The use of accounting flexibility to reduce labor renegotiation costs and manage earnings☆

Journal of Accounting and Economics · 2000 · Volume 30 · Issue 2

Abstract

We investigate the determinants of discretionary SFAS 106 choices of non-regulated firms. We find that more unionized firms are more likely to use immediate recognition, consistent with incentives to reduce labor renegotiation costs. Immediate recognition is more prevalent among post-adoption plan modifiers, particularly if their transition obligation is large, consistent with incentives to increase future reported earnings. Immediate recognition, together with post-adoption benefit plan reduction, frees future income from the transition obligation amortization expense and adds a positive component as negative prior service costs are amortized. Immediate recognition is less prevalent among firms with higher potential debt contracting costs.

Keywords

Labor negotiations, Earnings management, Postretirement benefits, Accounting flexibility

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