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 Items providing important information to users
What causes a firm to choose one accounting method over another where a free choice can be made? Three reasons… LIFO/FIFO, SL/DDB, Pooling/Purchase Minimizing agency costs (operating lease over capital lease, pooling over purchase) Signaling information that management wants to send to outside parties (selection of methods which provide information about future cash flows) Attempting to “influence” outside parties (LIFO over FIFO or DDB over SL
Uniformity Uniformity is 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 (SFAC 2).
Relevant Circumstances Are economically significant circumstances that can affect broadly similar events and accounting methods (criteria for selecting methods or format of financial statements) Two types of relevant circumstances Present magnitudes, conditions known at the time of the event (e.g., detail of lease contract, percentage of stock ownership) Future contingencies, factors that can be known only at a later date (e.g., resolution of a pending litigation, expected economic life of an asset) Are an extremely important aspect of the uniformity issue
Management & Relevant Circumstances Selection of accounting methods might be affected by motives different than those dictated by the relevant circumstances maximize reported income... management
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