Has the amendment of IAS 19 increased the value-relevance of OCI in the Swedish stock market?

119 Pages·2016·2.02 MB·English

by  Sebastian Bauer

Has the amendment of IAS 19 increased
the value-relevance of OCI in the
Swedish stock market?

Authors: Sebastian Bauer
Victor Lake
Supervisor: Catherine Lions

Student
Umeå School of Business and Economics
Spring semester 2016
Master thesis, two-year, 30 hp
ABSTRACT
The evidence of this research paper suggests an increased value-relevance of OCI in the
Swedish stock market after the 2011 amendment of IAS 19. This amendment eliminated the
popular corridor approach that ‘smoothed’ the recognition of actuarial gains and losses and
required companies instead to recognize such remeasurements directly to their full extent in
OCI. We reason that the current economic environment marked by low interest rates
together with demographic trends in life expectancy have amplified the impact of the
standard revision on financial statements. Moreover, this research paper is conducted in a
Swedish setting that is characterized by widespread occupational pension schemes. In line
with informational accounting research, we use regression models to identify whether OCI
has more explanatory power for stock market prices and returns. Shares listed on NASDAQ
OMX Stockholm are investigated for this purpose. Furthermore, in the course of this
research, we revisit the controversial debate on comprehensive income reporting and work
out inconsistencies in current IFRS reporting.
Keywords:
Value-relevance; accounting standard change; pension accounting; IAS 19; defined benefit
pensions; OCI; comprehensive income reporting.

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ACKNOWLEDGEMENT
We are deeply indebted to Catherine Lions whose prudent supervision laid the foundation
of this thesis project and greatly enhanced its quality. Merci beaucoup!

Umeå, 20th May 2016

___________________ ___________________

Sebastian Bauer Victor Lake

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TABLE OF CONTENTS

1. Introduction ........................................................................................................................ 1
1.1 Problem background ..................................................................................................... 1
1.2 Research question ......................................................................................................... 2
1.3 Research gap ................................................................................................................. 3
1.4 Research purpose .......................................................................................................... 3
1.5 Target audience............................................................................................................. 4
1.6 Research contribution ................................................................................................... 4
1.7 Limitations .................................................................................................................... 5
1.8 Ethical considerations ................................................................................................... 6
1.9 Disposition .................................................................................................................... 7
2. Methodology ....................................................................................................................... 9
2.1 Research philosophy ..................................................................................................... 9
2.1.1 Epistemology ......................................................................................................... 9
2.1.2 Ontology .............................................................................................................. 10
2.2 Research approach ...................................................................................................... 11
2.3 Research design .......................................................................................................... 12
2.3.1 General design purpose ....................................................................................... 12
2.3.2 Research strategy ................................................................................................. 13
2.3.3 Research choice ................................................................................................... 14
2.3.4 Time horizon ....................................................................................................... 14
2.4 Literature selection ..................................................................................................... 15
2.5 Ethical considerations ................................................................................................. 16
3. Situating the research question – The broader picture ..................................................... 17
3.1 Occupational pensions ................................................................................................ 17
3.2 Low interest rate environment .................................................................................... 19
3.3 Other remeasurement considerations ......................................................................... 22
3.4 A closer look into Sweden .......................................................................................... 22
3.5 Ethical considerations ................................................................................................. 23
4. Theoretical framework ..................................................................................................... 25
4.1 Accounting standards and accounting theory ............................................................. 25
4.1.1 General accounting theory ................................................................................... 25
4.1.2 Relevant economic or managerial theories .......................................................... 26
4.1.3 Accounting standards’ conceptual framework .................................................... 28
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4.1.4 Trends in the perspective of financial reporting .................................................. 31
4.1.5 Changes in accounting standards ......................................................................... 32
4.2 Pension accounting ..................................................................................................... 33
4.2.1 International Accounting Standard 19 – Employee Benefits .............................. 33
4.2.2 Significant changes and implications .................................................................. 36
4.2.3 Concerns in pension accounting .......................................................................... 37
4.3 Other comprehensive income ..................................................................................... 39
4.3.1 Overview of current IFRS OCI ........................................................................... 39
4.3.2 Issues in comprehensive income reporting .......................................................... 42
4.3.3 The point of view of the IASB ............................................................................ 45
4.4 Value-relevance .......................................................................................................... 45
4.4.1 Interpretations and perspectives of value-relevance ............................................ 45
4.4.2 Types of value-relevance studies ......................................................................... 47
4.4.3 Theories underlying value-relevance studies ...................................................... 48
4.4.4 Models on value-relevance .................................................................................. 49
4.4.4.1 General discussion of value-relevance models ............................................. 49
4.4.4.2 Price-level models ........................................................................................ 50
4.4.4.3 Return-level models ...................................................................................... 51
4.4.5 Literature review of previous studies .................................................................. 52
4.5 Ethical considerations ................................................................................................. 55
5. Data ................................................................................................................................... 58
5.1 Company selection ..................................................................................................... 58
5.2 Market data selection .................................................................................................. 60
5.3 Accounting data selection ........................................................................................... 61
5.4 Ethical considerations ................................................................................................. 63
6. Results .............................................................................................................................. 64
6.1 Descriptive data discussion ........................................................................................ 64
6.2 Inferential data discussion .......................................................................................... 72
6.2.1 Statement of hypotheses and corresponding data sets ......................................... 72
6.2.2 Pre-testing of data ................................................................................................ 74
6.2.3 Interpreting parameters ........................................................................................ 76
6.2.4 Regression results ................................................................................................ 77
6.2.4.1 Regression results for our first set of hypotheses ......................................... 77
6.2.4.2 Regression results for our second set of hypotheses .................................... 81
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6.2.5 Inferences on value-relevance ............................................................................. 85
6.2.5.1 Inferences on value-relevance for our first set of hypotheses ...................... 85
6.2.5.2 Inferences on value-relevance for our second set of hypotheses.................. 87
6.2.5.3 Summary of acceptance or rejection of hypotheses ..................................... 89
6.3 Results consolidation and discussion ......................................................................... 89
6.4 Ethical considerations ................................................................................................. 91
7. Reflections on this research paper .................................................................................... 92
7.1 Conclusions ................................................................................................................ 92
7.2 Quality criteria ............................................................................................................ 94
7.3 Ethical considerations ................................................................................................. 96
7.4 Suggestions for future research .................................................................................. 97
References ............................................................................................................................ 99

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LIST OF TABLES

Table 1. Summary of previous studies. ................................................................................ 55
Table 2. Overview of collected market data. ........................................................................ 60
Table 3. Overview of collected accounting data. ................................................................. 62
Table 4. Status of defined benefit plans (2010). ................................................................... 65
Table 5. Status of defined benefit plans (2015). ................................................................... 66
Table 6. Magnitude of unrecognized gains and losses. ........................................................ 67
Table 7. Magnitude of OCI................................................................................................... 68
Table 8. Magnitude of net income. ....................................................................................... 68
Table 9. Relative size of OCI to net income. ....................................................................... 69
Table 10. Magnitude of OCI (absolute values). ................................................................... 70
Table 11. Relative size of OCI to net income (absolute values). ......................................... 70
Table 12. Magnitude of remeasurements. ............................................................................ 71
Table 13. Set 1 regression results - Price-level model (1a). ................................................. 77
Table 14. Set 1 regression results - Price-level model (1b). ................................................. 78
Table 15. Set 1 regression results - Return-level model (2a). .............................................. 78
Table 16. Set 1 regression results - Return-level model (2b). .............................................. 79
Table 17. Set 1 regression results - Price-level model (1c). ................................................. 79
Table 18. Set 1 regression results - Price-level model (1d). ................................................. 80
Table 19. Set 1 regression results - Return-level model (2c). .............................................. 80
Table 20. Set 1 regression results - Return-level model (2d). .............................................. 81
Table 21. Set 2 regression results - Price-level model (1a). ................................................. 81
Table 22. Set 2 regression results - Price-level model (1b). ................................................. 82
Table 23. Set 2 regression results - Return-level model (2a). .............................................. 82
Table 24. Set 2 regression results - Return-level model (2b). .............................................. 83
Table 25. Set 2 regression results - Price-level model (1c). ................................................. 83
Table 26. Set 2 regression results - Price-level model (1d). ................................................. 84
Table 27. Set 2 regression results - Return-level model (2c). .............................................. 84
Table 28. Set 2 regression results - Return-level model (2d). .............................................. 85
Table 29. Summary on relative value-relevance (set 1). ...................................................... 85
Table 30. Summary on incremental value-relevance (set 1). ............................................... 86
Table 31. Summary on relative value-relevance (set 2). ...................................................... 87
Table 32. Summary on incremental value-relevance (set 2). ............................................... 87
Table 33. Summary on hypotheses. ...................................................................................... 89

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LIST OF FIGURES

Figure 1. Active membership in pension schemes (U.K.). ................................................... 17
Figure 2. Status of defined benefit schemes (U.K.). ............................................................ 18
Figure 3. Status of defined contribution schemes (U.K.). .................................................... 18
Figure 4. Trend in 10y government bond yields. ................................................................. 20
Figure 5. Trend in Aaa corporate bond yields. ..................................................................... 20
Figure 6. Trend in IAS 19 discount rates. ............................................................................ 21
Figure 7. Classification of pension expenses (IAS 19 revised). ........................................... 35
Figure 8. Components of OCI. ............................................................................................. 40
Figure 9. Illustrative example of OCI accounting. ............................................................... 41
Figure 10. Industry classification before adjustments. ......................................................... 58
Figure 11. Industry classification after adjustments. ............................................................ 59
Figure 12. Market capitalization classification..................................................................... 60
Figure 13. Occurence of defined benefit plans. .................................................................... 64
Figure 14. Occurrence of material defined benefit plans. .................................................... 65
Figure 15. Overview of chosen method IAS 19 old. ............................................................ 66

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