Research Report On the value relevance of SFAS No. 158 Robert Houmes ⇑ , Robert Boylan, William Crosby Jacksonville University, FL, USA article info Keywords: Defined benefit pension plans Value relevance SFAS No. 158 abstract After considerable discussion and some controversy, Statement of Financial Accounting Standards No. 158 entitled, ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans’’ was implemented in 2006. An important goal of these standards was to enhance financial reporting transparency for defined benefit pension plans (FASB, 2006). This study evaluates how well SFAS No. 158 achieved its objective. In particular, we compare the respective pre and post-SFAS 158 incremental value relevance of the bal- ance sheet and income statement for firms with defined benefit pension plans (DBPP). Results suggest that the value relevance of book value (net income) increased (decreased) for DBPP firms after the implementation of SFAS No. 158. Ó 2012 Published by Elsevier Ltd. Introduction Following years of debate on pension accounting re- form, in September of 2006, Statement of Financial Accounting Standards (SFAS) No. 158 entitled, ‘‘Employers’ Accounting for Defined Benefit Pension and Other Postretire- ment Plans’’ was adopted. An important provision of SFAS No. 158 was that firms with defined benefit pension plans recognize postretirement benefit obligations and net pen- sion obligations (the funded status) on the balance sheet (FASB, 2006). 1 The prior standard, SFAS No. 87 only required footnote disclosure (FASB, 1985). 2 A major criticism of SFAS No. 87 was its complexity and lack of transparency and that using note disclosure provided a significant source for off- balance sheet financing. Hence, a central objective of SFAS No. 158 was to improve the transparency of pension accounting. 3 This study evaluates the effectiveness of SFAS No. 158 in achieving this objective. Much discussion preceded SFAS 158’s enactment including numerous comment letters (FASB Comment Let- ters, 2006). 4 While many of the letters agreed ‘‘in theory’’ with the need for greater transparency, many expressed concerns regarding the potentially unintended economic consequences of including substantial additional pension liabilities on the face of the balance sheet. Some even argued that balance sheet recognition of pension liabilities under SFAS No. 158 could induce firms to abandon defined benefit plans. American International Group’s director of accounting policy Anthony Valoroso wrote, ‘‘we believe transparency can be achieved without creating an incentive for responsi- ble companies to abandon the most secure form of deliver- 1052-0457/$ - see front matter Ó 2012 Published by Elsevier Ltd. http://dx.doi.org/10.1016/j.racreg.2012.07.001 ⇑ Corresponding author. E-mail addresses: rhoumes@ju.edu (R. Houmes), rboylan@ju.edu (R. Boylan), bcrosby@ju.edu (W. Crosby). 1 Net pension obligation or funded status is the difference between the fair market value of the plan’s assets and the projected benefit obligation (PBO). The projected benefit obligation is the estimated present value of future employee benefits and under SFAS 158 is amended to include the estimated employee compensation at retirement rather than current compensation as prescribed under SFAS 87. 2 Although SFAS 87 was later amended by SFAS 88, SFAS 106, and SFAS 132 the essential accounting framework for defined benefit pensions was prescribed by 87. 3 The regulatory emphasis of 158 was the balance sheet as firms continued to smooth pension costs over years and report the effect under other comprehensive income as prescribed by SFAS 87. 4 Two-hundred and forty-six comment letters were received in response to FASB’s exposure draft. Research in Accounting Regulation 24 (2012) 112–114 Contents lists available at SciVerse ScienceDirect Research in Accounting Regulation journal homepage: www.elsevier.com/locate/racreg