Does Recognition Instead of Disclosure Matter to the Users of Financial Statements?: Evidence from SFAS 106

Posted: 25 Sep 1998

See all articles by Paquita Y. Davis-Friday

Paquita Y. Davis-Friday

Zicklin School of Business; City University of New York - Stan Ross Department of Accountancy

L. Buky Folami

University of Alabama in Huntsville

Chao-Shin Liu

University of Notre Dame - Department of Accountancy

H. Fred Mittelstaedt

University of Notre Dame

Date Written: September 1998

Abstract

This paper uncovers a potential explanation for the discrepancy between Amir (1996) and Choi, Collins, and Johnson (1997) by examining whether the users of financial statement data treat information differently if it is disclosed instead of recognized in the body of the financial statements. Amir (1996) finds that the liability for postretirement benefits other than pensions (PRBs) is value-relevant conditioned on earnings and pension information while Choi et al. (1997) find that the PRB liability is measured with more error than the pension liability and is therefore less reliable. Since Amir's sample consists only of SFAS 106 adopters and the Choi et al. sample includes both adopters and non-adopters (disclosers), we identify a sample of early adopters who disclose an estimate of their anticipated liability in the Management Discussion and Analysis (MD&A) or notes to their financial statements. We test whether accounting information disclosed in the MD&A or notes (the estimate of the PRB liability) is valued by the market the same as information recognized in the financial statements (the recognized PRB liability). The results indicate that the recognized PRB liability is capitalized at a higher rate than the disclosed liability. Our evidence suggests that the market treats information disclosed in the notes in this context as less reliable than similar information recognized in the body of the financial statements.

JEL Classification: G19, M41, M44, M45

Suggested Citation

Davis-Friday, Paquita Y. and Folami, L. Buky and Liu, Chao-Shin and Mittelstaedt, H. Fred, Does Recognition Instead of Disclosure Matter to the Users of Financial Statements?: Evidence from SFAS 106 (September 1998). Available at SSRN: https://ssrn.com/abstract=130888

Paquita Y. Davis-Friday (Contact Author)

Zicklin School of Business ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States
646-312-3048 (Phone)

City University of New York - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States
646-312-3048 (Phone)
646-312-3161 (Fax)

L. Buky Folami

University of Alabama in Huntsville ( email )

College of Administrative Science Department of Accounting & Information Systems
Huntsville, AL 35899
United States
256-890-6582 (Phone)
256-890-6328 (Fax)

Chao-Shin Liu

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6029 (Phone)
574-631-5255 (Fax)

H. Fred Mittelstaedt

University of Notre Dame ( email )

374 Mendoza College of Business
Notre Dame, IN 46556-0399
United States
574-631-5087 (Phone)
574-631-5255 (Fax)

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