Accounting Reporting Complexity and Non-GAAP Earnings Disclosure

52 Pages Posted: 2 Aug 2018 Last revised: 29 May 2019

See all articles by Nerissa C. Brown

Nerissa C. Brown

University of Illinois at Urbana-Champaign

Shira Cohen

Temple University - Department of Accounting

Adrienna A. Huffman

The Brattle Group

Date Written: January 8, 2019

Abstract

Stakeholders posit that the proliferation of non-GAAP metrics reflects the complexity of GAAP accounting. We explore this issue by investigating how accounting reporting complexity (ARC) shapes the disclosure and quality of manager-adjusted earnings information. We use a firm-level XBRL measure of ARC that maps directly to the FASB codification and captures the volume of accounting concepts applied within financial statement filings. We find that managers are 16% more likely to disclose an adjusted earnings metric when ARC shifts from the 25th to the 75th percentile. Hand-collected evidence suggests that firms tend to exclude earnings items with complex accounting guidance when ARC is high. Notably, the effect of ARC on non-GAAP disclosure is robust and incremental to the effects arising from general business and disclosure complexity. Furthermore, we find that the quality of managers’ earnings exclusions increases with ARC, though the complexity of certain accounts leads to lower quality adjustments.

Keywords: accounting complexity, non-GAAP earnings, XBRL, GAAP, voluntary disclosure

JEL Classification: M41, M43

Suggested Citation

Brown, Nerissa C. and Cohen, Shira and Huffman, Adrienna A., Accounting Reporting Complexity and Non-GAAP Earnings Disclosure (January 8, 2019). 29th Annual Conference on Financial Economics & Accounting 2018; Fox School of Business Research Paper. Available at SSRN: https://ssrn.com/abstract=3224798 or http://dx.doi.org/10.2139/ssrn.3224798

Nerissa C. Brown

University of Illinois at Urbana-Champaign ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Shira Cohen

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Adrienna A. Huffman (Contact Author)

The Brattle Group ( email )

San Francisco, CA 9133
United States

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