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Finite uniformity represents the relative approach. Some measurements are better than others in terms of representational faithfulness, and a choice among methods involves trade-offs between relevance and reliability. A “successful efforts” approach to research and development costs would be more representationally faithful than SFAS No. 2, but it could add significantly to verifiability problems. (We personally would favor this treatment, but that is not the issue.) Q-19 Firm A and B are exactly the same size as are Firm C and Firm D. Firm A acquires for cash 100 percent of the common stock of Firm C. Firm B acquires 100 percent of Firm D by exchanging one share of its own stock for each share of common stock of Firm D. Are there differences in relevant circumstances between these two transactions? Explain. This is a somewhat loaded question which is asking whether purchase and “pooling” are really different transactions requiring different accounting approaches. By way of analogy, assume a fixed asset were being acquired by means of (1) cash or (2) some amount of the acquiring firm’s common stock given in exchange for the asset. In both cases we would value the asset acquired in terms of the value of the consideration given up but there would be no different form of accounting for the acquired asset. We might want to use a different method of depreciation based on how we were going to use the asset but how the asset was acquired would be irrelevant. In other words consideration given up to acquire an asset or assets might affect the determination of the value of the asset but would not lead to a different method of valuation (purchase price versus historical cost). Relevant circumstances pertain to how an asset is controlled or used up but not to how much was given to acquire it. Q-20 How do Lev’s views on disclosure differ from the views of Brownlee and Young? Lev is in favor of publicly disseminating as much corporate information as possible to eliminate insider information. He feels that this will prevent markets from getting “thin.” Brownlee and Young favor disseminating information through financial analysts who will aggressively seek this information and sell it to clients. However, this is a form of selective disclosure and not all “players” will have this information. Hence Brownlee and Young would put information on a “supply and demand” basis. Market value of securities, however, would not be based on information symmetry. Q-21 Distinguish between the discrete and integral views of quarterly information disclosure. The discrete view sees each quarterly period as standing on its own whereas the integral view sees the quarter as part of a larger whole: the fiscal year.
Chapter 9: Uniformity and Disclosure: Instructor ManualSome Policy-Making DirectionsAccounting Theory (9thedition) Page 7 of 13 Q-22 What evidence supports the statement that SFAS No. 131is an improvement over SFAS No. 14?