Accounting Standards, Implementation Guidance, and Example-Based Reasoning
Posted: 21 Sep 2006
This paper examines interpretation of accounting standards that contain latitude and provide implementation guidance via affirmative examples (illustrating allowed reporting) or counter examples (illustrating disallowed reporting). Based on prior psychology research, we predict that practitioners engage in "example-based reasoning" in which they either focus on shared (rather than unshared) features between their particular case and a provided example or focus on the outcome indicated in the example, such that they are more likely to conclude that their case qualifies for the same treatment as the provided example. We test our predictions in two experiments in which participants judge the appropriateness of income-statement recognition. Experiment 1 uses MBA students as participants and varies example type (affirmative, counter) and case (revenue recognition, expense recognition) in a 2 x 2 design. Experiment 1 supports our predictions for both cases. Experiment 2 uses more experienced practitioners in accounting and finance as participants, focuses on revenue recognition, and varies example type (affirmative, counter, both) in a 1 x 3 design. Experiment 2 likewise supports the use of example-based reasoning, and also indicates that practitioners in the "both affirmative and counter example" condition respond as if they had only received an affirmative example. These results have implications for standard setters who are interested in understanding how implementation guidance that accompanies accounting standards can result in aggressive or conservative application of standards.
JEL Classification: M41, M44, C91
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