Disclosure Versus Recognition: The Case of Asset Revaluations

Cotter, Julie; Zimmer, Ian

doi:10.2139/ssrn.387641

Cited by 17 publications

(32 citation statements)

References 9 publications

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“…Ahmed, Kilic, and Lobo [2006] find similar results for recognized versus disclosed information about derivative financial instruments. Cotter and Zimmer [2003] provide evidence that investors react more to Australian asset revaluations that are recognized than to those that are only disclosed; additionally, firms tend to choose to recognize asset revaluations when asset value estimates are more reliable (e.g., market based), such that investors appear to be correctly viewing recognition as a signal of greater information reliability.…”

Section: R E T R a C T E Dmentioning

confidence: 90%

“…for recognized versus disclosed information about derivative financial instruments. Cotter and Zimmer [2003] provide evidence that investors react Cotter and Zimmer [2003] provide evidence that investors react more to Australian asset revaluations that are recognized than to those that R E T R A C T E D more to Australian asset revaluations that are recognized than to those that are only disclosed; additionally, firms tend to choose to recognize asset reval-…”

Section: R E T R a C T E Dmentioning

confidence: 99%

“…Determining stock-compensation amounts often involves a great deal of subjectivity, and information location is left to the discretion of management. Managers might respond to this measurement uncertainty by choosing to disclose when their estimates are unreliable (similar to Cotter and Zimmer's [2003] evidence with respect to asset revaluations). In contrast, determining lease asset and liability amounts involves little subjectivity (mainly mechanical calculation based on contractually defined amounts), and the specifics of a leasing contract determine information location.…”

Section: R E T R a C T E Dmentioning

confidence: 99%

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Retracted: Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information

Libby¹,

Nelson²,

Hunton³

2006

Journal of Accounting Research

154

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We examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock-compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction decisions for recognized information. While prior literature suggests that amounts are often relegated to footnotes because they are less reliable, our results suggest that the actual choice to disclose versus recognize can also reduce information reliability. These results have implications for the interpretation of prior research on the reliability of recognized and disclosed numbers, for * Johnson Graduate School of Management, Cornell University; †Accountancy Department, Bentley College. We thank Phil Berger, Rob Bloomfield, Shana Clor-Proell, Tom Dyckman, Brooke Elliott, Frank Hodge, Susan Krische, Marlys Lipe, Anne Magro, Mark Peecher, Steve Smith, Jay Thibodeau, an anonymous reviewer, and participants at workshops at Catholic University of Leuven, Cornell University, Drexel University, University of Illinois, University of Iowa, Maastricht University, Oklahoma University, University of Washington, and Washington University for comments. We thank Cornell's Johnson School and Bentley College for financial support, and we thank the Big 4 audit partners who participated in our experiments. R E T R A C T E D and Lease Information R E T R A C T E D and Lease Information R E T R A C T E DWe examine whether information in footnotes might lack reliability because auditors permit more misstatement in disclosed, as opposed to recognized, R E T R A C T E Dauditors permit more misstatement in disclosed, as opposed to recognized, amounts. In both the stock-compensation and lease settings, audit partners R E T R A C T E Damounts. In both the stock-compensation and lease settings, audit partners require greater correction of misstatements in recognized amounts than in R E T R A C T E Drequire greater correction of misstatements in recognized amounts than in the equivalent disclosed amounts. Debriefing questions indicate that the part- R E T R A C T E Dthe equivalent disclosed amounts. Debriefing questions indicate that the partners make these decisions knowingly, even though they expect greater client R E T R A C T E Dners make these decisions knowingly, even though they expect greater client resistance to correcting recognized amounts, because they view recognized R E T R A C T E D resistance to correcting recognized amounts, because they view recognized amounts as more material. Partners also spend more time on correction deci- R E T R A C T E Damounts as more material. Partners also spend more time on correction decisions for...

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Section: R E T R a C T E Dmentioning

confidence: 90%

Section: R E T R a C T E Dmentioning

confidence: 99%

Section: R E T R a C T E Dmentioning

confidence: 99%

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Retracted: Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information

Libby¹,

Nelson²,

Hunton³

2006

Journal of Accounting Research

154

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“…5 Prior literature reports that the reliability of accounting information is different between recognition in financial statements and disclosure in the notes (Bratten et al, 2013;Callahan, Smith, & Spencer, 2013;Cotter & Zimmer, 2003;Davis-Friday, Liu, & Mittelstaedt, 2004;Müller et al, 2015). This is because firm managers and auditors are more likely to scrutinize recognized amounts in financial statements than disclosed information in the notes (Clor-Proell & Maines, 2014;Cotter & Zimmer, 2003;Goncharov, Riedl, & Sellhorn, 2014). The differences in managers' and auditors' attitudes between recognized and disclosed items create differences in the reliability of accounting information.…”

Section: Hypothesis Developmentmentioning

confidence: 99%

Effect of capitalizing operating leases on credit ratings: Evidence from Japan

Kusano

2018

Journal of International Accounting, Auditing and Taxation

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The purpose of this study is to examine the effects of constructively capitalizing operating leases on credit ratings in Japan. In particular, this study investigates whether and how a credit rating agency considers operating lease information when determining credit ratings. First, this study shows that constructively capitalized operating leases are associated with credit ratings. Second, this study finds that the associations between credit ratings and operating leases versus finance leases are not substantially different. However, when operating lease disclosures are less reliable, this study finds that operating leases are not associated with credit ratings and that the risk relevance of operating leases is substantially different from that of finance leases. This study reports that the reliability of accounting information has significant effects on the risk relevance of operating leases. These results indicate that a credit rating agency considers operating lease information in determining credit ratings to the extent that this information is reliable. This study contributes to the literature on the usefulness of operating lease disclosures and to the discussions on the global convergence of accounting standards. JEL Classification: M41, M48

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“…Where there is significant uncertainty in determining FV, it may be necessary to require that an independent valuation is obtained. The relevance of such additional evidence is reflected in market assessments as indicated by the research of Cotter and Zimmer ().…”

Section: Developing the Proposal To Modify Financial Reportingmentioning

confidence: 99%

The Purpose of Financial Reporting: The Case for Coherence in the Conceptual Framework and Standards

Sutton

Cordery

Zijl

2015

Abacus

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This paper proposes a basis for progress in the development of the conceptual framework (CF) as a foundation for developing accounting standards. This topic has gained increased prominence following the IASB's (2013) release of its Review of the Conceptual Framework for Financial Reporting (RCFFR) proposing changes to the CF. In this paper the broad socio-economic environment is seen as determining the primary purpose of General Purpose Financial Reporting (GPFR), which, in turn, establishes the high-level properties of a CF suitable to meet that primary purpose. This is to support market stability and efficiency through the provision of an account of the financial position and performance of an entity that accords with economic reality.The case is made that the primary purpose of a CF is to provide the principles for the development of accounting standards that will result in GPFR that is useful. This requires theoretical coherence. The CF should drive the standards and if standards depart from the CF principles, such departures should be justified. This proposal is consistent with the position adopted in the RCFFR. However, in contrast to the RCFFR, this paper accents the purposive approach and links the formation of standards directly to the CF. This approach implies that standards are subordinate to CF principles; therefore compliance with standards should not provide a basis for compromising the faithful representation of economic reality. From the purpose identified for GPFR, the paper argues for a default presumption in favour of Fair Value Accounting, a retreat from the asset/ liability approach, and a re-casting of the income statement to focus on operational flows.

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Disclosure Versus Recognition: The Case of Asset Revaluations

Cited by 17 publications

References 9 publications

Retracted: Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information

Retracted: Recognition v. Disclosure, Auditor Tolerance for Misstatement, and the Reliability of Stock-Compensation and Lease Information

Effect of capitalizing operating leases on credit ratings: Evidence from Japan

The Purpose of Financial Reporting: The Case for Coherence in the Conceptual Framework and Standards

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