Compliance with Flexible Accounting Standards

32 Pages Posted: 30 Apr 2013 Last revised: 12 Aug 2017

See all articles by Øyvind Bøhren

Øyvind Bøhren

BI Norwegian Business School

Jørgen Haug

Norwegian School of Economics (NHH) - Department of Finance

Dag Michalsen

BI Norwegian Business School

Date Written: July 13, 2003

Abstract

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

Bøhren, Øyvind and Haug, Jørgen and Michalsen, Dag, Compliance with Flexible Accounting Standards (July 13, 2003). International Journal of Accounting 39, 2004, 1-19.. Available at SSRN: https://ssrn.com/abstract=2257736

Øyvind Bøhren (Contact Author)

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway
46410503 (Phone)

Jørgen Haug

Norwegian School of Economics (NHH) - Department of Finance ( email )

Helleveien 30
N-5045 Bergen
Norway

Dag Michalsen

BI Norwegian Business School ( email )

Nydalsveien 37
N-0442 Oslo, N-0442
Norway
4746410512 (Phone)

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