Empirical evidence from the academic literature on capital market effects of financial information placement (i.e., recognition on the face of the primary financial statements versus disclosure in the notes to the financial statements) is not straightforward. Therefore, the purpose of this paper is to contribute to the recognition versus required disclosure debate in a standard-setting context by exploring possible reasons for perceived differences between recognized and disclosed amounts. These differences, in our view, arise due to demonstrated auditors’ greater tolerance for misstatement in disclosed amounts, allowed noncompliance with disclosure requirements even in strong enforcement regimes, lesser care that preparers of financial statements devote to disclosures relative to recognized items as well as behavioural factors and differential processing costs related to the users of financial information. We believe that these arguments strengthen the case for the general preference for the recognition of financial information in the standard-setting context. The original scientific contribution of this paper is to systematically identify the reasons for the differences between recognized and disclosed amounts in financial statements. As such, this paper may provide a suitable basis for the justification of certain conceptual changes in the field of international accounting standards that are currently underway.
If the inline PDF is not rendering correctly, you can download the PDF file here.
Aboody, D. (1996). Recognition versus disclosure in oil and gas industry. Journal of Accounting Research, 34(Supplement), 21-32. https://doi.org/10.2307/2491423
Ahmed, A. S., Kilic, E., & Lobo, G. J. (2006). Does recognition versus disclosure matter? Evidence from value-relevance of banks’ recognised and disclosed derivative financial instruments. The Accounting Review, 81(3), 567-588. https://doi.org/10.2308/accr.2006.81.3.567
Al Jifri, K., & Citron, D. (2009). The value relevance of financial statement recognition versus note disclosure: Evidence from goodwill accounting. European Accounting Review, 18(4), 123-140. https://doi.org/10.1080/09638180802324351
Altamuro, J., Johnston, R., Pandit, S., & Zhang, H. (2014). Operating leases and credit assessments. Contemporary Accounting Research, 31(4), 551-580. https://doi.org/10.1111/1911-3846.12033
Barth, M. E., Beaver, W., & Landsman, W. R. (2001). The relevance of the value relevance literature for financial accounting standard-setting: Another view. Journal of Accounting and Economics, 31(1-3), 77-104. https://doi.org/10.1016/S0165-4101(01)00019-2
Barth, M., Clinch, G., & Shibano, T. (2003). Market effects of recognition and disclosure. Journal of Accounting Research, 41(4), 581-609. https://doi.org/10.1111/1475-679X.00117
Beresford, D. R. (1996). What did we learn from the stock compensation project? Accounting Horizons, 10(2), 125-130.
Beresford, D. R. (1997). How to succeed as a standard setter by trying really hard Accounting Horizons, 11(3), 79-90.
Bernard, V., & Schipper, K. (1994). Recognition and disclosure in financial reporting (Unpublished dissertation). University of Michigan, Ann Arbor, MI.
Bischof, J., Brüggemann, U., & Daske, H. (2011). Fair value reclassification of financial assets during the financial crisis. Retrieved from http://papers.ssrn.com/sol3/Papers.cfm?abstract_id=1628843 https://doi.org/10.2139/ssrn.1628843
Boyle, P. (2010). Discussion of ʼHow do conceptual frameworks contribute to the quality of corporate reporting regulation?ʼ. Accounting and Business Research, 40(3), 301-302. https://doi.org/10.1080/00014788.2010.9663404
Bratten, B., Choudhary, P., & Schipper, K. (2013). Evidence that market participants assess recognized and disclosed items similarly when reliability is not an issue. Accounting Review, 88(4), 1179-1210. https://doi.org/10.2308/accr-50421
Cascino, S., Clatworthy, M., Garcia Osma, B., Gassen, J., Imam, S., & Jeanjean, T. (2014). Who uses financial reports and for what purpose? Evidence from capital providers. Accounting in Europe, 11(2), 185-209. https://doi.org/10.1080/17449480.2014.940355
Clor-Proell, S. H., & Maines, L. A. (2014). The impact of recognition versus disclosure on financial information: A preparer’s perspective. Journal of Accounting Research, 52(3), 671-701. https://doi.org/10.1111/1475-679X.12053
Choudhary, P. (2011). Evidence on differences between recognition and disclosure: A comparison of inputs to estimate fair values of employee stock options. Journal of Accounting and Economics, 51(1-2), 77-94. https://doi.org/10.1016/j.jacceco.2010.09.004
Davies, M., Paterson, R., & Wilson, A. (1999). UK GAAP (6th ed). London, UK: Butterworths Tolley.
Davis-Friday, P. Y., Folani, L. B., Liu, C. S., & Mittelstaedt, H. F. (1999). The value relevance of financial statement recognition vs. disclosure: Evidence from SFAS no. 106. The Accounting Review, 74(4), 403-423. https://doi.org/10.2308/accr.19188.8.131.523
Davis-Friday, P. Y., Liu, C. S., & Mittelstaedt, H. F. (2004). Recognition and disclosure reliability: Evidence from SFAS no. 106. Contemporary Accounting Research, 21(2), 399-429. https://doi.org/10.1506/T0VC-Q15Y-W5QV-4UKQ
Deloitte. (2013). Disclosure initiative-Overview. Retrieved from http://www.iasplus.com/en/projects/major/disclosure-initiative-overview
Dye, R. (2001). An evaluation of ʼessays on disclosureʼ and the disclosure literature in accounting. Journal of Accounting and Economics, 32(1-3), 181-235. https://doi.org/10.1016/S0165-4101(01)00024-6
European Financial Reporting Advisory Group (EFRAG), Autorité des Normes Comptables (ANC), & Financial Reporting Council (FRC). (2012). Towards a disclosure framework for the notes: Discussion paper. Retrieved from http://www.efrag.org/files/ProjectDocuments/PAAinE%20Disclosure%20Framework/121015_Disclosure_Framework_-_FINAL1.pdf
Frederickson, J. R., Hodge, F. D., & Pratt, J. H. (2006). The evolution of stock option accounting: Disclosure, voluntary recognition, mandated recognition and management disavowals. The Accounting Review, 81(5), 1073-1093. https://doi.org/10.2308/accr.2006.81.5.1073
Fülbier, R. U., Hitz, J.-M., & Sellhorn, T. (2009). Relevance of academic research and researchers’ role in the IASB’s financial reporting standard setting. Abacus, 45(4), 455-492. https://doi.org/10.1111/j.1467-6281.2009.00300.x
Gopalakrishnan, V. (1994). The effect of recognition vs. disclosure on investor valuation: The case of pension accounting. Review of Quantitative Finance and Accounting, 4, 383-396. https://doi.org/10.1007/BF01078805
Hirshleifer, D., & Teoh, S. H. (2003). Limited attention, information disclosure, and financial reporting. Journal of Accounting and Economics, 36(1-3), 337-386. https://doi.org/10.1016/j.jacceco.2003.10.002
Hirst, E., Hopkins, P., & Wahlen, J. (2004). Fair values, income measurement, and bank analysts’ risk and valuation judgments. The Accounting Review, 79(2), 453-472. https://doi.org/10.2308/accr.2004.79.2.453
International Accounting Standards Board (IASB). (2010). Conceptual framework for financial reporting 2010. London, UK: IFRS Foundation.
International Accounting Standards Board (IASB). (2016a). 2016 International Financial Reporting Standards-IFRS (Red Book). London, UK: IFRS Foundation.
International Accounting Standards Board (IASB). (2016b). Conceptual framework. Retrieved from http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Pages/Conceptual-Framework-Summary.aspx
International Accounting Standards Board (IASB). (2016c). Disclosure initiative. Retrieved from http://www.ifrs.org/Current-Projects/IASB-Projects/Disclosure-Initiative/Pages/Disclosure-Initiative.aspx
Israeli, D. (2015). Recognition versus disclosure: evidence from fair value of investment property. Review of Accounting Studies, 20(4), 1457-1503. https://doi.org/10.1007/s11142-015-9335-x
Johnson, L. T., & Storey, R. K. (1982) Recognition in financial statements: Underlying concepts and practical conventions. Stamford, CT: Financial Accounting Standards Board (FASB).
Kadous, K., Koonce, L., & Thayer, J. (2012). Do financial statement users judge relevance based on properties of reliability? The Accounting Review, 87(4), 1335-1356. https://doi.org/10.2308/accr-50157
Knauer, T., & Wöhrmann, A. (2016). Market reaction to goodwill impairments. European Accounting Review, 25(3), 421-449. https://doi.org/10.1080/09638180.2015.1042888
Lambert, R. A. (2003). Discussion of ‘limited attention, information disclosure, and financial reporting’. Journal of Accounting and Economics, 36(1-3), 386-399. https://doi.org/10.1016/j.jacceco.2003.10.005
Libby, R., Nelson, M. W., & Hunton, J. E. (2006). Recognition v. disclosure, auditor tolerance for misstatement, and the reliability of stock-compensation and lease information. Journal of Accounting Research, 44(3), 533-560. https://doi.org/10.1111/j.1475-679X.2006.00210.x
Malkiel, B. G., & Baumol, W. J. (2002, April 4). Stock options keep the economy afloat. Wall Street Journal, p. A18.
McKernan, J. F. (2007). Objectivity in accounting. Accounting, Organisations and Society, 32(2), 155-180. https://doi.org/10.1016/j.aos.2006.03.008
Novak, A. (2011). A new approach to lease accounting. In T. Kern (Ed.), People and sustainable organization (pp. 362-401). Frankfurt am Main, Germany: Peter Lang.
Novak, A. (2012). Qualitative characteristics of useful financial information in conceptual framework. In M. Ferjan, M. Kljajić Borštnar, M. Marič, & A. Pucihar (Eds.), Quality, innovation, future: Proceedings of the 31st international conference on organizational science development (pp. 802-813). Kranj, Slovenia: Moderna organizacija.
Schipper, K. (2007). Required disclosures in financial reports. The Accounting Review, 82(2), 301-326. https://doi.org/10.2308/accr.2007.82.2.301
Solomons, D. (1986). The FASB’s conceptual framework: An evaluation. Journal of Accountancy, 161(6), 14-124.
Wiedman, C. I., & Wier, H. A. (1999). Management of note disclosures: The case of unconsolidated subsidiaries prior to FAS no. 94. Journal of Accounting, Auditing, and Finance, 14(1), 73-94.