Two Essays: Changes in the Implementation Flexibility and Financial Statement Location of Mandated Accounting Standards; and Does the Financial Statement Location of Transition Adjustments Matter to Investors?
Essay 1: In the 20 years since Balsam et al. (1995b) found evidence that mandated accounting standards provide significant implementation flexibility, numerous structural and environmental changes have occurred to the accounting standards setting process. Using a more recent sample of 13 significant mandated accounting promulgations, I reexamine whether implementation flexibility continues to characterize accounting standards. I find that standards continue to avail firms with adoption timing options. However, it appears that the FASB’s previously documented proclivity to direct equity increasing (decreasing) adjustments to the income statement (balance sheet) temporarily abated in the early years of my study, but this behavior was revived in 2006. Essay 2: Transition adjustments arising from the adoption of promulgated accounting standards are recognized in firms’ financial statements. However, the mandated location of these adjustments has shifted throughout the FASB’s history. Early in the FASB’s existence (1973-1988), transition adjustments were often recognized as part of ordinary income. Subsequent periods (1989-2014) saw the introduction of below the line adjustments to income, and, more recently, the advent of adjustments to comprehensive income. In this paper I explore whether the stock market exhibits a differential response to alternative financial statement reporting locations. I find that when firms adopt new accounting standards investors react to the magnitude of the transition adjustments, but there are no discernable valuation effects across alternative reporting locations. This suggests that affording firms with flexibility in the reporting location of transition adjustments might not effectively mitigate standard setters’ political costs.
Accounting, FASB, accounting standards, implementation flexibility, market response, financial statement reporting location
City University of New York - Graduate Center
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