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Chapter 9. Uniformity and Disclosure. Lecture. Choice among accounting methods Uniformity Relevant circumstances Nature of finite and rigid uniformity and flexibility Extent that standards are using finite uniformity, rigid uniformity, or flexibility Disclosure

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chapter 9

Chapter 9

Uniformity and Disclosure

lecture
Lecture
  • Choice among accounting methods
  • Uniformity
    • Relevant circumstances
    • Nature of finite and rigid uniformity and flexibility
    • Extent that standards are using finite uniformity, rigid uniformity, or flexibility
  • Disclosure
  • Items providing important information to users
slide3
What causes a firm to choose one accounting method over another where a free choice can be made? Three reasons…
  • Minimizing agency costs
  • Signaling information that management wants to send to outside parties
  • Attempting to “influence” outside parties
uniformity
Uniformity
  • Uniformityis seen as the concept that influences comparability.
  • Comparability is not an inherent quality of accounting numbers in the sense that relevance and reliability are, but instead deals with the relationship between accounting numbers.
relevant circumstances
Relevant Circumstances
  • Are economically significant circumstances that can affect broadly similar events
  • Two types of relevant circumstances
    • Present magnitudes, conditions known at the time of the event
    • Future contingencies, factors that can be known only at a later date
  • Are an extremely important aspect of the uniformity issue
management relevant circumstances
Management & Relevant Circumstances
  • Selection of accounting methods might be affected by motives different than those dictated by the relevant circumstances
    • maximize reported income... management compensation based on reported income
    • Minimize reported income...fear of government intervention on antitrust grounds
    • Smoothing income...less fluctuation = less risk
  • Potentially capable of distorting income measurement
uniformity7
Uniformity
  • Finite uniformity: Equates prescribed accounting methods with the relevant circumstances in generally similar situations
  • Rigid uniformity: Prescribes one method for generally similar transactions
  • Generally, if finite uniformity can be attained, it is superior to rigid uniformity for the standpoint of decision making
slide8

Broad Event Class

Simple Event

Complex Event

Measurementand/or CostConstraints

Measurable

And Cost

Effective

Rigid

Uniformity

Finite

Uniformity

Rigid

Uniformity

approaches to uniformity
Approaches to Uniformity
  • Rigid uniformity
  • Finite uniformity
  • Flexibility
    • applies to situations in which there are no discernible relevant circumstances
    • but more than one possible accounting method exists
    • prevalent in GAAP
disclosure
Disclosure
  • Is related with information in both the financial statements and supplementary communications-including
    • Footnotes
    • Post-statement events
    • Management’s analyses
    • Additional information beyond historical costs
  • Refers to the whole area of financial reporting and not simply to the financial statements
disclosure function of sec
Disclosure Function of SEC
  • Protective disclosure
  • Informative disclosure...the emphasis since early 1970s
u s securities and exchange commission
U.S. Securities and Exchange Commission
  • The SEC is managed by five (5) commissioners, 5-year appointments made by the President and confirmed by the Senate.
  • A maximum of three commissioners may be from the same political party.
  • Consists of a headquarters in Washington D.C., nine regional offices, six branch offices, and a $600M+ annual budget.
the disclosure process today
The Disclosure Process Today
  • Differential disclosure
    • Annual 10-K
    • Quarterly 10-Q
    • Aimed toward professional financial analysts
  • Additional disclosure?
    • Information overload
    • Information asymmetry (selective disclosure)
    • Signaling theory
    • Cost of disclosure for big vs. small firms
items providing important information
Items Providing Important Information
  • Summary Annual Report (SAR)
    • Condensed financial statements that omit or boil down the detail contained in traditional audited financial statements
    • Evolved from 1983 FEI study concerned with the readability of annual reports
  • Jenkins Committee Report (1994)
    • AICPA study 1991-94
    • Concerned with helping users understand a company’s business
key jenkins report disclosures
Key Jenkins Report Disclosures
  • Segmental disclosures
  • Core and non-core activities, separate then in the financial statements
  • Interim reporting
  • Secondary recommendations
jenkins secondary recommendations
Jenkins Secondary Recommendations
  • Balance sheet items with low verifiability
  • Innovative financial instruments (derivatives)
  • Adequate data for user to make forecast
  • Disclosure about alternatives and methods selected
  • Valuing internally generated intangibles frowned upon
  • Eliminate less relevant disclosures
jenkins committee report
Jenkins Committee Report
  • Does not tangle with FASB’s mission of standard setting
  • Recommends significant increase in disclosure & changing format of financial statements, at odds with SEC which would like to decrease disclosures in corporate annual reports
  • Consistent with conceptual framework
jenkins committee report18
Jenkins Committee Report
  • Adopts the user outlook of SFAC No. 1
  • Appears to be cognizant of market efficiency and its ability to absorb new disclosures
  • International implications...American firms would be at a disadvantage relative to foreign firms
summary
Summary
  • Choice among accounting methods
  • Uniformity
    • Relevant circumstances
    • Nature of finite and rigid uniformity and flexibility
    • Extent that standards are using finite uniformity, rigid uniformity, or flexibility
  • Disclosure
  • Items providing important information to users