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). Reporting accounting changes and their
multi-period effects. Science Direct. Retrieved June 9, 2022 from:
https://www-sciencedirect-
com.ezproxy.snhu.edu/science/article/pii/S0361368217300144?via%3Dihub
Whalen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting:
Reporting and analysis. Boston, MA: Cengage Learning.
