Financial Reporting Outcomes under Rules-Based and Principles-Based Accounting Standards

Abstract

SYNOPSIS: This archival study addresses whether the presence or absence of “bright lines” in a lease accounting standard influences the classification of leases as capital or operating. To the best of our knowledge, our study is the first archival research to address the association between lease classification decisions and the use of U.S. GAAP and IFRS lease accounting standards. We examine firms' lease classification decisions using 2007–2009 data from a matched sample of members of the Fortune Global 500 that report under U.S. GAAP and IFRS. Consistent with experimental work by Agoglia et al. (2011), we find strong evidence that U.S. GAAP firms using a lease standard containing bright-line guidance (i.e., ASC 840) are more likely to classify leases as operating than IFRS firms adhering to a lease accounting standard that lacks the bright lines of the U.S. standard (i.e., IAS 17). Also consistent with Agoglia et al. (2011), we find little evidence of increased dispersion accompanying financial reporting under IFRS. In fact, we find some evidence suggesting the use of IFRS may actually lead to lower dispersion in reporting outcomes.

Manager's Discretionary Power and Comparability of Financial Reports: An Analysis of the Regulatory Transition Process in Brazilian Accounting

“…In the model adjusted by stepwise, the years 2011 and 2012 had a significantly higher average comparability when compared to 2004. The results found corroborate other researches addressing the quality of accounting information (Collins, Pasewark, & Riley, 2012;Psaros & Trotman, 2004;Agoglia, Doupnik, & Tsakumis, 2011) and prove the superiority of the principle-based standard also over the comparability of financial reports. The main conclusion of this research is that increasing manager's discretionary power through flexibility of accounting standards does not decrease the comparability of financial reports.…”

“…Another study that investigated the relationship between the two accounting standard systems was Collins et al (2012). The objective of this research was analyzing variation in the classification of leasing operations in both types of regulations.…”

“…an increased level of judgment allows managers to incorporate more properly the economic events and their various nuances in accounting numbers, thus increasing their comparability (Dye & Verrecchia, 1995;Securities and Exchange Commission, 2003;Agoglia et al, 2011). The studies by Collins et al (2012) and Agoglia et al (2011) found differences between accounting choices (and, as a consequence, in the final outcome of financial reports) by managers working under rather strict regulatory systems when compared to those working under rather flexible systems, although in the latter no rather scattered outcomes have been found. In turn, Dye and Verrecchia (1995) argue, based on their research, that a pattern with greater discretion is more informative than a strict pattern.…”

“…Although there are empirical studies that evaluated the effects of regulatory changes on outcomes of financial reports or on the interpretive behavior of a manager in translating economic events into accounting numbers (Agoglia et al, 2011;Collins et al, 2012;Dye, 1985;Dye & Verrecchia, 1995;Psaros & Trotman, 2004;Stolowy & Ding, 2003;Ashbaugh, 2001;Ashbaugh & Pincus, 2001;Nelson, 2003;Jamal & Tan, 2010;Donelson et al, 2012), there is little prior evidence of the impact of regulatory flexibility directly on the comparability of financial reThe corporate scandals that occurred in the beginning of the last decade (e.g. Enron and WorldCom) and the subprime crisis in the USA rekindled an old debate between accountants on how accounting should be regulated: according to rather strict and specific rules or rather flexible and generic principles -for more details see Merino and Coe (1978).…”

“…In turn, the standards based on rules have a certain level of detail concerning their implementation and greater compliance. Regarding this theme, Collins, Pasewark and Riley (2012) claim that, according to this characterization, for a given scenario of financial reporting, standards based on principles require from a professional accountant greater judgment, while those standards based on rules requiring greater expertise in seeking legislative knowledge. Researchers claim that most accounting standards -either the U.S. or the International Financial Reporting Standards (IFRS) -have an extension based on rules, i.e.…”