Recognition Versus Disclosure In Financial Statements
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The Impact Of Recognition Versus Disclosure On Financial Information
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Author : Shana Clor-Proell
language : en
Publisher:
Release Date : 2014
The Impact Of Recognition Versus Disclosure On Financial Information written by Shana Clor-Proell and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
We investigate whether recognition on the face of the financial statements versus disclosure in the footnotes influences the amount that financial managers report for a contingent liability. Using an experiment with corporate controllers and chief financial officers, we find that financial managers in public companies expend more cognitive effort and exhibit less strategic bias under recognition than disclosure. This difference appears to be associated with capital market pressures experienced by public company managers as we find that both the cognitive effort and bias exhibited by private company managers are unaffected by placement. As a result, public company managers make higher liability estimates for recognized versus disclosed liabilities. Their liability estimates are similar to those of private company managers for recognition but lower than private company managers' estimates for disclosure. Our results have implications for auditors and financial statement users in evaluating recognized versus disclosed information for public and private companies.
Does Recognition Versus Disclosure Matter
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Author : Kun Yu
language : en
Publisher:
Release Date : 2009
Does Recognition Versus Disclosure Matter written by Kun Yu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2009 with categories.
Abstract: An important area of research and issue of interest for standard setters is whether information disclosure in the footnotes is a substitute for recognition in the financial statements. SFAS 158, issued in 2006, requires the recognition of pension liabilities that were only disclosed in the footnotes under SFAS 87, for the fiscal year ending after Dec. 15, 2006. I empirically examine whether the recognition of the previously disclosed off-balance-sheet pension liabilities affects investors' valuation and firms' contracting costs. I also incorporate levels of investor sophistication in my analyses. Using a sample of firms with pension liabilities that were disclosed under SFAS 87 and subsequently recognized under SFAS 158 from 1999 to 2007, I find that, without considering investor sophistication, SFAS 158 generally does not increase the value relevance of the previously disclosed off-balance-sheet pension liabilities. However, after taking into account investor sophistication, I show that the disclosed off-balance-sheet pension liabilities are more value relevant for firms with a higher level of investor sophistication in the pre-158 period; more importantly, I find that SFAS 158 significantly increases the value relevance of the previously disclosed off-balance-sheet pension liabilities for firms with a low proportion of sophisticated investors, and the increase in the value relevance is less pronounced for firms with a higher proportion of sophisticated investors. Consistent with the contracting theory, I find that requiring the recognition of previously only-disclosed liabilities affects the debt contracting cost and the cost of capital. However, only sophisticated investors appear to understand the effect of SFAS 158 on the debt contracting cost and the stock price. Overall, the results support that recognition affects investors' valuation and firms' contracting costs. The results also highlight the role of the level of investor sophistication in the value relevance of disclosed vs. recognized financial information.
Recognition Versus Disclosure In Financial Statements
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Author : Frank D. Hodge
language : en
Publisher:
Release Date : 2014
Recognition Versus Disclosure In Financial Statements written by Frank D. Hodge and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2014 with categories.
Research suggests that investors and creditors react less strongly to information disclosed in footnotes than to information recognized on the face of financial statements, due at least in part to cognitive processing limitations. Emerging technologies (e.g., XBRL) that facilitate directed searches and simultaneous presentation of related financial statement and footnote information could potentially alleviate these limitations. We use an experiment to investigate whether the use of a search-facilitating technology affects how individuals react to recognition versus disclosure of stock option compensation. We find that the use of search-facilitating technology reduces differences in nonprofessional investors' financial performance judgments and investment decisions created by recognition versus disclosure. Additionally, we provide evidence that investors perceive greater differences in financial statement reliability between recognition and disclosure when they use search-facilitating technology. Overall, our findings suggest that search-facilitating technology improves the transparency of financial statement information and therefore may reduce incentives for firms to lobby for or to choose footnote disclosure to minimize the effects of negative information.
Recognition Versus Disclosure
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Author : Doron Israeli
language : en
Publisher:
Release Date : 2015
Recognition Versus Disclosure written by Doron Israeli and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
The application of International Accounting Standard (IAS) 40, Investment Property, in the European Union created a unique setting to study the implications of a decision to recognize versus disclose financial statements' items because in this setting recognized and disclosed investment-property-related amounts share a common measurement base, i.e., fair value. I utilize this setting to (1) explore factors associated with a firm's choice to recognize versus disclose fair values of investment properties, (2) test whether recognized and disclosed amounts are valued equally by equity investors, and (3) determine whether these amounts exhibit equivalent associations with future financial outcomes. To correct for self-selection concerns and assure I compare analogous amounts, I develop a selection model and construct investment-property-related amounts that differ only in whether their components are recognized or disclosed. I find that (1) contractual and asset pricing incentives help explain the recognition versus disclosure choice, (2) investors place smaller valuation weights on disclosed amounts, and (3) recognized and disclosed amounts exhibit statistically equivalent associations with future changes in net rental income and cash flows from operations. Taken together, the evidence suggests that managers are opportunistic in making the recognition versus disclosure choice and that even when recognized and disclosed amounts share an equivalent measurement base and are equally relevant for future financial outcomes, investors weight disclosed information less heavily in determining a firm's value.
The Value Relevance Of Financial Statement Recognition Vs Disclosure
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Author : Paquita Y. Davis-Friday
language : en
Publisher:
Release Date : 2000
The Value Relevance Of Financial Statement Recognition Vs Disclosure written by Paquita Y. Davis-Friday and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2000 with categories.
This study examines whether the market values financial statement data differently if it is disclosed instead of recognized in the body of the financial statements. We identify a sample of 229 SFAS No. 106 adopters who disclose an estimate of their anticipated liability for retiree benefits other than pensions (PRB) in their financial reports prior to the year of recognition. We then test whether the disclosed estimate of the PRB liability is valued differently by the market than is the subsequently recognized PRB liability. We provide modest and model-sensitive evidence that the recognized PRB liability receives more weight than the disclosed liability in market value association tests.
Effects Of Recognition Versus Disclosure On The Structure And Financial Reporting Of Share Based Payments
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Author : Preeti Choudhary
language : en
Publisher:
Release Date : 2000
Effects Of Recognition Versus Disclosure On The Structure And Financial Reporting Of Share Based Payments written by Preeti Choudhary and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2000 with categories.
Does Recognition Versus Disclosure Affect Debt Contract Design Evidence From Sfas 158
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Author : John Donovan
language : en
Publisher:
Release Date : 2019
Does Recognition Versus Disclosure Affect Debt Contract Design Evidence From Sfas 158 written by John Donovan and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2019 with categories.
We study how recognition versus disclosure affects the control function of accounting through the use of debt covenants. While research shows that recognition affects the value-relevance of reported amounts, the effect on contracting is unclear. We examine whether covenants changed around SFAS 158 adoption, which required recognition of previously disclosed pension liabilities. We find that pension underfunding is negatively associated with the use of capital (i.e., balance sheet) covenants prior to recognition. Post-SFAS 158, pension underfunding is associated with a higher likelihood of using capital covenants relative to the pre-period. We find no evidence that SFAS 158 alters the use of income statement covenants. Additional analysis suggests a decrease in cost of debt with no corresponding change in credit risk. Collectively, the evidence suggests that recognition enables more effective allocation of control through the use of covenants because financial statements better represent the financial condition of the borrower.
Recognition Versus Disclosure Of Fair Values
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Author : Maximilian A. Müller
language : en
Publisher:
Release Date : 2015
Recognition Versus Disclosure Of Fair Values written by Maximilian A. Müller and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2015 with categories.
This paper examines pricing differences across recognized and disclosed fair values. We build on prior literature by examining two theoretical causes of such differences: lower reliability of the disclosed information, and/or investors' higher related information processing costs. We examine European real estate firms reporting under International Financial Reporting Standards (IFRS), which require that fair values for investment properties, our sample firms' key operating asset, either be recognized on the balance sheet or disclosed in the footnotes. Consistent with prior research, we predict and find a lower association between equity prices and disclosed relative to recognized investment property fair values, reflecting a discount assigned to disclosed fair values. We then predict and find that this discount is mitigated by lower information processing costs (proxied via high analyst following), and some support that it is also mitigated by higher reliability (proxied via use of external appraisals). These latter results are documented using subsample analyses to test one attribute (either information processing costs or reliability) while holding the other constant. Overall, these findings are consistent with fair value reliability and information processing costs providing complementary explanations for observed pricing discounts assessed on disclosed accounting amounts.
Does Recognition Instead Of Disclosure Matter To The Users Of Financial Statements
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Author : Paquita Y. Davis-Friday
language : en
Publisher:
Release Date : 1998
Does Recognition Instead Of Disclosure Matter To The Users Of Financial Statements written by Paquita Y. Davis-Friday and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 1998 with categories.
This paper uncovers a potential explanation for the discrepancy between Amir (1996) and Choi, Collins, and Johnson (1997) by examining whether the users of financial statement data treat information differently if it is disclosed instead of recognized in the body of the financial statements. Amir (1996) finds that the liability for postretirement benefits other than pensions (PRBs) is value-relevant conditioned on earnings and pension information while Choi et al. (1997) find that the PRB liability is measured with more error than the pension liability and is therefore less reliable. Since Amir's sample consists only of SFAS 106 adopters and the Choi et al. sample includes both adopters and non-adopters (disclosers), we identify a sample of early adopters who disclose an estimate of their anticipated liability in the Management Discussion and Analysis (MDamp;A) or notes to their financial statements. We test whether accounting information disclosed in the MDamp;A or notes (the estimate of the PRB liability) is valued by the market the same as information recognized in the financial statements (the recognized PRB liability). The results indicate that the recognized PRB liability is capitalized at a higher rate than the disclosed liability. Our evidence suggests that the market treats information disclosed in the notes in this context as less reliable than similar information recognized in the body of the financial statements.
The Real Effects Of Financial Statement Recognition
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Author : Riddha Basu
language : en
Publisher:
Release Date : 2018
The Real Effects Of Financial Statement Recognition written by Riddha Basu and has been published by this book supported file pdf, txt, epub, kindle and other format this book has been release on 2018 with categories.
We examine whether the recognition versus disclosure of identical accounting information affects the credit rating process and ultimately corporate credit ratings. The primary input into corporate credit ratings is adjusted financial statements, which the rating agencies create by modifying reported financial statements to reflect credit-relevant items not recognized under U.S. GAAP. The rating agencies have claimed that this process means that accounting changes that move previously disclosed information onto firms' financial statements have virtually no effect on firms' adjusted financial statements or their credit ratings. We show that this claim is incorrect using the implementation of Financial Accounting Standards Board Statement No. 158 (“SFAS158”). This standard did not prescribe any new financial information. Rather, it simply required the balance sheet recognition of a previously disclosed item. We find that firms recognizing an additional pension liability due to SFAS158 had lower leverage on the rating agency adjusted financial statements and received higher corporate credit ratings. This counterintuitive result occurs because the rating agency adjustments made pre-SFAS158 were punitive relative to the combination of the SFAS158 changes and the rating agency adjustments made post-SFAS158. The difference in rating agency adjustments pre- and post-SFAS158 was primarily due to rating agency adjustments in the pre-SFAS158 period that did not account for minimum liability adjustments, an aspect of pension accounting eliminated by SFAS158. Overall, our results indicate that SFAS158 generated real changes in rating agency adjustments, and that these changes had real consequences for firms' credit ratings.