Reported income and the expected rate of return on pension assets

A study demonstrates how companies increase reported income by selecting the expected long-term rate of return on pension assets, an estimation parameter used to measure the annual pension expense. When firms used an expected rate of return (ERR) that is different from the one implied by their pension asset allocation, the pension expense that they report is, on average, understated. This examination of the issue demonstrates that companies do in fact increase reported income this way. Both auditors and regulators should examine these links closely if they are to draw the correct conclusions about the appropriateness of pension disclosures.