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Example-Based Reasoning and Fact-Weighting Guidance in Accounting Standards

37 Pages Posted: 19 Feb 2014 Last revised: 17 Oct 2015

Gregory Paul Capps

Independent

Lisa Koonce

University of Texas

Brian J. White

University of Texas at Austin - Department of Accounting

Date Written: October 15, 2015

Abstract

The provision of examples as implementation guidance is pervasive in accounting standards. Prior research has established that preparers engage in “example-based reasoning,” a tendency to favor the accounting treatment in an example, even when the example does not exactly match the transaction at hand. In this paper, we investigate whether fact-weighting guidance counteracts this tendency. Such guidance, now found in some accounting standards, indicates whether particular transaction facts are more important than others in determining the appropriate accounting treatment. Using an experiment, we find that fact-weighting guidance does reduce preparers’ tendency to favor the accounting treatment in an example. However, results also suggest that some degree of example-based reasoning persists even with fact-weighting guidance, and that preparers are not fully aware of how fact-weighting guidance affects their judgments. Our findings have practical implications. They suggest to standard setters a potential remedy — namely, fact-weighting guidance — for the misuse of accounting examples. They also provide insights to accounting preparers regarding how fact-weighting guidance influences their judgments in ways they may not anticipate.

Keywords: accounting standards, implementation guidance, examples, fact-weighting guidance, debiasing

Suggested Citation

Capps, Gregory Paul and Koonce, Lisa and White, Brian J., Example-Based Reasoning and Fact-Weighting Guidance in Accounting Standards (October 15, 2015). Available at SSRN: https://ssrn.com/abstract=2397367

Gregory Paul Capps

Independent ( email )

No Address Available

Lisa L. Koonce

University of Texas ( email )

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

Brian J. White (Contact Author)

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States

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