Financial accounting standards require firms to clearly and prominently
disclose how an accounting change affects the financial statements in the
year in which the firms adopt the change. Firms on the other hand, are not
required to disclose this information in years following a change, even if the
accounting change has a material impact on financial statements for multiple
years. Which I disagree with, I believe that for accuracy and transparency,
changes should be disclosed for all years affected. The two types of
disclosure of the subsequent year effects of accounting changes. The first is a
reconciliation of results under the new and old accounting method, and the
second is a non-quantitative disclosure that the change occurred. Because of
the reconciliation disclosure and non-quantitative disclosure both aid
memory to some extent. Investors who did not receive multi-period
disclosures about the accounting change exhibit systematic forgetting,
making valuation judgments that converge over time with the valuation
judgments of investors who never received disclosure of the change. A
reconciliation disclosure in periods subsequent to an accounting change could
be costly for companies to produce, given that it requires the company to
maintain accounting records under both the old and new accounting method.
Despite the cost, companies should be expected to report the impact of
changes expected in subsequent years, especially if they have multi-period
impacts. This allows for better long-term decision making. Multi-period
disclosure of accounting changes would be useful to investors and other
users. An example would be, investors who are aware that an income
increasing accounting change occurred may provide a downward valuation of
the company. One reason being investors may view reported earnings as
artificially inflated as a result of the accounting change, and therefore adjust
reported earnings downward to arrive at value relevant earnings. I feel as if
multi-period accounting change disclosure would benefit investors and users
because it would highlight where the company’s growth or strong areas are,
as well as where they struggled or when they struggled.
Emett, S., & Nelson, M. (2017).2Reporting accounting changes and their
multi-period effects.Science Direct. Retrieved June 9, 2022
from:2https://www-sciencedirect-com.ezproxy.snhu.edu/science/article/pii/
S0361368217300144?via%3Dihub
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017).2Intermediate accounting:
Reporting and analysis. Boston, MA: Cengage Learning.
