Uniformity and

SomeDisclosure
Policy-Making Directions

By :

Billy Adhira (041924253022)

Saikou Conteh (041924253024)

Magister Akuntansi Universitas Airlangga 2020 ©

What Underlies the Choice Among Accounting Methods?

This is the matter that concerned with attempt to limit or restrict choices a
mong accounting methods that can exist in the same transaction or even si
tuations.
Examples :
a. LIFO vs FIFO
b. Straight Line vs Acceleration Depreciation Method
c. Purchase vs Pooling of Interest
Uniformity
“Sprouse” sees comparability as both a process (accountin
g for circumstances in accordance with similiarities or differenc
es) and an end result of this process (comparing alternatives to
make a decision).
Comparability is linked to uniformity, the degree of compar
ability that users can rely on is directly dependent on the level o
f uniformity present in financial statemens.
SFAC No 8 : “Comparability is the qualitatice characteristic
that enables users to identify and understand similiarities in, an
d differences among, items.
The Nature and Complexity of Events
An event has been recoreded in SFAC Some other examples of event complexity involve
No 6 as “a happening consequence to situations such as the following :
an entity”. Transactions occur between • Acquisition of common stock for control purpo
entities, between a firm and its emplo ses where the percentage of stock owned may
yees, and between a firm and investor vary.
s or lenders. • Difference in expected usage or benefit patter
In the case of long-term leases, some ns of depreciable fixed assets and intangibles
of the complicating factors are : • Long-term construction contracts in which pay
• The clause in lease providing for c ment by the buyer becomes uncertain
ancellation by either party;
• The proportion of assets life the l
ease period is expected to cover;
• The possible existence of favorabl
e renewal privileges (either for pu
rchase or rental) a the end of the
original lease period.
Relevant Circumstances
In the case of leases, all the elements considered are stipulated in the contrac
t; hence, they are known at the inception of the lease (except for the expected
life of the asset).

The Terminology of Relevance

Relevant circumstances are of two general types. Those conditions, known
only at a later date are called future contingencies. Relevant circumstances
pertain directly to the event accounted for and influence the accounting
method selected to represent the event.

The Role of Management in Relevant Circumstances

• Maximizing short-run reported income if it’s the basis for managerial
compensation
• Minimizing short-run reported incomr if there is fear of governmental
intervention on antitrust grounds
• Smoothing income if its believed that stockholders perceive the firm has a
lower amount of risk han is the case if greater fluctuations of earnings are
present
Finite and Rigid Unformity

The Need for an Alternative to Finite Unformity.

Rigid Unformity is prescribing one method for generally similar

transactions even though relevant circumstances are present.

Finite and Rigid Uniformity Relative to

Represantioanal Faithfulness and Verifiability
Finite uniformity should be more representationally fathful than rigid
uniformity. The approach to represantional faithfulness under finite
uniformity is that three are degrees of representational faithfulness.
The Present Status of Uniformity
Rigid Uniformity
In the case of Research and Development
costs, despite the presumed presence of future
benefits arising from an important proportion
of these costs, SFAS No 2 requires they be
immediately expensed
Flexibility
Flexibility is very prevalent in generally
accepted accounting principles. In addition to
the investment tax credit, depreciation
accounting provides a special example of
flexibility.

Finite Unformity
In the former case, any one of four conditions
is sufficient to warrant capitalization, whereas
the absence of all four results in an operating
lease. In the second situation, ownership
various percentage ranges of common stock
results in either full consolidation, equity, or
fair market value method. However, the FASB
recognized the fuzziness of stock ownership as
a criterion for degree of control when it noted
in interpretation no 35 that the 20%
demarcation point between cost then in effect
and equity methods is a guideline rather than
an inviolable rule.
The Present Status of Uniformity
Formulating Accounting Policy
In the various event categories, if its possible to discern relevant circumstances and they
can be measured and implemented in a cost effective manner, finite uniformity should be
implemented.

Uniformity Within Industries and

Relevant Circumstances
A possible aid to standard setters,
if they should attempt to bring
about uniformity, is that evidence
exists that there is some degree of
similiarity relative to accounting
method choices within industries,
particularly if they are of a similar
size.
The Usefulness of Accounting Allocations
Allocations are criticized on the grounds that they are incorrigible. There is no
absolutely correct way to allocate costs because no single allocation method
can be proved as the “scientifically” superior than another methods. For this
reason, all accounting allocations are concluded, in the end, as an arbitrary.

Disclosure
Broadly interpreted, disclosure is concerned with information in both the
financial statements and supplementary communications including footnotes,
post statement events, managements discussion and analysis of operation for
the forthcoming year, financial and operating forecasts, the summary of
significant accounting policies, and additional financial statements covering
segmental disclosure and extention beyond historical cost.
The Disclosure Function of the SEC
One of these can be termed protective disclosure since the SEC is concerned with protecting uns
ophisticated investors from unfair treatment. The other aspect is informative disclosure, the full ra
nge of information useful for investment analysis purposes. Obviously, there is some degree of ov
erlap between these functions of disclosure.

The Shift Toward Informative Disclosure

After the FASB exposure draft on general price level statements came out, for most major firms t
he SEC in ASR 190 required supplementary disclosures of replacement cost information for depre
ciation expense, fixed assets valuation, cost of good sold, and inventories
Imperfection of the Disclosure Process
Beaver believed that the emphasis on more disclosure in the annual report downgraded the impo
rtance of the differential disclosure approach. Differential disclosure is distinguished from selectiv
e disclosure. The latter indicates more information available to some individuals, which is informat
ion asymmetry. This constitutes insider information and raises the possibility that those in possess
ion of the insider information can earn an abnormal return.

Forms and Methods of Disclosure

Managements Discussion and Analysis
• Results of operations, including information on selling price changes, cost changes, and
volume changes
• Assessment of the enterprise’s future liquidity
• Capital resources and planned capital expenditures]
• Known trends, uncertainties, and future events which might have a material effect on
subsequent no 1-3
Signalling and Management Earnings Forecast

Lev and Penman found that firms that disclosed expected favorable earnings were indeed reward
ed by favorable changes in security prices. They also found that nondisclosing firms in the same i
ndustry as forecasting firms were not negatively affected by not publishing their earnings forecas
t. Furthermore, some firms that did disclose “bad news” were subject to negative price reactions.
SFAC No 131
SFAC No 131 requires segment reporting by “management approach which…is based on the way
that management organizes the segment within enterprise for making operating decisions and
assessing performance. This is clearly intended to follow through on the committees segmental
disclosure recommendation.
Quarterly Information

The SEC requires many publicy traded companies to disclosure quarterly financial data. Interest in
these reports oerked up significantly in our age of instant information and communication. Lang
and Lundhom found that firms with more indormation disclosure policies have a greater analyst
following, more accurate analyst earnings forecasts, and less volatility in forecast revisions.

Small Firms vs Larger Firms

Recent suggests that the disclosure of small firms, such as earning announcements as well as
published financial statements for larger firms. The reason for this may be that much less
information is publicy available on smaller firms, which makes their published financial statements
and related disclosures relatively more important for investors and therefore more
comperehensive.
Improving Accounting Standards

It s in the best auditors ro require better disclosure of related party

transactions such SPE’s used by Enron, among others. Disclosure should show
how SPEs affect the parents financial position and the nature of the various
interests in the SPE.
 Thank you
Accounting Theory, University of Airlangga Surabaya 2020