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Chapter 9: Uniformity and Disclosure

Chapter 9: Uniformity and Disclosure. 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 . Relevant Circumstances.

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Chapter 9: Uniformity and Disclosure

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  1. Chapter 9: Uniformity and Disclosure • 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

  2. 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

  3. 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

  4. 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

  5. Broad Event Class Simple Event Complex Event Measurementand/or CostConstraints Measurable And Cost Effective Rigid Uniformity Finite Uniformity Rigid Uniformity

  6. 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

  7. 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

  8. Disclosure Function of SEC • Protective disclosure • Informative disclosure...the emphasis since early 1970s

  9. The Disclosure Process Today • Differential disclosure • Annual 10-K • Quarterly 10-Q • Aimed toward professional financial analysts • Additional disclosure? • Information overload • Information asymmetry • Signaling theory • Cost of disclosure for big vs. small firms

  10. 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

  11. Key Jenkins Report Disclosures • Segmental disclosures • Core and non-core activities, separate then in the financial statements • Interim reporting • Secondary recommendations

  12. 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

  13. 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

  14. 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

  15. Chapter 9: Uniformity and Disclosure • 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

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