The Effect of Bad News on SAB 74 Disclosure Compliance

54 Pages Posted: 25 Apr 2009 Last revised: 25 Mar 2010

See all articles by Raquel Meyer Alexander

Raquel Meyer Alexander

Washington and Lee University

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Mary S. Stone

University of Alabama - Culverhouse College of Commerce & Business Administration

Lili Sun

University of North Texas - Department of Accounting

Date Written: January 12, 2010

Abstract

SEC Staff Accounting Bulletin No. 74 (SAB 74, U.S. SEC 1987) requires registrants to provide information about the predicted financial statement effect of an enacted but not yet adopted accounting standard. The objectives of SAB 74 disclosures are to inform users the registrant will be required to adopt a new standard, and to assist users in assessing the impact of adoption on the registrant’s financial statements upon adoption. Regulators and investors find SAB 74 disclosures useful for their decision-making (Davis-Friday et al. 1999, 2004; SEC 2005). However, little evidence exists concerning whether companies meet their SAB 74 disclosure responsibilities, and how useful SAB 74 disclosures are for predicting the financial statement impact of adopting new accounting standards.

Our results indicate substantial variation in how companies complied with SAB 74 when adopting one recent accounting standard (FIN 48 in 2007), and raise questions about the quality of SAB 74 disclosures. For example, we find that less than 20% of companies provide dollar estimates of the standard’s adoption effect. Although a majority of companies disclose an immaterial adoption effect under SAB 74, many of these same companies disclose material effects upon adoption less than 60 days later. Controlling for other factors, firms with “bad news” arising from adoption of the new standard are less likely to provide SAB 74 estimates. We find that when provided, SAB 74 estimates are incrementally useful in predicting the financial statement effect of FIN 48 adoption. We develop a SAB 74 disclosure model that might be useful to regulators concerned with mandatory disclosure compliance (or lack thereof) and to investors relying upon SAB74 estimates.

Keywords: Predictive usefulness, SAB 74, mandatory disclosure, compliance, FIN 48

JEL Classification: M41, M44, M45

Suggested Citation

Alexander, Raquel Meyer and Ettredge, Michael L. and Stone, Mary S. and Sun, Lili, The Effect of Bad News on SAB 74 Disclosure Compliance (January 12, 2010). Available at SSRN: https://ssrn.com/abstract=1392290 or http://dx.doi.org/10.2139/ssrn.1392290

Raquel Meyer Alexander

Washington and Lee University ( email )

204 W Washington St
Lexington, VA 24450
United States

Michael L. Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Mary S. Stone

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Box 870223
School of Accountancy 314 Alston Hall
Tuscaloosa, AL 35487-0223
United States
205-348-2915 (Phone)
205-348-8453 (Fax)

Lili Sun

University of North Texas - Department of Accounting ( email )

1155 Union Circle #305219
Denton, TX 76203-5017
United States
940-565-3077 (Phone)

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