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
Broad Event Class
Simple Event
Rigid
Uniformity
Complex Event
Measurement
and/or Cost
Constraints
Measurable
And Cost
Effective
Rigid
Uniformity
Finite
Uniformity
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 communicationsincluding
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
Differential disclosure
Annual 10-K
Quarterly 10-Q
Aimed toward professional financial analysts
Additional disclosure?
Information overload
Information asymmetry (selective disclosure)
Signaling theory
Cost of disclosure for big vs. small firms
Items Providing Important Information
Summary Annual Report (SAR)
Condensed financial statements that omit or boil down
the detail contained in traditional audited financial
statements
Evolved from 1983 FEI study concerned with the
readability of annual reports
Jenkins Committee Report (1994)
AICPA study 1991-94
Concerned with helping users understand a company’s
business
Key Jenkins Report Disclosures
Segmental disclosures
Core and non-core
activities, separate
then in the financial
statements
Interim reporting
Secondary
recommendations
Jenkins Secondary Recommendations
a.
b.
c.
d.
Balance sheet items with low verifiability
Innovative financial instruments (derivatives)
Adequate data for user to make forecast
Disclosure about alternatives and methods
selected
e. Valuing internally generated intangibles frowned
upon
f. Eliminate less relevant disclosures
Jenkins Committee Report
Does not tangle with FASB’s mission of
standard setting
Recommends significant increase in
disclosure & changing format of financial
statements, at odds with SEC which would
like to decrease disclosures in corporate
annual reports
Consistent with conceptual framework
Jenkins Committee Report
Adopts the user outlook of SFAC No. 1
Appears to be cognizant of market
efficiency and its ability to absorb new
disclosures
International implications...American firms
would be at a disadvantage relative to
foreign firms
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