incentives. We exploit a sequence of two similar regulatory changes, one under US GAAP and the other under IFRS, which have one key difference — while both changes mandate improvements to the disclosure of pension asset allocation, only the latter removes preparer incentives to disclose opaquely (by eliminating a key reporting assumption–the expected rate of return on pension assets or ERR, which can be more effectively manipulated if asset allocation remains opaque). We construct two difference-in-difference research designs to examine the difference in disclosure outcomes between these two changes. We find that the IFRS disclosure standard is effective at improving pension asset transparency as intended, whereas the US standard — which only mandates better disclosure while leaving unchanged preparers’ incentives to disclose or obfuscate — is not as effective at improving pension asset transparency. Our findings suggest that accounting standards are more effective at improving financial reporting quality when standards are designed so as to minimize the incentives built in to report favorable accounting numbers.