Mental Accounting in Financial Reporting and Voluntary Disclosure

37 Pages Posted: 30 Nov 2010  

M.G. Fennema

Florida State University - Department of Accounting

Lisa Koonce

University of Texas

Date Written: November 27, 2010

Abstract

Those involved in financial reporting and voluntary disclosure routinely make decisions about how to describe transactions and economic events. Key components of these decisions include how to label information, whether to aggregate or disaggregate it, and how frequently to provide it. For example, firms reporting under IFRS rules must determine whether to label interest paid as an operating or financing cash flow. Analysts evaluating a firm’s compound financial instruments must decide whether to consider them as reported (i.e., as one unit of account) or bifurcate them into their component parts. The purpose of this paper is twofold: First, we describe a robust theory from psychology, mental accounting, that can help explain how those involved in financial reporting and voluntary disclosure might make these kinds of decisions and evaluate them. Second, we provide illustrative examples of how this theory can aid scholars in their research on financial reporting issues, including those currently facing standard setters.

Keywords: Mental Accounting, Financial Reporting, Voluntary Disclosure

JEL Classification: M40

Suggested Citation

Fennema, M.G. and Koonce, Lisa, Mental Accounting in Financial Reporting and Voluntary Disclosure (November 27, 2010). Available at SSRN: https://ssrn.com/abstract=1717078 or http://dx.doi.org/10.2139/ssrn.1717078

Martin (Bud) G. Fennema

Florida State University - Department of Accounting ( email )

Rovetta Business Bldg. (RBA)
College of Business
Tallahassee, FL 32306-1110
United States
850-644-8231 (Phone)
850-644-8234 (Fax)

Lisa L. Koonce (Contact Author)

University of Texas ( email )

Dept. of Accounting
McCombs School of Business
Austin, TX 78712
United States
512-471-5576 (Phone)
512-471-3904 (Fax)

Paper statistics

Downloads
1,191
Rank
12,974
Abstract Views
4,873