Recognition Versus Disclosure
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| Author | : Jeremy Michels |
| Publisher | : |
| Total Pages | : 55 |
| Release | : 2016 |
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Standard setters explicitly state that disclosure should not substitute for recognition in financial reports. Consistent with this directive, prior research shows that investors find recognized values more pertinent than disclosed values. However, it remains unclear whether reporting items are recognized because they are more relevant for investing decisions, or whether requiring recognition itself prompts differing behavior on the part of firms and investors. Using the setting of subsequent events, I identify the differential effect of requiring disclosure versus recognition in a setting where the accounting treatment of an item is exogenously determined. For comparable events, I find a stronger initial market response for firms required to recognize relative to firms that must disclose, although the large magnitude of the identified effect calls into question whether this difference can be attributed to accounting treatments alone. In examining various reasons for the stronger market response to recognized values, I fail to find support for the hypothesis that this difference is due to differential reliability of disclosed and recognized values. I do find some evidence that investors underreact to disclosed events, consistent with investors incurring higher processing costs when using disclosed information.
| Author | : Doron Israeli |
| Publisher | : |
| Total Pages | : 59 |
| Release | : 2015 |
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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.
| Author | : Preeti Choudhary |
| Publisher | : |
| Total Pages | : 103 |
| Release | : 2000 |
| Genre | : |
| ISBN | : 9780549486183 |
| Author | : Shana Clor-Proell |
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| Total Pages | : |
| Release | : 2014 |
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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.
| Author | : Kun Yu |
| Publisher | : |
| Total Pages | : 436 |
| Release | : 2009 |
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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.
| Author | : Maximilian A. Müller |
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| Total Pages | : |
| Release | : 2013 |
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| Author | : Maximilian A. Müller |
| Publisher | : |
| Total Pages | : 55 |
| Release | : 2015 |
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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.
| Author | : Chunqi Zhang |
| Publisher | : |
| Total Pages | : 176 |
| Release | : 2005 |
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| Author | : Jeany Yonghao Zheng |
| Publisher | : |
| Total Pages | : 40 |
| Release | : 1997 |
| Genre | : Current value accounting |
| ISBN | : |
| Author | : Julie Cotter |
| Publisher | : |
| Total Pages | : 32 |
| Release | : 2003 |
| Genre | : |
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Australian GAAP requires firms to either disclose or recognize the current values of real estate in their financial statements. Given recognition criteria related to reliable measurement, the propensity to recognize an upward revaluation is subject to the inherent uncertainty of the assessed increase in value. Accordingly, we predict and find that managers are more likely to recognize (rather than just disclose) revaluations when the revaluation estimate is more reliable. The recognition criteria contained in Australian GAAP implies that market participants will rationally infer that revaluations recognized in the balance sheet are more reliably measured than those disclosed in footnotes. An analysis of share market effects finds that the market discounts disclosure compared to recognition of real estate revaluations. This effect becomes insignificant when controls for the reliability of revaluations are included in the analysis, and we therefore conclude that the value relevance of recognized revaluations is not due to recognition per se, but rather to the fact that the assets being revalued are more reliably measured.
