Compliance with Flexible Accounting Standards
32 Pages Posted: 30 Apr 2013 Last revised: 12 Aug 2017
Date Written: July 13, 2003
We examine to what extent firms adhere to the stated intent of non-compulsory accounting standards when reporting for intercorporate investments. The Generally Accepted Accounting Principles (GAAP) in Norway strongly recommend that a 20–50% intercorporate investment is accounted for by the equity method rather than the cost method if the investment is long-term, of strategic importance, and involves significant influence. Even so, we find that actual use of the equity method is independent of the duration of the investment period, the fraction of equity held, of its recent growth, and of the investor’s voting power. This lack of compliance suggests that one cannot use the observed choice between the cost method and the equity method to infer the underlying characteristics of the investment as specified by the accounting standard. Flexible GAAP may therefore not induce firms to disclose the information that the GAAP were designed to produce.
Keywords: Generally accepted accounting principles, flexible accounting standards, compliance, intercorporate investments, cost method, equity method
JEL Classification: M41, K42, G38
Suggested Citation: Suggested Citation