Material Changes in Accounting Estimates and the Usefulness of Earnings

54 Pages Posted: 21 Nov 2017 Last revised: 9 Jan 2023

See all articles by Anne Albrecht

Anne Albrecht

Texas Christian University - M.J. Neeley School of Business

Matthew Glendening

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business

Kyonghee Kim

Michigan State University

Kwang Lee

Korea Advanced Institute of Science and Technology (KAIST)

Date Written: December 21, 2022

Abstract

This study provides insights into the efficacy of FASB ASC 250 by examining the impact of material changes in accounting estimates (MCEs) on the usefulness of earnings. We find that MCEs, on average, increase the usefulness of earnings measured by the predictive ability of earnings for future cash flows and investor responsiveness to earnings news. Although the results suggest that some firms time their implementation of MCEs to meet desired earnings targets, we also find that ASC 250 disclosures attract investors and regulators’ scrutiny, suggesting that MCEs are a costly earnings management tool. Collectively, our findings provide limited support for the widespread use of MCEs for earnings management and suggest that their use as an earnings management tool is much more nuanced than suggested by prior research. Finally, notwithstanding the benefits of ASC 250 disclosures, our descriptive analysis of related disclosures of accounting estimates suggests that there is room for further improvements in current disclosure practices and regulatory monitoring.

Keywords: accounting estimates, management discretion, disclosure regulation, usefulness of earnings

JEL Classification: M41, M43

Suggested Citation

Albrecht, Anne and Glendening, Matthew and Kim, Kyonghee and Lee, Kwang, Material Changes in Accounting Estimates and the Usefulness of Earnings (December 21, 2022). KAIST College of Business Working Paper Series No. 2017-022, Available at SSRN: https://ssrn.com/abstract=3074071 or http://dx.doi.org/10.2139/ssrn.3074071

Anne Albrecht (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

Matthew Glendening

University of Missouri at Columbia - Robert J. Trulaske, Sr. College of Business ( email )

331 Cornell Hall
Columbia, MO 65211
United States

Kyonghee Kim

Michigan State University ( email )

N206 North Business Complex
632 Bogue Street
East Lansing, MI 48824
United States
517-432-2920 (Phone)

Kwang Lee

Korea Advanced Institute of Science and Technology (KAIST) ( email )

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

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