Earnings Management: The Case of Other Postemployment Benefits and SFAS No. 106 (Manuscripts) (Statement of Financial Accounting Standard‪)‬

ABSTRACT SFAS No. 106 dramatically changed the way firms account for other postemployment benefits (OPEBs). Firms must now record OPEB expenses on an accrual basis, which typically results in a much higher expense being recorded than under the cash basis method required by the predecessor standard. Most firms are not contract bound with respect to their OPEB plans and, thus, may curtail employee benefits to offset the higher expenses resulting from SFAS No. 106. In addition, with the many estimates used to compute the OPEB expense and the options of adopting the standard early as well as recognizing the entire transition obligation immediately, SFAS No. 106 provided a variety of methods for managing earnings. The current study examines the financial statements of 100 firms over the seven-year period subsequent to the implementation of SFAS No. 106 to determine whether and to what extent earnings management may have occurred. The results suggest that, in general, firms have engaged in significant earnings management with respect to SFAS No. 106.