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Predicting cash flows related to defined benefit plan contributions

Published online by Cambridge University Press:  15 February 2010

THOMAS D. DOWDELL JR ,
BONNIE K. KLAMM  and
ROXANNE M. SPINDLE
THOMAS D. DOWDELL JR*
Affiliation:
North Dakota State University, College of Business, Accounting, Finance, and Information Systems Department, Fargo, ND58108-6050 (e-mail: Thomas.Dowdell@ndsu.edu)
BONNIE K. KLAMM
Affiliation:
North Dakota State University, College of Business, Accounting, Finance, and Information Systems Department
ROXANNE M. SPINDLE
Affiliation:
Virginia Commonwealth University, School of Business, Department of Accounting
*
*Corresponding author.
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Abstract

Future contributions to defined benefit pension plans are a significant cash flow item that can be difficult to estimate. Funding ratios – pension assets relative to pension liabilities – have long been considered important for estimating cash flows needed for current and future pension contributions (Ballester et al., 1998). However, US GAAP or IFRS funding ratios that companies report in their financial statements may differ from funding ratios used by pension regulators. These regulatory funding ratios may be more useful for predicting future contributions.

We investigate whether US regulatory and GAAP funding ratios are different and whether regulatory funding ratios provide useful information for predicting future contributions. For 3,877 firm years from 1995 through 2002, we observe that regulatory and GAAP funding ratios differ by more than 5% for 73% of our sample. We also find that predictions of future contributions are improved by using regulatory funding ratios in addition to GAAP funding ratios. Our results are relevant to accounting standard setters' ongoing review of pension accounting rules.

Type
Articles
Information
Journal of Pension Economics & Finance , Volume 9 , Issue 4 , October 2010 , pp. 505 - 532
Copyright
Copyright © Cambridge University Press 2010

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