Chapter 9: Uniformity and Disclosure: Instructor Manual
Some Policy-Making Directions
Accounting Theory (9
th
edition) Page 1 of 13
CHAPTER HIGHLIGHTS
It is extremely important in this chapter to make sure that definitions of concepts are well
understood. The first important distinction is between simple and complex events. How relevant
circumstances can affect complex events is the next link. Examples of the two types of relevant
circumstances (present magnitudes and future contingencies) should help to reinforce the
concept.
Finite and rigid uniformity, as total systems, represent ideal types. Nevertheless, a better
understanding of current standards can be acquired if they are analyzed from the standpoint of
finite and rigid uniformity. A third orientation, flexibility, is also present where several methods
are allowed and no relevant circumstances are present.
The chapter contains an extensive discussion of disclosure and also lists and discusses different
methods of disclosure. The difference between selective and differential disclosure is discussed
as well as arguments in favor of more or less disclosure. Forms and methods of disclosure
include management’s discussion and analyses, signalling and management earnings forecasts,
segmental disclosures (the Jenkins Committee Report and SFAS No. 131), and quarterly
information.
QUESTIONS
Q-1 Is Cadenhead’s conception of circumstantial variables as the only permissible
departure from prescribed accounting methods closer to finite or rigid uniformity?
Cadenhead’s conception of circumstantial variables is more narrow in scope than the concept of
relevant circumstances discussed in the chapter. Departures from the rigidly prescribed
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Some Policy-Making Directions
Accounting Theory (9
th
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Q-2 Do you think management policies should be acceptable as potential relevant
circumstances? Why or why not?
Obviously, either side of the issue can be taken. Our position would be only insofar as
management policies involve a choice among relevant circumstances. For example, a
managerial choice between a lease for 60 percent of the economic life of an asset versus a 90
Q-3 How do present magnitudes differ from future contingencies?
The time dimension is the difference, of course. Under present magnitudes, the relevant
circumstances are present in the nature of the transaction, which is accepted as a surrogate or
Q-4 Are simple transactions really examples of rigid uniformity? Why or why not?
Since no relevant circumstance differentials are present in simple event situations, their
Q-5 Finite and rigid uniformity would result in different information being received by
users of financial statements. What difference would this make in terms of resource
allocation when viewed from a macroeconomic standpoint?
It would be hoped that the additional information provided by finite uniformity, which would
affect security prices, would result in a more accurate portrayal of the risk-return configuration
Q-6 Why does segment disclosure in SFAS No. 131 represent a potential improvement over
segment disclosure in SFAS No. 14?
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Some Policy-Making Directions
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th
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Q-7 How do protective and informative disclosures differ?
Protective disclosure assures that unsophisticated investors are not treated unfairly. Informative
Q-8 Under previous disclosure requirements of the SEC, dividends paid during the past two
years to shareholders must be stated in the annual report. This requirement has been
broadened:
There must be disclosure of any restrictions on the firm’s present or future dividend-
paying ability.
If the firm has not paid dividends in the past despite the availability of cash, and the
corporate intention is to continue to forgo paying dividends in the foreseeable future,
disclosure of this policy is encouraged.
If dividends have been paid in the past, the firm is encouraged to disclose whether this
condition is expected to continue in the future.
Do you think that this broadening of disclosure of dividend policy is primarily
protective or informative? Discuss.
There is, of course, some overlap between protective and informative disclosure. The
broadening of disclosure of dividend-paying policy appears to be more protective since the
Q-9 ASR 242 of the SEC states that relative to payments made to foreign governmental and
political officials, “. . . registrants have a continuing obligation to disclose all material
information and all information necessary to prevent other disclosures made from
being misleading with respect to such transactions.” This ASR appeared shortly after
the passage of the Foreign Corrupt Practices Act. Do you think this type of disclosure
is primarily protective or informative in nature?
Businesses subject to the Foreign Corrupt Practices Act must provide systems of internal control
in terms of maintaining accountability for assets and ensuring that transactions are in accordance
with management’s authorization; access to assets is permitted only to those having proper
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Some Policy-Making Directions
Accounting Theory (9
th
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Q-10 If uniformity means eliminating alternative accounting treatments, then surely
comparability of financial statements of different enterprises would be improved. Do
you agree with this statement? Comment.
The sense of uniformity in the statement is rigid uniformity. Where methods are restricted, the
Q-11 Is the choice of LIFO a relevant circumstance compared to FIFO?
On their own the choice would not be a relevant circumstance. The choice would not affect
actual inventory flows. The switch would really be nothing more than a choice among
Q-12 Do you agree that it is not necessary to provide information for undiversified
investors? Discuss.
Q-13 SFAC No. 6 defines circumstances as follows:
Circumstances are a condition or set of conditions that develop from an event or series
of events, which may occur almost imperceptibly and may converge in random or
unexpected ways to create situations that might otherwise not have occurred and might
not have been anticipated. To see the circumstance may be fairly easy, but to discern
specifically when the event or events that caused it occurred may be difficult or
impossible. For example, a debtor’s going bankrupt or a thief’s stealing gasoline may
be an event, but a creditor’s facing the situation that its debtor is bankrupt or a
warehouse’s facing the fact that its tank is empty may be a circumstance.
How does this definition of circumstances relate to the definition of relevant
circumstances presented in the chapter?
Circumstances, as defined in SFAC No. 6, may or may not entail relevant circumstances as the
term is defined in the chapter. The situations described in SFAC No. 6 all entail changes in cash
Chapter 9: Uniformity and Disclosure: Instructor Manual
Some Policy-Making Directions
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th
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Q-14 SFAS No. 13 in effect regards a lease period of 75 percent or more as a relevant
circumstance in distinguishing between capital and operating leases. What economic
factors (cash flow differentials) lie behind this policy choice?
At least as the FASB sees it, where the asset is leased for more than 75 percent of its economic
life, the lessee is closer to an owner in terms of risk considerations. This would probably mean a
Q-15 An argument against additional disclosure is that financial analysts aggressively seek
this information, which is then sold to their customers, resulting in an adequate market
solution to the problem of providing timely and relevant information on securities. Do
you agree?
Certainly, as Brownlee and Young have argued, while accounting information is a public good,
those who acquire it from financial analysts do have the time utility benefit of acquiring it first.
Q-16 What are the possible benefits of a disclosure process that is integrated with major
policies in marketing, production, and finance? Do you think only “good news” items
should be disclosed?
Lev sees an integrated disclosure policy leading to a reduction of uncertainty over the long run,
which should, therefore, lead to higher security prices. Of course, the release of “bad news” (as
Q-17 Do you think that disclosures of smaller firms have more information content than
disclosures for larger firms?
Q-18 What is meant by the term “degrees of representational faithfulness?”
The term degrees of representational faithfulness refers to a relative rather than an absolute view
of representational faithfulness. Sterling (1985) is an exemplar of the absolute approach: it
either is or is not representationally faithful, although even he admits to measurement
Chapter 9: Uniformity and Disclosure: Instructor Manual
Some Policy-Making Directions
Accounting Theory (9
th
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Q-19 Firm A and B are exactly the same size as are Firm C and Firm D. Firm A acquires for
cash 100 percent of the common stock of Firm C. Firm B acquires 100 percent of Firm
D by exchanging one share of its own stock for each share of common stock of Firm
D. Are there differences in relevant circumstances between these two transactions?
Explain.
This is a somewhat loaded question which is asking whether purchase and “pooling” are really
different transactions requiring different accounting approaches. By way of analogy, assume a
fixed asset were being acquired by means of (1) cash or (2) some amount of the acquiring firm’s
common stock given in exchange for the asset. In both cases we would value the asset acquired
Q-20 How do Lev’s views on disclosure differ from the views of Brownlee and Young?
Lev is in favor of publicly disseminating as much corporate information as possible to eliminate
insider information. He feels that this will prevent markets from getting “thin.” Brownlee and
Q-21 Distinguish between the discrete and integral views of quarterly information
disclosure.
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Some Policy-Making Directions
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th
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Q-22 What evidence supports the statement that SFAS No. 131 is an improvement over SFAS
No. 14?
There has been a reduction in the number of firms claiming they only operate in one segment. In
addition, the average number of segments reported has increased per firm. Also, the number of
CASES, PROBLEMS, AND WRITING ASSIGNMENTS
1. Refer to either a current intermediate accounting text or a guide to current “generally
accepted accounting principles.” Give at least one example for each of the four cells of
Exhibit 9-1 (your instructor may desire to modify this problem).
Cell IA (relevant circumstances and finite uniformity)
SFAS No. 13 uses the 75 percent rule relative to the proportion of the estimated
economic life that the asset is leased for (costs should be lower the longer the lease period
extends, but we would still prefer to use rigid uniformity and capitalize all long-term
leases).
SFAS No. 19 (superseded by SFAS No. 25) requires successful efforts because write-off
Chapter 9: Uniformity and Disclosure: Instructor Manual
Some Policy-Making Directions
Accounting Theory (9
th
edition) Page 8 of 13
2. Compare and contrast the Hutton (2004) and Lev (1992) disclosure strategies.
Lev, Baruch (Summer 1992). “Information Disclosure Strategy.” California Management
Review, Summer 1992, pp. 9-32.
3. Give as many examples as you can of flexibility under current generally accepted
accounting principles.
As noted in the text, the investment tax credit (aside from any carryforward aspects), inventories,
and treasury stock involve no differences in relevant circumstances; hence, they are classic
examples of flexibility. Depreciation is a special case because different usage patterns might
involve relevant cash flow differentials, but these have not been used by standard setters. A free
choice exists among selection of methods, such as straight-line, sum-of-the-years’-digits, and
fixed percentage of declining balance.
SFAS No. 19 attempted to eliminate full costing in the oil and gas industry in favor of only one
method, successful efforts. Accounting Series Release 253 of the SEC permitted either method,
and SFAS No. 25 then rescinded SFAS No. 19, leaving an unfettered choice between full costing
and successful efforts. For further coverage, see Chapter 15.
It is very unclear that legitimate relevant circumstances exist in terms of differentiating between
purchases and poolings. Consequently, the situation was to be one of flexibility. Pooling is now
gone.
Chapter 9: Uniformity and Disclosure: Instructor Manual
Some Policy-Making Directions
Accounting Theory (9
th
edition) Page 9 of 13
4. SFAS No. 115 defines held-to-maturity securities as debt securities that the firm “has
the positive intent and ability to hold those securities to maturity.” Trading securities
“are bought and held principally for the purpose of selling them in the near term….”
Available-for-sale securities are simply everything else.
SFAS No. 115 requires held-to-maturity securities to be valued at amortized cost with
the other two carried at fair value. Unrealized gains and losses on trading securities are
recognized in net income but for trading securities unrealized gains and losses are
recognized as other comprehensive income and as a separate part of owners’ equity.
Two members of the FASB voted against the standard. They wanted the three types of
securities to be carried at market value and unrealized gains and losses of the three
“types” to go through income.
Required:
Evaluate the Board’s attempt to use a finite uniformity approach to the investments
covered in the standard. How did the dissenters to SFAS No. 115 want to deal with the
problem?
This is what we would call phoney finite uniformity. The finite uniformity being employed is
based on managerial intent which is not a good way to go. Why an intent – which may or may
not materialize – should result in bond investments to be carried at cost if this is an intent to hold
Chapter 9: Uniformity and Disclosure: Instructor Manual
Some Policy-Making Directions
Accounting Theory (9
th
edition) Page 10 of 13
5. Cadenhead presented an approach to uniformity referred to as circumstantial variables.
Circumstantial variables are environmental conditions (conditions beyond the control
of the individual firm that are applicable to the particular industry that the firm is in).
Circumstantial variables lead to problems relative to either (1) costliness of the
prescribed method in the particular event situation or (2) a low degree of verifiability
because estimates vary widely relative to the prescribed method. For example,
Cadenhead notes that the existence of a ready market with regularly quoted prices
would facilitate inventory valuation if realizable value were not used relative to
inventories, but the absence of such a market would allow a firm to use another type of
inventory/cost of goods sold measurement.
In the four situations discussed here, classify each situation according to whether it
provided that the future returns can be reasonably estimated (there are five other
conditions that must also be met but they are of no concern here). If sales returns
cannot be reasonably estimated, then sales revenues are not recognized until returns
can be reasonably estimated or (more likely) the return privilege has substantially
expired. Hence, it is not cash flow differences that are at issue but rather the ability to
estimate the expected returns that is the key point.
Investment tax credit (assume no investment tax credit carryforward problem): All of
the cash benefits in the form of lower taxes are received in the year of asset acquisition.
The enterprise may recognize benefit (in the form of lower tax expense) in the year of
acquisition or the benefits may be spread over the life of the asset in the form of lower
annual depreciation.
Oil and gas accounting: SFAS No. 19 tried to allow only “successful efforts.” In
successful efforts, the costs of dry holes must be written off once it is known that the
holes are dry. If (and only if) a well were successful, drilling costs would be capitalized
and amortized over future years.
a. This would be an example of rigid uniformity because capitalization is not
attained even if future cash flows materialize. Immediate expensing must occur
regardless of future cash flow prospects. This would also be an example of
conservatism and also results in a higher degree of verifiability.
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Some Policy-Making Directions
Accounting Theory (9
th
edition) Page 11 of 13
6. Colleges and universities frequently get graduating seniors to donate money to them.
A very common practice is to divide this money up over a number of years. Thus a
$30 donation might be divided up over a five year period (based on a Wall Street
Journal article of March 2, 2007; the $30 contribution and the $6 division over five
years was actually cited in the article).
Required:
Is this an allocation? Discuss.
Why do you think that colleges and universities follow this practice?
What entry did the college make for the five year division?
Do you have any other comments you would like to make about this practice?
Golden, Daniel (2007). “To Boost Donor Numbers, Colleges Adopt New Tricks,” The Wall
Street Journal, March 2, 2007: page A1.
a. An allocation is a “slicing up” or dividing of costs or revenues arising in one
period which are applicable to many periods. The key question to ask relates to
the donor’s intentions when the gift was made. If the donor clearly indicates that
this is a multi-year gift, an allocation would likely make sense to match the gift
with the periods in which the intentions cover. However, the tenor of the article
indicates this is not the case. If so, we would classify this practice as
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Some Policy-Making Directions
Accounting Theory (9
th
edition) Page 12 of 13
CRITICAL THINKING AND ANALYSIS
1. What is the relationship between uniformity (both finite and rigid) and disclosure?
This is more a case of complementarity than anything else. Uniformity, in terms of employing
finite where it is feasible and cost effective, and using rigid where it is not both require extensive
disclosures to further bring about comparability. Finite uniformity may require more extensive
2. Assume two countries adopt International Financial Reporting Standards (IFRS) for
their financial accounting and reporting. One has a highly developed economic history;
one has a language that has changed little over several hundred years and lacks today’s
economic terms. How might comparability be affected if English IFRS is translated to
the native languages of both countries?
Student research should find multiple articles addressing the problems that language introduce to
comparability across countries when adopting IFRS. Some articles they will likely find include:
• Huerta, Esperanza, Yanira Petrides, and Gary P. Braun (April 2013). “Translation of
IFRS: Language as a barrier to comparability,” Research in Accounting Regulation, 1–12.
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Some Policy-Making Directions
Accounting Theory (9
th
edition) Page 13 of 13
3. Morunga and Bradbury (2012) find that IFRS adoption may lead to some adverse
disclosure results. Discuss their findings.
Morunga, Maria and Michael Bradbury (2012). “The Impact of IFRS on Annual Report Length,”
Australasian Accounting Business & Finance Journal,
47-62.