With pervasive pension deficits, Korean firms have been under pressure to improve their pension funding status. We examine whether firms have incentives to set obligationdecreasing pension assumptions when they have large pension deficits (pension obligations in excess of plan assets) and when they do not make sufficient contributions to external pension funds. We find that firms report larger actuarial gains (or smaller actuarial losses) associated with the remeasurement of pension liabilities when the pension funding ratio (the ratio of the fair value of plan assets to defined benefit obligations) is lower and when contributions to plan assets relative to pension service costs are smaller. Next, upon the introduction of a minimum pension funding guideline, we examine whether firms exercise discretion regarding actuarial assumptions to comply with funding ratio guidelines. We find that the effect of the funding ratio and contributions to pension funds on actuarial gains and losses is more pronounced for firms whose funding ratios are slightly below the minimum funding ratio than for firms whose funding ratios exceed or fall short of the minimum funding ratio by a large margin. Our results indicate that firms opportunistically exercise discretions regarding their corporate pension accounting under International Financial Reporting Standards (IFRS) to comply with pension funding regulations, thereby reducing pension deficits.​

Keywords: IAS 19; Pension accounting; Actuarial assumptions; Managerial discretion