The Effect of Principles-Based Standards on Financial Statement Comparability: The Case of SFAS-142
Advances in Accounting, 2020
54 Pages Posted: 19 Jun 2020
Date Written: May 20, 2020
This study examines the effects of a prominent principles-based standard (SFAS-142, Goodwill and Other Intangible Assets) on financial statement comparability. Using non-goodwill-intensive firms as our control group, we implement a difference-in-differences research design to examine how SFAS-142 affects comparability among goodwill-intensive firms (i.e. a treatment group), and comparability between goodwill-intensive firms and non-goodwill-intensive firms (i.e. another treatment group). We find that SFAS-142 decreases comparability among goodwill-intensive firms, as well as comparability between goodwill-intensive and non-goodwill-intensive firms. We also find that these reductions in comparability are less severe when the verifiability of net assets is higher. Overall, the results suggest that principles-based standards may reduce comparability, particularly when the accounting items entail high uncertainty and verifiability is low.
Keywords: Comparability, principles-based standards, verifiability, goodwill
JEL Classification: M41
Suggested Citation: Suggested Citation