Clarification or Confusion: A Textual Analysis of ASC 842 Lease Transition Disclosures

Abstract

We apply latent Dirichlet allocation to examine the textual characteristics of firms’ transition disclosures in the context of the adoption of Accounting Standard Codification (ASC) 842 on leases. We find that firms’ lease transition disclosures become less readable and more dissimilar the closer to adoption. This occurs because the disclosures entail more use of technical and complex words and less use of simplifying descriptive language to communicate the transition. Consistent with these different textual characteristics, we also find that it is the technical component of the lease transition disclosures that reduces the timeliness of analyst forecast revisions and increases market-related information uncertainty. These economic outcomes support the view that the transition disclosures for ASC 842 favor those investors most able to benefit from technical information over those who may prefer the use of more straightforward language to describe the transition.

Keywords: ASC 842, latent Dirichlet allocation, new lease standard, transition disclosures, technical language

JEL Classification: M41