Chapter 9 Uniformity and Disclosure.ppt

Chapter 9: Uniformity and Disclosure 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 Relevant Circumstances Are economically significant circumstances that can affect broadly similar events Two types of relevant circumstances Present magnitudes, conditions known at the time of the event Future contingencies, factors that can be known only at a later date 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 compensation based on reported income Minimize reported income...fear of government intervention on antitrust grounds Smoothing income...less fluctuation = less risk Potentially capable of distorting income measurement Uniformity Finite uniformity: Equates prescribed accounting methods with the relevant circumstances in generally similar situations Rigid uniformity: Prescribes one method for generally similar transactions Generally, if finite uniformity can be attained, it is superior to rigid uniformity for the standpoint of decision making Approaches to Uniformity Rigid uniformity Finite uniformity Flexibility applies to situations in which there are no discernible relevant circumstances but more than one possible accounting method exists Prevalent in GAAP Disclosure Is related with information in both the financial statements and supplementary communications-including Footnotes Post-statement events Management’s analyses Additional information beyond historical costs Refers to the whole area of financial reporting and not simply to the financial statements Disclosure Function of SEC Protective disclosure Informative disclosure...the emphasis since early 1970s The Disclosure Process Today