Linked Balance Sheet Presentation

Abstract

Certain financial statement items are closely related, such as items in hedging relationships. In this paper, we develop theory and conduct two experiments to investigate three different balance sheet presentation formats for related financial statement items. We posit that a linked presentation format rarely used in practice allows financial statement users to better distinguish among firms with different economics. Neither net presentation nor separate presentation of related balance sheet items allows users to make this distinction. The results of two experiments—one in a hedging context and the other in a lending context—support our theory-based predictions.

Keywords: financial statements, linked presentation, causal reasoning

JEL Classification: D81, M41