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Does the Balance Sheet Approach Improve the Usefulness of Accounting Information?

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  • Masaki Kusano

    (Graduate School of Economics, Kyoto University, Japan)

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    Abstract

    The purpose of this study is to investigate the effects of a change in the accounting model on accounting information for decision making. Especially, this study shows that net income (earnings) does not play an important role in providing useful information for decision making if the accounting model changes from flow-based accounting to stockbased accounting. If the IASB and the FASB adopt stock-based accounting and measure assets and liabilities at fair value, earnings persistence and predictive ability will decrease, and the usefulness of income information will be impaired due to the increasing transitory earnings and the effects of earnings volatility. Stock-based accounting that emphasizes the balance sheet will impair the valuation role of financial reporting because the combined usefulness of accounting information of the book value of net assets and earnings does not improve; the usefulness of stock information (the balance sheet) for decision making does not necessarily improve, and the usefulness of flow information (net income) decreases. This finding indicates that the balance sheet approach does not necessarily improve the usefulness of accounting information.

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    File URL: http://www.rieb.kobe-u.ac.jp/tjar/article/vol2/pdf/7.Kusano.pdf
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    Bibliographic Info

    Article provided by Research Institute for Economics & Business Administration, Kobe University in its journal The Japanese Accounting Review.

    Volume (Year): 2 (2012)
    Issue (Month): (December)
    Pages: 139-152

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    Handle: RePEc:kob:tjrevi:dec2012:v:2:p:139-152

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    Related research

    Keywords: Stock-Based Accounting; Flow-Based Accounting; Fair Value; Earnings Persistence; Earnings Volatility;

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    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Demerjian, Peter R., 2011. "Accounting standards and debt covenants: Has the “balance sheet approach” led to a decline in the use of balance sheet covenants?," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 178-202.
    2. George J. Benston & Michael Bromwich & Alfred Wagenhofer, 2006. "Principles- versus rules-based accounting standards: the FASB's standard setting strategy," Abacus, Accounting Foundation, University of Sydney, vol. 42(2), pages 165-188.
    3. Edward M. Werner, 2011. "The value relevance of pension accounting information: evidence from Fortune 200 firms," Review of Accounting and Finance, Emerald Group Publishing, vol. 10(4), pages 427-458, November.
    4. Benston, George J., 2008. "The shortcomings of fair-value accounting described in SFAS 157," Journal of Accounting and Public Policy, Elsevier, vol. 27(2), pages 101-114.
    5. Hann, Rebecca N. & Heflin, Frank & Subramanayam, K.R., 2007. "Fair-value pension accounting," Journal of Accounting and Economics, Elsevier, vol. 44(3), pages 328-358, December.
    6. Joerg-Markus Hitz, 2007. "The Decision Usefulness of Fair Value Accounting - A Theoretical Perspective," European Accounting Review, Taylor & Francis Journals, vol. 16(2), pages 323-362.
    7. David Easley & Maureen O'hara, 2004. "Information and the Cost of Capital," Journal of Finance, American Finance Association, vol. 59(4), pages 1553-1583, 08.
    8. Skinner, Douglas J., 1999. "How well does net income measure firm performance? A discussion of two studies1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 105-111, January.
    9. Geoffrey Whittington, 2010. "Measurement in Financial Reporting," Abacus, Accounting Foundation, University of Sydney, vol. 46(1), pages 104-110.
    10. Richard Lambert & Christian Leuz & Robert E. Verrecchia, 2007. "Accounting Information, Disclosure, and the Cost of Capital," Journal of Accounting Research, Wiley Blackwell, vol. 45(2), pages 385-420, 05.
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