Considering the fact that the financial statements are meant to
deliver fairly represented information which accurately portrays the
companies financial standing as of a given point in time, considering
the results of the test in the article, that investors benefit to a greater
degree when accounting changes are disclosed over a multi year time
period subsequent to the accounting change. According to the test,
those individuals who were given little to no information in
subsequent periods tended to value the stock of the company at a
much higher price as the impact to the stock only occurs in the year
the change happened. This causes issues however when it comes to
fairly representing figures for investors as there is a tendency to over
estimate the price of the stock being that investors had forgotten
about the change. In this regard I believe that the best method which
holds true to the goal of financial statements would be to use the
"smoothing effect" instead of the "fair value method" (see below).
The non switchers in these instances were those who were given the
test using the smoothing method whereas the switchers were given
fair value with various types of reminders given their test group. As
we can see those who were given the smoothing approach
consistently valued the stock at a lower average as compared with
those who are given just a reminder of the change. The most accurate
method is certainly the smoothing method as it accurately represents
the change over time, if I were an investor I would want the company
to use this method for my analysis as it is the most conservative.
As we can see from the graph the larger amount of information given
leads to a lower stock price estimate or alternatively the less amount
given a higher one. Given this I would expect that multiperiod
disclosures would be very useful for investors as the test indicates
that given time, if there is not a reminder present, investors tend to
forget which could effect their investing process. In addition the
smoothing method allows for consistency between account periods.
Reference:
Emett, S., & Nelson, M. (2017).
Reporting accounting changes and
their multi-period effects.
Science Direct. Retrieved June 9, 2022
