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A study of IAS 19 due process: Respondents disapprove the IASB’s proposal for new discount rate assumptions

Samira Demaria1, Dominique Dufour2, Moïse Louisy-Louis3 (corresponding author), Philippe Luu4

Abstract:

This paper examines the 227 comment letters received by the International Accounting Standard Board (IASB) in response to the exposure draft describing the revision of IAS 19, the main pronouncement stipulating the accounting of pension schemes. The paper focuses specifically on the proposition of the IASB for a single discount rate for the valuation of defined benefit obligations and plan assets. Adopting a content analysis method, the paper highlights relationships between respondents’ characteristics and comments. Our analysis reveals contrasting viewpoints between users and preparers, with the latter group in majority disapproving the IASB’s proposal.

Keywords: IAS 19, due process, discount rate, expected rate of return, net interest approach

1Assistant professor, Nice-Sophia Antipolis University, GREDEG CNRS UMR 6227 demaria@unice.fr

2Assistant professor, Nice-Sophia Antipolis University, GRM EA 4711, domduf@wanadoo.fr

3Assistant professor – Ph D abd, International University of Monaco, GRM EA 4711, mlouisylouis@monaco.edu

4Statistical engineer, Nice-Sophia Antipolis University, GRM EA 4711, luu@unice.fr

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1. Introduction

For the past 40 years, pension accounting has been a major construction site mainly because it has been historically difficult to reconcile the interests of various groups of stakeholders. Most recently, the International Accounting Standard Board (IASB) has focused on reformatting IAS 19, Employee Benefits, the main pronouncement relating to the accounting for defined pension obligations. Acknowledging stakeholders’ pressing demands for a thorough revision of IAS 19, as evidenced by Hamacher and Pozen (2012), Jackson (2012), Jenkins (2011), and Woolfe (2012), the Board initiated in July 2006 a due process which lasted about five years and generated a sizeable number of comment letters from various interest groups as pension accounting represents a strategic issue for both private and public entities. Indeed, Sir David Tweedie, IASB Chairman, recognizes the magnitude of the financial stakes when stating that “accounting for pensions is a complex area of huge importance. The total liability for 80 of the top companies around the world alone is estimated to be around £700 billion. In some cases, the pension liability even exceeds the market capitalisation of the company” IASB (2008).

Specifically, Picconi (2006) identifies the core issues here: “a complex system of pension accounting,” impacting both financial performance and financial position, and “the fact that small changes in assumptions can result in large changes in pension value.” Specifically, Picconi refers to the discount rate used in the valuation of pension liabilities. Directly extending from the concept of time value of money, the discount rate is used to estimate at the balance sheet date the amount (i.e. the present value commonly referred to as PV) of pension obligation which will be paid to beneficiaries in future periods. Furthermore, discount rate and PV are inversely proportional and a slight change in the discount rate can cause significant change in PV and therefore on the reporting entity’s leverage and ability to meet debt covenants. As a result, the paper addresses the technicality of IAS 19 and examines the political activity that surrounds the due process, for which Tutticci (1994) believes that “submissions on exposure drafts are the most observable form of lobbying and have formed the main basis for previous lobbying research. This study adopts methods of content analysis employed by Aerts (2005), Larson (2008) Chatham et al. (2010).

The purpose of this paper is twofold. First, the paper reviews the main conceptual issues that characterize pension accounting. Specifically, the paper describes the central role played by the discount rate and reveals the conceptual issues raised by the IASB’s new discount rates assumptions (the so-called “net interest approach”). Second, the paper provides a statistical review of respondents’ characteristics and affiliation who participated in the IAS 19 due process. Our analysis shows that users and preparers adopt diverging perspective in regard to the IASB’s proposal. We evidence that those who approve the proposal argue for its simplicity whereas those who disapprove explain that the revised standard fails to address the fundamental issues raised by the accounting of defined benefit pension plans.

The paper is structured into six sections described as follows: in addition to the introductory section, section 2 overviews the challenging historical background around pension accounting, section 3 describes the development of the research questions, section 4 details the research design, section 5 reports the study’s results, section 6 discusses the results, and the final section draws concluding remarks and provides direction for further research.

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2. Background

2.1. Due process

The IASB develops international standards through a public consultative process which seeks the involvement of stakeholders, both individuals and organizations, from around the world. All standard or amendment to existing standard must go through this procedure (an exception to this rule was brought by the 2007-2010 financial crisis which led to the revision of IAS 39). According to Richardson and Eberlein (2011) the due process “promises to counter-balance the arbitrariness of participation rules that results from the self-mandated character of private standard-setting.” The IASB due process comprises six stages, two of which are said to be public stages, leading to the publication of a Discussion Paper (DP) and an Exposure Draft (ED), allowing interest groups to express their views within a given period of time (see the “IASB Due Process Handbook” for further details (IFRS foundation, 2012).

The first official text, Exposure draft E16 entitled Accounting for Retirement Benefits in Financial Statements of Employers, was released in April 1980 by the International Accounting Standards Committee (IASC). Shortly after, the first version of IAS 19 was published as IAS 19, Accounting for Retirement Benefits in Financial Statements of Employers. The below exhibit shows the main events and pronouncements, that have influenced the development of the accounting treatment of pension obligations since 1980.

INSERT EXHIBIT 1 ABOUT TIMELINE OF GENESIS AND REVISIONS OF IAS 19 HERE

The diagram also shows that the development (and subsequent revisions) of pension accounting rules has occurred in a nonlinear fashion, with intense activity in recent years. The Board reopened the revision of IAS 19 in March 2013 when it introduced a new ED1, few months after the 2006/2011 revision became effective in January 2013. This clearly indicates that the revision of pension accounting rules is a lengthy and difficult task.

IAS 19 deals with the methods of recognition and measurement of employee benefits. These are defined by the IASB as “all forms of consideration given by an entity for services rendered by employees” (IAS 19 § 7). In particular, post-employment benefit plans include i) defined contribution plans under which an employer “pays fixed contribution into a separate entity (a fund) and will have no legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits,” and ii) defined benefit plans which are succinctly viewed as “plans other than defined contributions” (IAS19 §7). As a result, the accounting for defined contribution plans is rather straightforward. In contrast, the accounting for

1 The IASB announced on March 25, 2013 that in order to address concerns raised about the 2011 revised IAS 19 (specifically about the accounting for contributions for employees and third parties to defined benefit plans), it had a new Exposure Draft opened for comments until July 25, 2013.

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defined benefit plans requires more sophisticated methodologies and the formulation of a complex set of long-term estimations and/or assumptions. The main reason for this has to do with the fact that an employer promises to make pension payments (according to a specific contractual arrangement or formula) to employees after their retirement. In consequence, the employer retains both the investment and actuarial risks in managing its pension obligations (investment risk arises when return on plan assets may not be sufficient to meet expected benefits and actuarial risk surfaces when benefits fall short of expected needs).

For the purpose of this paper, we have focused on the due process implemented in relation to the revision of IAS 19, Employee Benefits, which started in 2006 and ended in 20112. One of the main issues that the standard-setter has sought to address has to do with the fact that IAS 19 suffers from a lack of comparability and transparency (especially because of the multiplication of recognition options). The objective of the 2006-2011 due process was to provide more transparency and to simplify the accounting for employee benefits. The revision of IAS 19 lasted about five years, from 2006 to 2011. The below timeline illustrates the various successive events that the IASB has implemented since 2006 and until the revised standard became effective in January 2013.

INSERT EXHIBIT 2 ABOUT IAS 19 CALENDAR HERE

In response to the ED published in April 2010, the IASB received 227 comment letters (vs. 150 correspondences for the DP phase), whose worldwide signatories are representatives of corporations, national standard-setters, academics, or interest groups. The document invited respondents to present their viewpoint in relation to 17 questions that could be grouped according to three main themes: recognition3 (especially immediate vs. deferred recognition), presentation (in particular in relation to gains and losses) and disclosure.

In this paper, rather than addressing all questions raised by the standard-setter, we decided to focus on one strategic question which deals with the determination of the discount rate. Question 5 of the ED is formulated as follows: The exposure draft proposes that the finance cost component should comprise net interest on the net defined benefit liability (asset) determined by applying the discount rate specified in paragraph 784 to the net defined benefit liability (asset). 2 Specifically, we have concentrated on the ED stage as it permits stakeholders to provide answers to specific questions. It is important to note that irrespective of whether the IASB has published a DP, an ED is the IASB’s main vehicle for consulting the public. Unlike a DP, an ED sets out a specific proposal in the form of a proposed standard (or amendment to an existing standard). As a result, it is expected that comments from the ED stage are more thorough and pertinent. Although the DP phase permits respondents to express views on a larger range of questions, focusing on the ED phase allows us to understand whether the Board really takes into the specific rationale put forward by respondents.

3 Questions relating to recognition are shown in Appendix 1.

4 IAS 19 paragraph 78, p.20: “The rate used to discount post-employment benefit obligations (both funded and unfunded) shall be determined by reference to market yields at the statement of financial position date on high quality corporate bonds. In countries where there is no deep market in such bonds, the market yields (at the

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As a consequence, it eliminates from IAS 19 the requirement to present an expected return on plan assets in profit or loss. Should net interest on the net defined benefit liability (asset) be determined by applying the discount rate specified in paragraph 78 to the net defined benefit liability (asset)? Why or why not? If not, how would you define the finance cost component and why? The impact of the discount rate and changes proposed by the IASB are further discussed in the next sections.

2.2. IAS 19 and Discount Rate

INSERT EXHIBIT 3 ABOUT MAJOR CHANGES TO IAS 19 HERE

Prior to 2011, the standard-setter indicates that “actuarial assumptions shall be unbiased and mutually comparable” and explains that unbiased means “neither imprudent nor excessively conservative.” In practice, there is little that can be said about an entity’s choice of mortality rate, turnover, or other demographic variables (which should reflect the opinion of actuarial expert(s)). Of course, there should be some consistency over time and with assumptions made by similar entities evolving in comparable conditions. Discrepancies are even more flagrant when entities make financial assumptions, especially regarding the discount rate. Paragraph 78 prescribes that the discount rate should be “determined by reference to market yields at the end of the reporting period on high quality corporate bond,” otherwise “the market yields on government bonds shall be used” (IFRS Foundation, IAS 19, p. A611). The most important weakness in such a method is that the discount rate is used to merely reflect the concept of time value of money5 but fails to account for an entity’s credit risk (which renders the choice of discount rate even more questionable since yields on government bonds can be used as proxies). As a matter of fact, Napier (2009) rightly argues that “the appropriate discount rate to use has been a major issue of controversy in pension accounting over the past 25 years.” More specifically, Napier reveals the limitations in relying on corporate bond rates: “the bond rate could be considered as the aggregate of: (i) the real risk-free rate (the pure time value of money); (ii) expected inflation; and (iii) the average expected rate of default. Although the first two components are relevant, there is no obvious link between the probability of default on corporate bonds and the measurement uncertainties relating to pension liabilities” (Napier, 2009, p.243).

statement of financial position date) on government bonds shall be used. The currency and term of the corporate bonds or government bonds shall be consistent with the currency and estimated term of the post-employment benefit obligations.”

5 The definition of interest cost is in fact based on this notion of time value of money as interest cost both captures and quantifies somehow the annual opportunity cost of carrying defined benefit plans. Paragraph 82 stipulates that interest cost is computed by multiplying the discount rate as determined at the start of the period by the present value of the defined benefit obligation throughout that period, taking account of any material changes in the obligation (IFRS Foundation, IAS 19, p. A611)

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Paragraphs 92 to 95 of IAS 19 describe the measurement of actuarial gains and losses and introduce the so-called corridor method. Beechy (2009) criticizes the method and explains the rationale for standard-setters for initially implementing such a controversial approach. Beechy (2009) notices that “current standards require low-risk measures for the liability while companies invest in higher-risk equities,” a practice which “introduces higher volatility” and “causes the experience gains and losses that accounting standards historically have attempted to smooth out.” The researcher concludes his analysis very persuasively by arguing that “accounting standards have been complicit in attempting to cover up the mismatch between investment strategy and liability structure” (Beechy, 2009, p.102).

After 2011, the elimination of the corridor method has important advantages. It first abolishes the discretion that reporting entities had in choosing between three methods to account for actuarial gains and losses. Entities are now required to immediately recognize actuarial gains and losses, referred to as remeasurements, in other comprehensive income. Service cost and net interest income (or expense) are also immediately recognized in earnings. As a result, this approach i) avoids spilling an unnecessary amount of volatility into earnings, ii) better reconciles with the matching principle, and iii) produces a more faithful representation of the reporting entity’s pension obligation for the period. Lastly, the application of a unique discount rate to the net defined benefit liability or asset eliminates the need for presenting in the income statement the expected return on plan assets (IASB, 2011).

3. Development of the research questions

3.1. Complex accounting and large financial stakes

Pension accounting has historically attracted plethoric research. The main reason why the research community nurtures such a persistent interest for the field has to do probably with the fact that pension matters have tremendous repercussions for public or private institutions, governments, NGOs, investors, creditors, and individual consumers. In short, pensions represent an important element of deferred compensation. As indicated by Glaum (2009), “based on contracts, and often encouraged by tax incentives, employees agree to temporarily forego part of the remuneration owed to them for services rendered in a given period, in exchange for a promise to receive pension payments in later periods, usually after retirement.” It appears therefore that pensions-related questions (such as how much to contribute or which type of schemes to select) represent critical issues for individuals. At a macro-level, for instance at a state-level, pensions also epitomize a crucial matter. For example, in the 2011 edition of the OECD sponsored Pensions at a Glance, researchers evidence increasing trends in public expenditure on cash benefits for old-age and survivors as a percentage of total government spending. In 2007, for certain Western Europe countries, the percentage reached between a quarter to a third of total government spending: this was the case for Austria, France, Germany, Greece, and Italy.

As previously mentioned, the choice of pension accounting assumptions can significantly impact firms’ financial position and performance. Specifically, the choice of the discount rate significantly influences a firm’s level of indebtedness. As an illustration, Royal Dutch Shell, a

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global oil company with market capitalization amounting to $169.5 billion (at the end of 2011), disclosed in its 2011 annual report that one percentage point increase or decrease in its discount rate would cause a $9.1 billion decrease (i.e. 5.3% of market cap.) or $11.3 billion increase (6.7%) in defined benefit obligations (2011 Annual Report, p. 129). In other words, a one percentage point change in the discount rate would have caused pension obligations to shrink 13.0% or increase 16.2%.

In addition to the discount rate used in estimating pension obligations, the estimated rate of return (or ERR6) on pension assets has also generated a plethora of research due to its impact on pension cost. In particular, Adams et al. (2011) indicate that “a reason that the ERR has attracted attention is because management’s choice of a higher ERR lowers pension expense, and thereby increases the firm’s reported net income without affecting its underlying cash flows.” In the case of Royal Dutch Shell, one percentage point increase or decrease in its ERR would cause a $633 million decrease or $631 million increase in pension benefit expense (since pension income derived from plan assets is aggregated to pension expense). Because reporting entities are required to fund any pension shortfalls within a given period of time, it appears evident that the choice of pension accounting assumptions directly impacts leverage and profitability and indirectly affects capital expenditure and growth strategy. Similarly to the example of Royal Dutch Shell, research analysts affiliated to Citigroup, Dawson and Deans (2012), have sought to understand the impact of discount rate changes on firms’ indebtedness. In their report dated April 10, 2012, Dawson and Deans estimate that a drop of 84 bps in the “iBoxx € AA 10 + index yield” (i.e. a proxy for the discount rate used by members of the Euro Stoxx 50 index) has led to a 13% rise in pension liabilities to €418 billion for the first quarter of 2012.

3.2. Due process stakes: Pension accounting and financial information

The ED states that a single rate should be determined in reference to market yields observed on corporate bond rated AA (investment grade). As a result, reporting entities need to use to his rate to estimate the income that is expected to be earned from pension assets. This approach arguably offers two advantages: verifiability and comparability. This rate is indeed verifiable since yields on corporate bonds represent information which is publicly available. Besides, determination based on market yields de facto takes away reporting entities’ discretionary practice Adams et al. (2011). With regard to the issue of comparability, we remain prudent. In a recent paper, Gordon and Gallery (2012), focus on this notion of comparability. They distinguish “deep comparability,” depicting a situation in which an economic reality is described through the lens of a unique accounting method, and “surface comparability” in which a unique accounting method is used to describe different economic realities. In light of this analysis, one may wonder whether the IASB’s proposal merely promotes “surface comparability.” In addition, in practice there is not a unique market rate to which reporting entities should refer (e.g. maturity or sector driven). As a matter of fact, the IASB has recently extended the discussion about how to select this rate.

6 The expected rate of return is a metric used to estimate the return that can be anticipated on pension assets at the start of the accounting period. It is used to determine a (comprehensive) income statement item (and thus can inflate or deflate earnings) rather than for estimating the fair value of pension assets (balance sheet item).

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Additionally, the use of a discount rate based on market yields observed on AA-rated corporate bonds raise several questions. It appears attractive to use a single rate to estimate expected income earned from pension assets and pension obligations which both relate to the same liabilities. However, pension assets and liabilities are inherently different. Pension obligations require to formulate a set of long-term assumptions such as mortality, employee turnover or rate of increase of salaries. In other words, reporting entities retain some discretionary power with regard to pension obligations, which is no longer true for the expected rate of return of pension assets (Sandu, 2012). Moreover, assuming that the risks associated with pension assets and liabilities are not identical, it appears questionable to use a single rate for actuarial purposes. Lastly, the use of a single rate may adversely affect asset management practices. In fact, the IASB’s proposal may deter entities from designing optimal investment strategies.

3.3. Hypotheses development.

Prior studies of the due process commonly distinguishes respondents in two categories: preparers, those who help prepare the financial information, and users, those who use this information (Saemann, 1999; Kwok and Sharp, 2005; Holder et al., 2013). We adopt this approach in order to elaborate hypotheses which will be tested empirically

In the North American context, Saemann considers that users seek after uniformity for several reasons. First, it helps reduce the complexity that typically characterizes financial information. Second, it enhances comparability between financial statements (arguably across time and sectors) helps simplify the search for specific information. Yen et al. (2008) also notices users’ desire for information which can be easily retrieved. Quagli and Paoloni (2012) show similar findings in the context of the accounting of SMEs. In contrast, we anticipate preparers to reject the IASB’s proposal for a single rate. Prior literature reveals that preparers tend to oppose proposals that reduce the number treatments or methods that could be implemented (Quagli and Paoloni, 2012). In consequence, we expect preparers to oppose the single rate as presently defined. These arguments allow us to formulate hypothesis 1, suggesting a diverging viewpoint between users and preparers:

H1: Users and prepares share diverging opinion on the IASB’s proposal for a single rate.

To address this hypothesis, we will use a content analysis protocol. This leads us to elaborate the next hypotheses.

H2: Those who argue in favor of the single rate use keywords relating to the notion of uniformity.

H3: Those who oppose the Board’s proposal stress on the fundamental issues that are raised by the use of a single rate.

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4. Research design

This section presents the research design, empirical data and methods. First, our empirical data is based on comment letters received by the IASB during the due process. These documents are available free of charge from the IASB website. All comment letters are published in English. The exposure draft generated 227 comment letters.

Most of the respondents are firms or members of the financial community (banks, accounting professionals, etc...) and are based in the USA or the UK, however nearly all industries and countries are represented (see tables 1 and 2 for further details).

INSERT TABLE 1 ABOUT ANALYSIS OF ED RESPONDENTS HERE

We distinguish between respondents which are involved in the preparation of financial statements from those considered as users of the financial information. Such a contrast helps to enhance the understanding of the motives of respondents to the ED, since it is unlikely that these two groups share the same expectations about financial statements. According to Sunder (2009) and Gray et al. (2011) preparers of financial statements are firms’ CFO and standard-setters, and users are bankers7, analysts, and professional and non-professional investors.

INSERT TABLE 2 ABOUT ANALYSIS OF ED RESPONDENTS BY INDUSTRY HERE

Amongst the questions relating to recognition, question 5 has effectively drawn respondents’ interest. It is the most controversial question: in contrast to other questions, most of the respondents who voice their opinion disagreed fully or partially with the IASB’s proposal. The participation is also higher for question 5: respondents expressed their views in 193 comment letters (which is the highest frequency even when including the 17 questions). In addition, question 5 generated by far the smallest number of None’s for a single question (15% in contrast to 22.9% to 32.6% for questions 1 through 4). In other words, those who chose to answer to question 5 had a firm opinion which they needed to stand for.

INSERT TABLE 3 APPROBATION TO QUESTIONS HERE

7 For the banking sector we distinguish banks that respond as firm preparers and banks that respond as users of the financial information.

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In light with prior literature (in particular Saemann, 1999), we identified within our sample of comment letters the words used by respondents to justify their viewpoint with regard to the hypotheses previously discussed. In relation the simplicity theme, we searched for synonyms of consistency, useful information, simplicity and comparability. To identify the vocabulary employed by those who disapprove the proposal, we use similar protocol. Knowing that the cons are concerned about the fundamental issues raised by the use of a single rate, we searched words that could be associated with review, DBO, rate, strategy, standard, tax, and change. The below table shows the key words we identified in our investigation.

INSERT TABLE 4 VARIABLE DEFINITIONS HERE

5. Results

5.1. Descriptive statistics

We use contingency tables to display our findings. Frequency distributions are produced between the approbation to question 5 and each of the following variables: country of respondent, industry and rationales.

INSERT TABLE 5 CROSS TABULATIONS BETWEEN QUESTION 5 APPROBATION AND COUNTRY HERE

Table 5 displays the relationship between the respondents’ nationality and their views regarding the IASB’s proposal to adopt the net interest approach and a single discount rate for defined benefit obligation and plan assets. One striking element is that even though the FASB has collaborated with the IASB on this project, it appears that a majority of US respondents disagreed with the Board on question 5. When referring back to table 5, we noticed that 23 US respondents out of 43 voted No. We could cautiously try to explain this phenomenon by advancing that there is more resistance on the US side to adopt the revised IAS 19 and especially the net interest approach (this could be as well interpreted as a persistent rift between US GAAP and IFRS despite the planned global convergence toward IFRS).

INSERT TABLE 6 CROSS TABULATIONS BETWEEN QUESTION 5 APPROBATION AND INDUSTRY HERE

Table 6 highlights the following facts about respondents’ views regarding the IASB’s proposal and the industry they are affiliated to:

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• Interestingly enough, respondents affiliated to the Accounting/Actuary/Audit sector represent the largest category of those who approved, disapproved and had partial approval, accounting respectively for 40%, 20% and 46% of the Yes group, No group, and Partials. This shows that the views of the Accounting/Actuary/Audit sector is fairly mixed. This could mean that the accounting profession is not yet convinced by the IASB’s proposal. If this is the case, this is not very reassuring for non-experts

• Half of the public sector respondents provided None approbations

• Even the views of standard-setters are mixed. Out of the 14 standard-setters, 3 approve the board’s proposal (Great Britain, Israel and Russia), 4 give a partial approbation (Belgium, France, Korea and Australia), 4 disagree (Netherlands, Japan, Norway and Canada) and 3 didn’t voice their opinion

• Half of the preparers (47.6%) disagree with the Board’s proposal whereas 21.4% of them agree. The approbation is slightly higher in the users group (26.3%) in contrast to 36.8% of the users who reject the proposal.

INSERT TABLE 7 CROSS TABULATIONS BETWEEN TOPICS MENTIONED AND APPROBATION FOR QUESTION 5

Table 8 compares approbation and the rationale(s) most frequently advanced by respondents to justify the reason for their approbation. Columns do not add up to 100% because respondents may cite several criteria at once. It appears for instance that amongst those who approved question 5, 46% mentioned consistency as the reason (or one of the reasons) for this choice: “The proposal would seem to be consistent with the overall structure of accounting for pension costs and would provide consistency across entities.” (CL811, user, UK)9

The simplicity of the method is an argument for 42% of respondents: “This approach has the advantage of simplicity and reflects the reality that entities are financing a net liability (asset).” (CL7, preparer, Australia)

Comparability is a valid argument to accept the proposition of the board for 24%: “We believe that the proposed guidance will improve comparability between entities and will provide greater transparency for the users of the financial statements.” (CL55, preparer, USA)

Many respondents (17.5%) approve the IASB’s proposal but express concerns about the limitations of the proposed method: “The ASB acknowledges the limitation of the proposed approach, as outlined in paragraph BC32 of the ED, but we agree that using the same rate to calculate interest income on plan assets as the rate used to discount the liabilities is an

8 We use CL to shorten Comment Letter.

9 Appendix 3 detail more verbatim.

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acceptable practical expedient. The ASB encourages the IASB to undertake further research as part of a comprehensive review on pensions accounting on how to determine the discount rate to be used for employee benefit obligations.” (CL2, preparer, UK)

The main reason advanced by respondents for rejecting the proposal for a single discount rate for the valuation of plan assets and DBO has to do with the nature of this rate, as three quarters of comment letters mentioned that point (76.6%): “While the discount rate represents this expected rate of growth for the liability, it does not appropriately represent the rate of growth of assets in most pension plans.” (CL86, preparer, USA)

The inherent difference between DBO and plan assets is also viewed as a basis for rejecting the proposal by 38,8% of respondents: “We believe the link between the interest cost on the defined benefit obligation and interest income on plan assets is not logical unless the plan assets are predominantly invested in fixed interest instruments of the same deemed credit quality as the benefit obligation.” (CL129, preparer, Switzerland)

In addition, respondents disagreed with the Board on the ground that a fundamental review of IAS 19 is highly desirable rather than a short-term practical expedient (25.1%): “Given le problems with the current IAS 19 and the proposals in the Exposure Draft, BIAC believes the IASB should undertake a fundamental review of IAS 19.” (CL21, preparer, International)

Lastly, respondents rebuffed the net interest approach since it impairs the corporate investment strategy (20.3%): “We are concerned that applying the same interest rate used in determining the net present value of obligations to determine the return on plan assets for the period will not reflect economic reality and may drive inappropriate investment strategies.” (CL137, preparer, UK)

5.2. Hypotheses testing

INSERT TABLE 8 TEST OF HYPOTHESIS 1

For users, we notice a perfectly mixed response since as many as users approve and disapprove the IASB’s proposal. In contrast, preparers predominantly rejected the proposal. However, globally, observed differences the two groups of respondents are not statistically significant. Consequently, hypothesis H1 cannot be validated.

INSERT TABLE 9 TEST OF HYPOTHESES 2 AND 3

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We observe that those having approved the proposal use more frequently in their explanation key words that we have identified, such as simplicity, useful information or comparability. For each of these items, there is a difference between the two groups which is statistically significant. These findings allow us to validate hypothesis H2.

Similarly, words used by those opposing the proposal for a single rate correspond to the anticipated vocabulary. Again, differences between the two groups are statistically significant at the exception of tax and change. Therefore, hypothesis H3 is partially validated.

6. Discussion

Hypothesis H1, which presumed that users and preparers share diverging viewpoint in regard to the IASB’s proposal, could not be validated. It appears that the traditional divide that separates users and preparers does not hold with regard to question 5. The debate about the determination of the discount rate seems to go beyond each group’s respective concerns. We notice in particular that a weak majority of preparers disapprove the proposal for a single rate. In contrast, users appear extremely divided between support and disapproval of the proposal. This could imply that the proposal is perceived to be too radical and that its application would suddenly impact practices.

Broadly speaking, hypotheses H2 and H3 are validated. It appears therefore that there is a competition between the quest for simplicity and the fundamental characteristics that the accounting information must display. We find here a tension between relevance and comparability. The Board seems to favor comparability at the expense relevance, even if it may merely reflect “surface comparability.” Nonetheless, the fundamental issues remain. The determination of the appropriate discount rate is a challenging issue for the IASB as it concerns several standards. As a matter of fact, the IASB has recently launched a research project aiming at addressing this matter. Details are disclosed on its website as follows:

“Different Standards specify different discount rates, depending on the objective of the particular IFRS. Views received during the agenda consultation suggest that the reasons for using different discount rates are not well understood, with some respondents suggesting that such differences cause IFRS requirements to be inconsistent. The research project will examine discount rate requirements in IFRS, explaining why those differences exist and assessing whether there any inconsistencies that the IASB should address” (Source: www.ifrs.org)

The Board is therefore conscious about the difficulties encountered by users and preparers. Indeed, in its June 2011 press release, the IASB indicates that it had “received broad support for the overall objectives of improving transparency, comparability and understandability by eliminating the options for recognition and presentation of changes in defined benefit plans and improving disclosures about those plans” (IASB, 2011, p. 14). However, when discussing question 5 (which mainly addressed whether or not the standard-setter needed to adopt the net interest approach), the Board appears to be vague and to silence the amount of feedback and disagreement (or request for a “fundamental review”) raised by question 5.

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In the end, the Board confirmed the ED proposal on the grounds that “the net interest approach better represents the economics of the net defined benefit asset or liability” (IASB, 2011, p. 16). The main technical implication is that the revision indeed addresses a peculiar issue with the former version: “under the previous approach, a deficit could result in net finance income if the expected return on plan assets exceeded the interest cost on the defined benefit obligation” (IASB, 2011, p. 10). Yet, in order to eliminate the amount of subjectivity involved in determining the expected rate of return on plan assets, the Board adopted a “practical expedient” (CL2, CL30, CL37, CL38, CL57 ....) and appears to have disregarded the list of counter-arguments advanced by respondents. In particular, the cons explained that:

• Applying a common discount rate to both the defined benefit obligation and plan assets the standard would in substance take away entities’ ability to design a competitive and effective investment strategy. This view is echoed in the following citation: “even if the assets and obligations are presented on a net basis in the statement of financial position, they not do share the same characteristics nor are they measured on the same basis; entities do not invest in assets only to be rewarded by the time value of money.” (CL26, preparer, France)

• By applying a discount rate based on market yields of high quality corporate bond rates, the standard eliminates the superior return expected from mixed investment portfolios that contain assets riskier than debt securities and thus ignores the fact that defined benefit obligations and plan assets are inherently different and therefore managed accordingly. In addition, respondents have on several instances indicated that such a discount rate would likely force asset managers to shift their investment strategy and favor lower-return assets (such as government bonds). Ultimately, it appears that the main beneficiaries of pension plan, employees, are the ones who will be worst off. For example, this view is shared by the Vice President in Finance of a large US mobile phone company: “requiring the use of a discount rate that is based on the current yield for high quality corporate bonds seems inconsistent with nature of the investment portfolios that we see in current benefit plan disclosures.” (CL188, preparer, USA)

• Adopting the ED proposal without spearheading a fundamental review of IAS 19 would cause disruption and potentially produce misleading information for financial statement users. For instance, the Belgian Accounting Standards Board has formally called for such a review and further guidance regarding the determination of the discount rate: “given the fact that the current ED is an answer to short-term improvement needs of the Standard, we would have expected that the Board also included more guidance on the determination of the related discount rate.” (CL1, preparer, other)

In contrast to what the Board advances, respondents’ viewpoints regarding whether to adopt the net interest approach were more diverse than described by the Board in its feedback statement.

In terms of scientific contribution, in contrast to prior literature (Saemann, 1995 and 2004; Kwok and Sharp, 2005 or Yen et al. 2008), this study shows that the viewpoints and arguments raised by stakeholders (both users and preparers) who disapproved the Board’s proposal, are not taken into account. The IASB has therefore closed the eyes to the viewpoint of more than half of respondents. Such an outcome casts doubt about the willingness of preparers of financial statements to genuinely apply the new rules.

15

7. Conclusion

To sum up, we have analyzed the 227 comment letters received for the IASB in relation to the Exposure Draft stage of the IAS 19 due process. We have sought to put in evidence the fact that respondents have mostly approved the Board’s proposal relating to the recognition of defined benefit cost components. However, question 5, which deals with the net interest approach and the determination of the discount rate to be applied to both the defined benefit obligation and plan assets, is the exception. There is no consensus on that very controversial question.

To our knowledge, this paper is the first fully devoted to the study of the IAS 19 Exposure Draft stage. So it contributes to the prior research by analyzing all the comment letters on pension accounting. This paper also contributes to enrich the accounting perspective by articulating the viewpoint of practitioners on defined benefit obligations. Specifically, we show that those in favor of the proposal for a single rate praise this approach for its simplicity whereas those against regret the fact that the proposal does not address fundamental issues.

Despite a rigorous empirical protocol, the present study has limitations that should be acknowledged. The validity of this paper (both internal and external) is constrained by the study’s parameters that we have chosen to implement. We have considered a subset of the six-step IASB’s due process. As such, the scope of our analysis remains limited indeed to the ED. It is conceivable that our findings would be amended in the case we had included in our study the comment letters received by the Board during the third stage (relating to the DP). Again, we have chosen to focus on the ED stage because i) it represents the “public consultative” part of the due process (and presumably the most visible and transparent part of the due process), and ii) it allows a richer debate about underlying conceptual issues. However, a study covering both the discussion paper and the exposure draft stages would provide a better longitudinal view of the IASB’s international due process and could be an interesting element for further research.

Additionally, it appears that a study seeking to quantify the financial impacts of the revamped IAS 19 on a sample of public companies would allow the financial community to gauge the magnitude of the proposed changes. For instance, a simulation, in which variations in discount rates on the DBO and returns on plan assets are compared to changes in the finance cost (on the P&L) and in the net defined liability (asset) (on the B/S), could provide substance and depth to the pension accounting debate. As such, the work of Amen (2007), targeting German entities, offer an interesting perspective for further research. Besides, a simulation is a particularly attractive experiment because pension accounting (especially defined benefit schemes) involves the formulation of a complex set of sophisticated assumptions over multiple periods (otherwise, empirical papers constructed on overly simplistic assumptions or assumptions that poorly reconcile with corporate practices, tend to bring little to scientific knowledge). Lastly, it is worth noting that the access to data can turn out to be a daunting task. For example, the construction of a pan-European simulation structured around time series involving financial, market and demographic data requires access to not only publicly available information (such as corporate accounts) but also demographic data (which typically is fragmented or unavailable).

16

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Appendices

Appendix 1: Questions raised by the IASB and relating to the recognition of pension cost

Question 1: The exposure draft proposes that entities should recognize all changes in the present value of the defined benefit obligation and in the fair value of plan assets when they occur. Do you agree? Why or why not?

Question 2: Should entities recognize unvested past service cost when the related plan amendment occurs? Why or why not?

Question 3: Should entities disaggregate defined benefit cost into three components: service cost, finance cost and remeasurements? Why or why not?

Question 4: Should the service cost component exclude changes in the defined benefit obligation resulting from changes in demographic assumptions? Why or why not?

Question 5: The exposure draft proposes that the finance cost component should comprise net interest on the net defined benefit liability (asset) determined by applying the discount rate specified in paragraph 78 to the net defined benefit liability (asset). As a consequence, it eliminates from IAS 19 the requirement to present an expected return on plan assets in profit or loss. Should net interest on the net defined benefit liability (asset) be determined by applying the discount rate specified in paragraph 78 to the net defined benefit liability (asset)? Why or why not? If not, how would you define the finance cost component and why?

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Appendix 2: Examples of verbatim present in comment letters

Approval for consistency • “We believe using this rate would be consistent with the rate used to discount the defined benefit

obligation and would be practical to implement.” (CL50, preparer, Canada) • “We believe that the “expected rate of return” approach was not useful to users of the financial

statements and this proposal is more consistent with current investment practice” (CL76, preparer, UK)

• “Applying this to the net asset or liability is consistent with the actual investment approach of many defined benefit plans where there has been a trend towards matching assets to liabilities more and more closely.” (CL122, user, UK)

• “We are in favour of this proposal as it eliminates the inconsistency and subjectivity associated with arriving at the expected return on assets, therefore improving comparability.” (CL210, preparer, Canada)

Approval for simplicity • “We are attracted to the simplicity and pragmatism of this approach.” (CL136, user, International) • “This would provide a simplified method of calculating the financing cost component that could be

uniformly applied by all plan sponsors.” (CL184, preparer, France) • “As a result, we believe this will simplify accounting treatment”. (CL195, preparer, Other) Approval for comparability • In particular, using the same rate to calculate interest income on plan assets and to discount the

defined benefit liability provides greater consistency and comparability between entities.” (CL59, preparer, UK)

• “It contributes to a more transparent recognition of the components and improves comparability across institutions.” (CL96, user, International)

• “We support the presentation of the net finance cost arising from the net liability as a theoretical improvement in the P&L charge that will aid comparability between plans.” (CL166, user, USA).

Conditional approval • “We agree, but strongly encourage the Board to provide additional guidance with respect to the

intent and implications of material changes.” (CL43,user, Canada) • “However, in the longer term, we believe that a wider review of the measurement of post-

employment benefit plans is needed. In particular, we believe that the Board's basis for conclusions on the use of high quality corporate bonds to determine the discount rate.” (CL59, preparer, UK)

• “So the use of the discount rate on the obligation for the "expected" asset return is an "elegant" compromise and may be necessary until the more comprehensive review of defined benefits is completed.” (CL150,user, UK)

Disapproval: discount rate • “But the method of calculating net interest proposed by the Board is one that estimates investment

income corresponding to a discount rate, irrespective of the way the plan assets are to be invested.” (CL88, preparer, Japan)

• “The discount rate on high quality corporate bonds, as specified in paragraph 78, does not match the return based on the portfolio risk profile (asset mix) or expected settlement date of the actual underlying assets.” (CL82, preparer, Canada)

• “That approach would silently assume that plan assets are discounted by the same interest rate as the DBO. That approach would fully ignore the investment strategy of the fund and the underlying risk.” (CL102, preparer, other country)

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Disapproval: inherent difference between DBO and plan assets • “We do not agree to applying the discount rate specified in paragraph 78 where the defined plan

obligation has been funded with plan assets. In such cases the weighted average yield to maturity of the plan asset should be used.” (CL14, preparer, India/Pakistan)

• “No, we do not agree that the discount rate should be applied to the net defined liability (asset) to determine net interest. In paragraph BC32 of the ED, the Board acknowledges that the net interest approach is limited because “plan assets may be made up of many different types of investments, and that the return on high quality corporate bonds would be arbitrary and would not be a faithful representation of the return that investors require or expect from each type of asset.” We concur; the discount rate is unrelated to assets in the plan and should not be utilized. We do not believe the elimination of the current IAS 19 requirement to present an expected return on plan assets within profit or loss is appropriate. The expected return on assets is fundamentally different from the discount rate on liabilities and provides relevant information on the way benefit plan assets are managed.” (CL33, user, UK)

• “The defined benefit liabilities and assets are different and have different characteristics so why apply the same interest rate to each?” (CL207, preparer, UK)

• “It is necessary to distinguish the rates to use for the determination of the defined benefit liability and those for the plan assets and not use a single discount rate for the net effect.” (CL217,user, Other)

The need for a fundamental review • “We would view the proposed approach as a short-term fix that should be a subject of the

upcoming fundamental review of IAS 19.” (CL136, preparer, International) • “The appropriate rate(s) to be used to discount the defined benefit obligation and to measure the

return on plan assets to be reported in the performance statement should be addressed as part of a more fundamental review of the principles applicable.” (CL138, preparer, UK)

• “We believe that this aspect of IAS 19 will need to be reconsidered as part of the more fundamental review of IAS 19.” (CL223, user, International)

Disapproval: strategy • “The elimination of the requirement to incorporate an expected rate of return on plan assets in

profit and loss could lead entities to alter investment strategies to manage actual performance to the discount rate. We believe that an investment strategy limited to discount rate performance could inhibit the plan sponsor’s ability to manage pension assets in the most financially disciplined manner and become detrimental to a company’s shareholders, as such a strategy would likely require additional benefit plan funding in excess of that required when investing for the long term in a mix of equities and fixed income security.” (CL27, preparer, USA)

• “This change in methodology also may allow plan sponsors to base decisions about plan asset allocation purely on economic and risk management grounds, without adversely affecting profit or loss. In fact, removing the immediate benefit of asset risk-taking.” (CL69, user, USA)

• “That approach would fully ignore the investment strategy of the fund and the underlying risk.” (CL105, preparer, Other)

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Tables, figures, and illustrations

Exhibit 1: Timeline of genesis and revisions of IAS 19

Source: IFRS (ifrs.org) and Deloitte resources (iasplus.com)

Exhibit 2: IAS 19 calendar (IASB)

Source: IASB, Project Summary and Feedback Statement, 2011

 

Exposure Draft E16 (1980): Accounting for Retirement

Benefits in Financial Statements of Employers

IAS 19 (1983) effective

1980 1990

2000 2010

IAS 19 (1983): Accounting for Retirement Benefits in

Financial Statements of Employers

Exposure Draft E47 (1992): Retirement Benefit Costs

IAS 19 (1993): Retirement Benefit Costs, revised as part of “Comparability of Financial Statements project”

Exposure Draft E54 (1996): Employee Benefits 

IAS 19 (1993) effective

IAS 19 (1998) Employee Benefits

IAS 19 (1998effective

Limited revisions to IAS 19 (1998)

Revisions of IAS 19 (2000) effective

“Asset ceiling” amendment to IAS 19 (2000)

IAS 19 (2002) amendment effective

IAS 19.144-152 on equity compensation benefits are replaced by IFRS 2 Share-based Payment

(2004)

Exposure draft of proposed amendments to IAS 19 about recognition of actuarial gains and losses (2004)

Commitment to major rethink of accounting for

pensions by IASB and FASB (2006)

IAS 19 amended for “Annual Improvements to IFRS 2007 in regard to negative past service costs and curtailments” (2008)

IAS 19 (2008) amendment effective

Exposure draft of proposed amendments to IAS 19 about the discount rate (2009)

Exposure Draft (2010): Defined Benefit Plans

Amended IAS 19 (2011): Elimination of the corridor method 

IAS 19 (2011) effective Jan. 1, 2013

Exposure draft (March 2013) to IAS 19 relating to contributions for employees and 3rd parties

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Exhibit 3: Major changes to IAS 19

IAS 19 prior 2011 IAS 19 after 2011Corridor approach permitted to smooth actuarial gains/losses over time

Corridor approach is eliminated and replaced by immediate recognition of actuarial gains/losses

Pension income/expense was calculated as the net of pension income (= pension assets x estimated rate of return on pension assets) and pension expense (= pension liability x AA corporate or government yield)

Estimated rate of return on pension assets = AA corporate or government yield Net interest income/expense = net defined liability/asset x AA corporate or government yield

Actuarial gains/losses can be deferred and recognized in later periods

All changes in pension liabilities and assets must be included in the financial statements for the current period

Disaggregation of pension cost into three elements: service cost, finance cost and remeasurement

Other requirements aimed at improving disclosure

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Table 1: Analysis of ED respondents by country

COUNTRY N % COUNTRY N % UK 45 19.8 PAKISTAN 2 0.9 USA 43 18.9 ISRAEL 2 0.9 INTERNATIONAL/EU 15 6.6 SOUTH AFRICA 2 0.9 JAPAN 14 6.2 IRELAND 2 0.9 AUSTRALIA 12 5.3 NEW ZEALAND 2 0.9 GERMANY 12 5.3 NORWAY 2 0.9 CANADA 11 4.8 BRAZIL 1 0.4 SWITZERLAND 9 4.0 KENYA 1 0.4 NETHERLANDS 9 4.0 MALAYSIA 1 0.4 SWEDEN 7 3.1 RUSSIA 1 0.4 INDIA 6 2.6 ZAMBIA 1 0.4 FRANCE 6 2.6 TRINIDAD & TO 1 0.4 CHINA/HK 6 2.6 FINLAND 1 0.4 MEXICO 4 1.8 LUXEMBOURG 1 0.4 BELGIUM 3 1.3 ITALY 1 0.4 AUSTRIA 2 0.9 KOREA 1 0.4

CHILI 1 0.4 TOTAL 227 100

Note: In the remainder of the paper, countries with less than 3 frequencies are gathered in a new category called OTHER COUNTRIES. International/EU refers to national and international standard-setters

24

Table 2: Analysis of ED respondents by industry

(Note that the industry classification is based on Industry Classification Benchmark (ICB), which is used by Dow Jones and FTSE in various indexes. We retained the ICB’s main industry categories but further divided the Financials sector into Financials which include banks and insurers, Accounting which are accounting professionals, and we grouped together auditors and actuaries. We added the Standard-setter category which did not exist in the ICB classification)

Note: In the remainder of the paper, the detailed sector is not used.

Respondent Sector N % PREPARERS TOTAL PREPARERS 189 83.3

FIRM OR FIRM ASSOCIATION 80 35.2 ACCOUNTING/ACTUARY/AUDIT 66 29.1 BANK/INSURANCE 29 12.8

STANDARD-SETTER 14 6.2 USERS TOTAL USERS 38 16.7

PUBLIC 18 7.9 ANALYST/CONSULTANT 13 5.7

PENSION 7 3.1 TOTAL LETTERS 227 100.0

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Table 3: Approbation to questions relating to the recognition of defined benefit costs

Approbation Question 1 Question 2 Question 3 Question 4 Question 5 N % N % N % N % N % Total

1.Yes 117 51.5 110 48.5 108 47.6 131 57.7 50 22.0 2.Partial 35 15.4 13 5.7 33 14.5 13 5.7 39 17.2 3.No 23 10.1 30 13.2 20 8.8 12 5.3 104 45.8 4.None 52 22.9 74 32.6 66 29.1 71 31.3 34 15.0 With opinion 175 153 161 156 193 227

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Table 4: Variable definitions

Variable name Variable description Variable categories

Country Nationality of the author/company

australia/nz; canada; france; germany; india/pakistan; international/europe; japan; netherlands; sweden/finland; switzerland; uk; usa; other

Industry Industry of the author/company

accounting; actuary/audit; bas. mat./ind.; consumer g/s; energy/oil/gas/; financials; public; standard setter; other

Approbation to IASB's proposals

Q5 Approbation to question 5 yes; no; partial; none

Question 5 topics

Consistency Consistency 1 (mentioned); 0 (not mentioned) Review Fundamental Review 1 (mentioned); 0 (not mentioned) Simplicity Simplicity 1 (mentioned); 0 (not mentioned)

DBO DBO and Plan assets are inherently different 1 (mentioned); 0 (not mentioned)

Rate

Discount rate based on market yields of high quality corporate bonds is not appropriate for investment portfolio made of mixed assets (esp. equity)

1 (mentioned); 0 (not mentioned)

Comparability Comparability 1 (mentioned); 0 (not mentioned) Useful_info Meaningful / Useful information 1 (mentioned); 0 (not mentioned)

Strategy Take away ability to design/influence the corporate investment strategy 1 (mentioned); 0 (not mentioned)

Tax Ignore tax/fees issues relating to plan assets 1 (mentioned); 0 (not mentioned)

Change Firms may change their investment policy 1 (mentioned); 0 (not mentioned)

GAAP Method fails to consider convergence with GAAP practices 1 (mentioned); 0 (not mentioned)

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Table 5: Cross tabulations between question 5 approbation and country

1.Yes 2.Partial 3.No 4.None ALL Comment Letter N col % row % N col % row % N col % row % N col % row % N col % row % BELGIUM 0 0 0 1 2.6 33.3 1 1.0 33.3 1 2.9 33.3 3 1.3 100.0 INTERNATIONAL/EU 3 6.0 20.0 3 7.7 20.0 4 3.8 26.7 5 14.7 33.3 15 6.6 100.0 MEXICO 0 0 0 0 0 0 2 1.9 50.0 2 5.9 50.0 4 1.8 100.0 USA 6 12.0 14.0 5 12.8 11.6 23 22.1 53.5 9 26.5 20.9 43 18.9 100.0 SWEDEN 0 0 0 0 0 0 5 4.8 71.4 2 5.9 28.6 7 3.1 100.0 CHINA/HK 0 0 0 0 0 0 4 3.8 66.7 2 5.9 33.3 6 2.6 100.0 NETHERLANDS 0 0 0 0 0 0 6 5.8 66.7 3 8.8 33.3 9 4.0 100.0 FRANCE 0 0 0 2 5.1 33.3 4 3.8 66.7 0 0 0 6 2.6 100.0 JAPAN 1 2.0 7.1 4 10.3 28.6 8 7.7 57.1 1 2.9 7.1 14 6.2 100.0 AUSTRALIA 1 2.0 8.3 2 5.1 16.7 9 8.7 75.0 0 0 0 12 5.3 100.0 INDIA 2 4.0 33.3 1 2.6 16.7 3 2.9 50.0 0 0 0 6 2.6 100.0 UK 12 24.0 26.7 10 25.6 22.2 17 16.3 37.8 6 17.6 13.3 45 19.8 100.0 SWITZERLAND 2 4.0 22.2 1 2.6 11.1 6 5.8 66.7 0 0 0 9 4.0 100.0 GERMANY 6 12.0 50.0 2 5.1 16.7 3 2.9 25.0 1 2.9 8.3 12 5.3 100.0 CANADA 6 12.0 54.5 0 0 0 5 4.8 45.5 0 0 0 11 4.8 100.0 OTHER 11 22.0 44.0 8 20.5 32.0 4 3.8 16.0 2 5.9 8.0 25 11.0 100.0 ALL LETTERS 50 100.0 22.0 39 100.0 17.2 104 100.0 45.8 34 100.0 15.0 227 100.0 100.0

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Table 6: Cross tabulations between question 5 approbation and industry

1.Yes 2.Partial 3.No 4.None ALL Comment Letter N col % row % N col % row % N col % row % N col % row % N col % row %ACC./ACTUARY/AUDIT 20 40.0 30.3 18 46.2 27.3 21 20.2 31.8 7 20.6 10.6 66 29.1 100.0BANK/INSURANCE 2 4.0 6.9 8 20.5 27.6 15 14.4 51.7 4 11.8 13.8 29 12.8 100.0FIRM OR ASSOCIATION 15 30.0 18.8 5 12.8 6.3 50 48.1 62.5 10 29.4 12.5 80 35.2 100.0STANDARD-SETTER 3 6.0 21.4 4 10.3 28.6 4 3.8 28.6 3 8.8 21.4 14 6.2 100.0TOTAL PREPARERS 40 80.0 21.2 35 89.7 18.5 90 86.5 47.6 24 70.6 12.7 189 83.3 100.0ANALYST/CONSULTANT 3 6.0 23.1 2 5.1 15.4 8 7.7 61.5 0 0 0 13 5.7 100.0PENSION 1 2.0 14.3 1 2.6 14.3 4 3.8 57.1 1 2.9 14.3 7 3.1 100.0PUBLIC 6 12.0 33.3 1 2.6 5.6 2 1.9 11.1 9 26.5 50.0 18 7.9 100.0TOTAL USERS 10 20.0 26.3 4 10.3 10.5 14 13.5 36.8 10 29.4 26.3 38 16.7 100.0ALL RESPONDENTS 50 100.0 22.0 39 100.0 17.2 104 100.0 45.8 34 100.0 15.0 227 100.0 100.0

Table 7: Cross tabulations between topics mentioned and approbation for question 5

1.Yes 2.Partial 3.No 4.None ALL Comment Letter N %* row % N %* row % N %* row % N N %** row % Tax 0 0.0 0.0 0 0.0 0.0 1 1.0 100.0 0 1 0.4 100.0 GAAP 1 2.0 7.1 1 2.6 7.1 12 11.5 85.7 0 14 6.2 100.0 Strategy 0 0.0 0.0 8 20.5 17.4 38 36.5 82.6 0 46 20.3 100.0 DBO 0 0.0 0.0 9 23.1 10.2 79 76.0 89.8 0 88 38.8 100.0 Rate 1 2.0 0.8 28 71.8 22.6 95 91.3 76.6 0 124 54.6 100.0 Review 10 20.0 17.5 19 48.7 33.3 28 26.9 49.1 0 57 25.1 100.0 Simplicity 21 42.0 47.7 20 51.3 45.5 3 2.9 6.8 0 44 19.4 100.0 Consistency 23 46.0 62.2 13 33.3 35.1 1 1.0 2.7 0 37 16.3 100.0 Comparability 12 24.0 60.0 8 20.5 40.0 0 0.0 0.0 0 20 8.8 100.0 Useful_info 3 6.0 75.0 1 2.6 25.0 0 0.0 0.0 0 4 1.8 100.0 Change 1 2.0 33.3 2 5.1 66.7 0 0.0 0.0 0 3 1.3 100.0

(*% of comment letters within the approbation group, i.e. Yes, Partial, No, and None; **% of total number of comment letters

29

Table 8: Cross tabulation between approbation and industry

Respondent No Yes or Partial All

Independence Test's p-value

χ²(1) Fisher's Exact Test

PREPARER 90 75 165 0.6555 0.6860 USER 14 14 28 All 104 89 193

Table 9: Number and percentage of letters mentioning each argument

Argument No Yes or Partial

Independence Test's p-value

χ²(1) Fisher's Exact Test

Consistency 1 (1 %) 36 (40 %) <.0001 *** <.0001 *** Review 28 (27 %) 29 (33 %) 0.3901 0.4306Simplicity 3 (3 %) 41 (46 %) <.0001 *** <.0001 *** Comparability 0 (0 %) 20 (22 %) <.0001 *** <.0001 *** Useful info 0 (0 %) 4 (4 %) 0.0289 * 0.0436 * DBO 79 (76 %) 9 (10 %) <.0001 *** <.0001 *** Rate 95 (91 %) 29 (33 %) <.0001 *** <.0001 *** Strategy 38 (37 %) 8 (9 %) <.0001 *** <.0001 *** Tax 1 (1 %) 0 (0 %) 0.3537 1.0000Change 0 (0 %) 3 (3 %) 0.0592 0.0963 GAAP 12 (12 %) 2 (2 %) 0.0131 * 0.0227 *

Total Letters 104 89 * p < 0.05 ; ** p < 0.01 ; *** p < 0.001