Characteristics influencing perceptions of accounting pronouncement quality.

SYNOPSIS: Effective capital markets rely on financial information mandated by high-quality accounting pronouncements. This study identifies characteristics associated with the quality of pronouncements issued by the Financial Accounting Standards Board (FASB). We relate pronouncement qualities

described in previous literature directly to comments on actual pronouncements made by respondents familiar with pronouncement use. Our review of previous literature suggests that desirable or normative characteristics of accounting pronouncements can be categorized as informational, operational, and formational in nature. We find that informational characteristics tend to dominate FASB constituents' explanations of their rankings of the best and worst accounting pronouncements, with operational and formational characteristics carrying relatively larger weights in the rankings of worst pronouncements.

Keywords: FASB; accounting pronouncements.

Data Availability: Data concerning perceptions of pronouncement quality were obtained directly from the FASB. All other data are available from public sources.

INTRODUCTION

The stability of U.S. capital markets depends on the quality of the information received about investment opportunities. One purpose of the due process required by the Financial Accounting Standards Board (FASB) is to subject proposed pronouncements to the scrutiny of a wide array of constituents. The concern for pronouncement quality is obvious in the stated goals of the FASB. For example, in April 1996, the FASB's strategic plan sought "to gain more acceptance for the Board's process and pronouncements" (Beresford 1997,86). However, as with any deliberative process, not everyone is satisfied with the outcome. Dissatisfaction can lead to calls for revisions or interpretations of previously issued standards as well as intervention by the Securities and Exchange Commission (SEC) or the U. S. Congress. At a minimum, the dissatisfaction can also create the perception that a pronouncement is low quality.

In an attempt to identify the elements of a high-quality accounting standard, five commentaries were published in the June 1998 issue of A Horizons (hereafter, the AH commentaries). Their stated purpose is to identify characteristics that contribute to high-quality pronouncements (Knutson and Napolitano 1998; Linsmeier et al. 1998; Smith 1998; Rogero 1998; Wulif and Koski-Grafer 1998). However, these commentaries are presented on a stand-alone basis, each reflecting the perspectives of the various FASB constituents. No attempt is made to build a consistent, coherent model of what characterizes a "high-quality" pronouncement.

In a separate study, Reither (1998) presents a compilation of characteristics that FASB constituents identify when making judgments about high- and low-quality pronouncements. Reflecting the descriptive nature of her research question, Reither does not attempt to relate these judgments to any normative prescriptions as outlined in the AH commentaries.

One obvious next step in assessing the FASB's due process is to examine whether these normative characteristics outlined in the commentaries are reflected in constituents' judgments of quality in actual pronouncements. Reither's (1996, 1998) data on FASB constituents' judgments on which pronouncements are "best" or "worst" provide us with a unique opportunity to link empirically the normative qualities reflected in the commentaries with the actual judgments of constituents.

This study contributes to our understanding of desirable characteristics of FASB standards by (1) developing, from the AH commentaries, a general model or taxonomy of desirable or normative characteristics, and (2) using Reither's (1996, 1998) survey data to assess whether these normative characteristics are reflected in the actual judgments of FASB constituents on which pronouncements are high or low quality. Our results suggest characteristics can be categorized under three basic constructs: informational, operational, and formational. When we analyze Reither's data relative to this framework, we find that FASB constituents refer to only a subset of the desirable characteristics proposed in the AH commentaries in assessing quality, with most focusing on the informational aspects of the pronouncement. However, we also find that operational and formational characteristics are important in constituents' dissatisfaction with a particular pronouncement.

ACCOUNTING PRONOUNCEMENT CHARACTERISTICS

Arthur Levitt, former Chairman of the SEC, states the following concerning the quality of pronouncements:

I firmly believe that the success of capital markets is directly dependent on the quality of the accounting and disclosure system. Disclosure systems that are founded on high quality pronouncements give investors confidence in the credibility of financial reporting--and without investor confidence, markets cannot thrive. (Levitt 1998, 80)

But what constitutes a "high quality" pronouncement is the subject of some debate. To stimulate discussion, the AH commentaries were solicited from users and preparers of financial statements (Imhoff 1998). In each case, the authors either enumerated or bolded characteristics they believe indicate higher quality. However, no cross-article analysis or integration is attempted to summarize or unify the concepts identified.

After carefully reading the commentaries, we identified 38 characteristics representing similar and dissimilar constructs and summarize them in the Appendix. (1) Based on the similarities, we reduce this set to 16 unique characteristics, (2) and organize them into three broad categories that relate to the role played in the standard-setting process. The three categories that we believe best capture the underlying concepts are informational, operational, and formational characteristics. Figure 1 provides a schematic of the roles played by each of these categories in the development and implementation of an accounting pronouncement.

Informational Characteristics

Informational characteristics relate to the ability to generate data useful in decision making. Of the 38 characteristics from the AR commentaries detailed in the Appendix, we categorize 24 as informational characteristics and consolidate them into the 8 unique categories of informational characteristics presented in Table 1. (3)

A frequently mentioned characteristic (four commentaries) is the importance of economic reality. The most common reference to this characteristic is the notion that pronouncements should "require use of measurement attributes for assets and liabilities that are consistent with their intended use" (Rogero 1998, 179).

Four commentaries want standards to adhere to the Conceptual Framework. Those authors believe the Conceptual Framework is familiar to users and explains the basis for a new pronouncement. In addition, the authors believe the Conceptual Framework provides a benchmark for evaluating a proposed pronouncement (Linsmeier et al. 1998).

Three commentaries argue that pronouncements should provide better information than existing pronouncements. For example, pronouncements can become obsolete when the economic environment or business practices change (Linsmeier et al. 1998). Three commentaries suggest that a pronouncement should solve a current problem. Two commentaries argue that certain pronouncements reflect "overcompensation" of a "perceived disaster" (Rogero 1998; Wulff and Koski-Grafer 1998). The implication is that certain reporting problems result from failed internal controls in individual corporations rather than deficiencies in accounting standards.

Table 1 also includes four less frequently mentioned characteristics. Two commentaries identify conformity with international standards, while increased comparability between reporting corporations, use of current value instead of historical cost, and proper income recognition are mentioned in one commentary each.

Operational Characteristics

Operational characteristics relate to implementing and fulfilling pronouncement requirements. We categorize 10 of the 38 characteristics in the Appendix as operational. Given the similarities between characteristics, these 10 are reduced to the 5 unique categories reported in Table 1. Most of these characteristics are mentioned in the commentaries written by industry representatives with experience in implementing statement requirements (i.e., Rogero 1998; Wulff and Koski-Grafer 1998).

Two commentaries focus on the clarity of the pronouncement. The authors want pronouncements to be readable and understandable, with examples to facilitate implementation. Rogero (1998) notes that, after issuance, "frantic activity" occurs as companies and auditors attempt to understand and apply the new rules by the effective date.

Three commentaries discuss issues related to the costs and benefits associated with newly required disclosures. FASB Concepts Statement No. 5 (para. 63) states that the cost of providing information should not exceed the benefit from having that information. Wulff and Koski-Grafer (1998) argue that stockholders absorb the cost of information in the form of lower dividends. Another commentary recommends that "an explicit analysis of costs and benefits...should be included in the basis for conclusions" of the statement (Rogero 1998, 178).

The remaining three characteristics reflect the diversity of the FASB's constituencies. From an auditor's standpoint, high-quality standards should provide detailed implementation guidance to the disclosing entity (Smith 1998) and verifiable information (Knutson and Napolitano 1998). Corporate constituents, as represented by Wulff and Koski-Grafer's (1998) commentary, desire flexibility to accommodate all circumstances and transactions. In contrast, the public accounting profession, represented by Smith's (1998) commentary, wants accounting pronouncements to reduce alternatives in order to promote consistency.

Formational Characteristics

Formational characteristics relate to the development of the pronouncement and to the subsequent assessment of its usefulness. Three commentaries suggest characteristics that should be used to evaluate prospective pronouncements and review existing pronouncements. We categorize the remaining 6 of the 38 characteristics into three distinct formational constructs.

Two commentaries propose improving pronouncement quality by utilizing external sources during the formation process. Linsmeier et al. (1998) recommend that relevant academic research be considered and Rogero (1998) suggests the use of task forces.

Commentaries written by corporate representatives (Rogero 1998; Wulff and Koski-Grafer 1998) recommend issuing pronouncements on a timely basis. Wulff and Koski-Grafer (1998) argue that some projects try to accomplish too much and should be broken down into smaller projects that can be accomplished in less than one year. Both commentaries also recommend that pronouncements be subject to sunset provisions to ensure that their effectiveness is re-examined.

RESEARCH DESIGN

We use the data and comments collected by Reither (1996, 1998) from 57 of 75 individuals attending the 1996 AAA/FASB Financial Reporting Issues Conference. These participants include 33 academics, 12 standard setters, two regulators, seven public accountants, and three financial analysts. Reither's subjects are thus broadly representative of the FASB's diverse constituency. Reither asked respondents to identify the three best and three worst accounting pronouncements issued by the FASB. (4) After excluding industry-specific and superseded pronouncements from the first 125 Statements of Financial Accounting Standards, 68 standards remain for our analyses.

When she solicited participants' rankings, Reither asked them to explain why they believed a ranked pronouncement is of high or low quality. The resulting responses were compiled by Reither (1996) and made available to interested parties. Our initial review of these responses suggests that a few were superficial or no explanations were provided by participants; we omit these responses from our analyses. The remaining comments form the basis of our study. Obviously, the validity of our conclusions is contingent upon how seriously the conference participants approached their ranking task. Participants may not have fully revealed all of their reasons underlying their judgments. Also of some concern is the fact that only three-fourths of the participants chose to take part in the task, suggesting that a nonresponse bias could affect our results. Although we have no reason to believe that such biases are present, both possibilities represent potential limitations to our study.

We extend Reither's (1998) analysis by conducting content analysis on the explanations provided by her participants. Each explanation consists of sentences or phrases ranging approximately from 2 to 40 words. We looked for references to the same characteristics identified in the AH commentaries. Table 1 details the keywords we used in the content analysis to identify the characteristics. For the "best" pronouncements, we checked for keywords relating to the positive aspects of the characteristic. For example, in the case of increases comparability, we examined the text for phrases such as "provides standardization." In the case of "worst" pronouncements, we looked for phrases such as "does not provide standardization." Virtually all commentaries were concise and most contained the exact verbiage as the keywords in Table 1.

RESULTS

Our content analysis reveals that, of the 16 characteristics listed in Table 1, only nine are cited ten or more times in participants' explanations of why they judged certain standards to be of high or low quality. This suggests that participants used only a subset of the characteristics. Surprisingly, we identified three additional characteristics not mentioned in any of the AH commentaries These include whether the standard is politically motivated, whether the pronouncement exhibits longevity, and whether the pronouncement required amendment. These characteristics relate to both the formulation (politically motivated) and the continuing review (longevity and amendment) of the pronouncement and are categorized as formational characteristics. Two of the three are cited ten or more times, and included in further analyses. This increases the number of frequently cited (ten or more citations) characteristics from 9 to 11. Table 2 reports these 11 characteristics, along with the number of times each is associat ed with "best" and "worst" ratings.

Table 2 indicates that 6 of the 11 frequently cited characteristics are informational, three are operational, and two are formational. Economic reality is cited more frequently (83 citations) than any other characteristic, a frequency almost twice that of the second most frequently cited characteristic, provides better information (49 citations). (5) Further, economic reality is most frequently cited for both best (possessing economic reality) and worst pronouncements (lacking economic reality). The next four most frequently cited characteristics are, in order, provides better information (49 citations), is clear (45 citations), adheres to the conceptual framework (44 citations), and provides implementation guidance (38 citations). (6)

What Are Characteristics of the Best Pronouncements?

Table 2 reports nine characteristics cited at least ten times in participants' evaluations of pronouncements considered to be of best quality. Six relate to the informational qualities of the pronouncement. Focus seems to be on the disclosure's ability to accurately represent a transaction or event (economic reality, 48 citations). Best pronouncements are also characterized by improvement over the status quo in solving a reporting problem--provides better information receives 38 citations and solves a problem receives 27 citations. Three other informational characteristics received frequent mention. These include adheres to the conceptual framework (22 citations), increases comparability (18 citations), and favors current value over historical cost (10 citations).

Compared to the informational characteristics of the pronouncement, participants place relatively less emphasis on the operational and formational characteristics. The clarity of the pronouncement and amount of implementation guidance provided by the pronouncement receives frequent mention (22 and 11 citations, respectively). Participants mention only one formational characteristic, longevity, more than ten times, even though none of the AH commentaries mention this characteristic. In fact, longevity is mentioned primarily in association with SFAS No. 5, Accounting for Contingencies. Apparently, the fact that this older pronouncement is not superseded, or significantly revised, indicates to the participants that it is a higher-quality pronouncement.

What Are Characteristics of the Worst Pronouncements?

Conference participants mention seven characteristics more than ten times when assessing the worst pronouncements. Four of the seven are informational characteristics. The primary factor for identifying worst pronouncements is the lack of economic reality or the inability to recognize what is perceived as a genuine obligation or future benefit (35 citations). For example, participants criticize SFAS No. 123, Stock-Based Compensation, for failing to recognize an obligation to employees, and fault SFAS No. 2, Research and Development Costs, for failing to recognize an asset that should be capitalized and amortized against net income. Failure to adhere to the conceptual framework is cited 22 times, the same number of times it is cited as a determinant of the best pronouncements, while the inability to provide better information and the inability to solve a problem are cited 11 times each.

Operational and formational characteristics are also influential in conference participants' perceptions of the worst accounting pronouncements. Pronouncements that do not provide implementation guidance (30 citations) and that are not clear (23 citations) are frequently associated with worst rankings. With regard to formational characteristics, politically motivated is frequently mentioned as a source of dissatisfaction (16 citations).

Which Are the Best and Worst Pronouncements?

Table 3 presents all pronouncements receiving either best or worst votes. Interestingly, participants fail to assign either good or bad rankings to most pronouncements. Forty of the 68 pronouncements analyzed in the study received neither best nor worst votes. Of the 28 pronouncements receiving votes, only 12 garner at least ten best or worst votes; 25 receive at least one "Worst" rating and 18 receive at least one "worst" rating. In Table 3, the "Total" column reports the sum of the best and worst votes. We calculate the "Difference" score by subtracting the best votes from the worst votes (Reither 1998). Based on the Table 3 data, participants view SFAS No. 106, SFAS No. 95, SFAS No. 5, and SFAS No. 107 most favorably and SFAS No. 13, SFAS No. 123, SFAS No. 15, and SFAS No. 2 least favorably. (7)

To identify those characteristics most closely associated with pronouncements receiving frequent mention as either best or worst, we focus on the 12 pronouncements receiving at least 10 total citations. Table 4 summarizes these pronouncements and characteristics referenced by participants in their evaluation.

The four pronouncements perceived as best, by having difference scores in excess of +10, are rated favorably for very different reasons. For example, SFAS No. 106, Postretirement Benefits Other than Pensions, has the most "best" votes, its popularity relating primarily to informational characteristics. The requirement to recognize a liability associated with postretirement benefits is viewed as consistent with the conceptual framework and the definition of a liability (8 citations), and as representing economic reality (22 citations). In addition to providing better information, participants view the new disclosure requirements of SFAS No. 106 as solving an existing problem of no disclosure of these obligations (seven citations). In total, participants cite SFAS No. 106 favorably for its informational characteristics 45 times, but only three times each for its operational and formational characteristics.

On the other hand, SFAS No. 5, Accounting for Contingencies, rates highly based on operational characteristics (clarity, six citations) and formational characteristics (longevity, five citations), and relatively less so for its informational characteristics (10 total informational characteristics). Citing SFAS No. 5 for its clarity seemed a bit surprising, given its use of terms "probable," "reasonably possible," and "remote." Interestingly, these imprecise terms and lack of implementation guidance are viewed beneficially by participants as flexible (four citations).

SFAS No. 95, Statement of Cash Flows, rates favorably with conference participants because it is an improvement over prior guidance (11 citations). In addition, they believe it solves a problem (five citations) not addressed by prior pronouncements. Under APB No. 19, companies prepared a Statement of Changes in Financial Position either on a working capital or cash flow basis. Clearly, participants view this option as problematic and believe a single format increases comparability (eight citations). In this case, informational characteristics (cited 25 times) strictly dominate operational and formational characteristics (cited 8 times and 1 time, respectively).

Like SFAS No. 95, participants view SFAS No. 107, Fair Value Disclosure of Financial Instruments, favorably for its informational characteristics (15 citations vs. one operational and zero formational citations). Participants observe that SFAS No. 107 provides better information than prior disclosure requirements (six citations). In addition, the use of current value accounting is seen as a positive attribute of this standard (five citations).

Table 3 also lists four pronouncements strongly characterized as worst by having difference scores lower than -10. As with the four "best" pronouncements, we subject these four "worst" to the additional analysis reported in Table 4. Summed over the four pronouncements, we find that the characteristic most often cited by constituents is the lack of economic reality of the resulting disclosures (26 total citations). In fact, in all four pronouncements considered to be "worst," at least 5 of the 67 participants cited a lack of economic reality as a factor contributing to the pronouncement's ineffectiveness.

SFAS No. 13, Leases, received the most votes as a "worst" pronouncement. In addition to the lack of economic reality, participants criticize the pronouncement for lacking clarity (nine citations) and not providing implementation guidance (ten citations). In total, participants cite the pronouncement for its informational characteristics (or lack thereof) 11 times, for operational characteristics 22 times, and for formational characteristics 7 times. Specific comments are highly critical of the ability to manipulate SFAS No. 13's classification criteria to avoid recognizing legal obligations as liabilities. Finally, the pronouncement is criticized for requiring numerous amendments (six citations). These amendments to SFAS No. 13 include 13 other FASB standards and 18 FASB interpretations and technical bulletins.

Although the lack of economic reality (seven citations) is a significant factor in classifying SFAS No. 123, Stock-Based Compensation, as one of the worst pronouncements, political compromise (seven citations) is an equal contributor to the pronouncement's lack of popularity. Even though a prior exposure draft requires reporting the value of stock options given to employees as an expense, the FASB subsequently modified their position on this issue in response to intense pressure. The final standard requires only pro forma disclosure of the estimated stock compensation expense and the resulting pro farina net income. Participants appear to view the FASB's final standard as a political response rather than practically motivated. Interestingly, one of the pronouncements receiving a number of "best" citations (SFAS No. 106) is also the subject of a great deal of political compromise. Apparently, respondents felt that the positive characteristics associated with SFAS No. 106 outweigh the negative characteristics.

Table 4 also includes four other pronouncements that we characterize as highly controversial because they had high numbers of both best and worst votes (at least five votes each), yet are not unequivocally perceived as favorable or unfavorable. For example, SFAS No. 115, Investments in Debt and Equity Securities, received seven best votes and seven worst votes. Those evaluating this pronouncement favorably cited the use of current value accounting (four citations). SFAS No. 94, Consolidation of Majority-Owned Subsidiaries, and SPAS No. 52, Foreign Currency Translation, also received an equal amount of best and worst votes (five each and six each, respectively).

SFAS No. 87, Employers' Accounting for Pensions, received 14 best ratings and eight worst ratings. Those rating SFAS No. 87 as a best pronouncement refer to its economic reality. Similar to SPAS No. 106 for postretirement benefits, SFAS No. 87 requires recognition of a minimum pension liability when the benefit obligation exceeds the plan assets available for plan participants. Participants apparently believe that the prior requirements did not properly recognize a firm's obligation for pension benefits. However, negative ratings for SFAS No. 87 are not strongly associated with any particular characteristic.

In sum, the four best pronouncements rate favorably due (1) primarily to the informational characteristics of the standard (95 citations), and (2) relatively less to operational characteristics (26 citations) and formational characteristics (9 citations). The four worst pronouncements also rate unfavorably because of informational reasons (55 citations), but operational (25 citations) and formational characteristics (18 citations) play a relatively larger role compared to their "best" counterparts. (8)

CONCLUSIONS AND LIMITATIONS

This research has two main objectives. First, we review five commentaries published in the June 1998 issue of Accounting Horizons to develop a general taxonomy of normative characteristics that accounting pronouncements should reflect. Second, relative to this taxonomy, we analyze how FASB constituents rate actual accounting pronouncements, including their explanations, to identify the characteristics used to assess the quality of accounting pronouncements. Prior research presents mostly descriptive information on pronouncement quality without explicitly considering the normative recommendations of constituents.

The primary implication of our study relates to the pronouncement generation process. Because one of the FASB's strategic goals is "to gain more acceptance for the Board's process and pronouncements" (Beresford 1997, 86), constituent concerns must be impounded in final standards. We find evidence consistent with the notion that pronouncements that satisfy (do not satisfy) the normative characteristics outlined by constituents tend to elicit higher- (lower-) quality ratings. We further find, in general, that the informational characteristics of accounting pronouncements primarily influence the FASB's constituents' perceptions of the standards' quality. However, we also find that both operational and formational characteristics of accounting pronouncements must be considered by standard setters in their consensus-building processes. More specifically, our results suggest the FASB should be particularly attentive to the economic reality of accounting pronouncements, the consistency with the conceptual framework, the incremental benefit over existing disclosure requirements, and the existence of clear implementation guidelines. In addition, the FASB should be aware that perceptions of political compromise may result in pronouncements being viewed less favorably.

APPENDIX

Characteristics Identified in Accounting Horizons Commentaries


Linsmejer et al.

L1                Addresses a deficiency
L2                Improves decision making
L3                Benefits exceed costs
L4                Consistent with research
L5                Consistent with
                  conceptual framework

Smith

S1                Assesses economics of transactions
52                Provides comparability, standardization
S3                Provides balance between concepts and rules
S4                Addresses appropriate accounting concept
55                Provides clear implementation
                  guidance in form of rules

Knutson and
Napolitano

K1                Improves information for decisions
K2                Relevant to investment evaluation process
K3                Can be evaluated by the audit process
K4                Fits in double-entry accounting model
K5                Depicts economic phenomena
K6                Favors current rather than historic values
K7                Does not act as a substitute for
                  measurement and recognition
K8                Does not facilitate smoothing

Rogero

R1                Clear and understandable, utilizes
                  concepts, cost does not exceed benefit
R2                Replicates the economics of the transaction
R3                Contributes to user understanding
R4                Addresses problems not addressed
                  by other pronouncements
R5                Developed by task forces and field-tested
R6                Considers international harmonization
R7                Considers importance and
                  pervasiveness of underlying problem
R8                Subject to sunset review
R9                Completed on a timely basis

Wulif and
Koski-Grafer

W1                Accounts for economics of the transaction
W2                Provides more relevant information
                  than current practice
W3                Reflects real-world operating conditions
W4                Prevents or minimizes a current deficiency
W5                Completed in a reasonable amount of time
W6                Benefits exceed cost
W7                Addresses international issues
W8                Has flexibility (principles not rules)
W9                Limits disclosure to key data only
W10               Clear and concise language
W11               Subject to sunset review
TABLE 1

Taxonomy of Accounting Pronouncement Characteristics

Short                                     Keywords for
Explanation                            Evaluation of Best

Informational Characteristics

Economic reality               Recognizes a liability/obligation/
                               asset/benefit, economic reality


Provides better                Decision-relevant, better
information                    information for users

Adheres to                     Adheres to conceptual
conceptual                     framework, uses accrual basis
framework

Solves a problem               Satisfies deficiency or problem,
                               corrects or improves current
                               condition

Increases                      Increases comparability,
comparability                  provides standardization

Favors current                 Favors current value over
value                          historical cost


Provides proper                Indicates performance, income
income                         recognition, prevents smoothing
recognition

Conforms to                    Adheres to international
international                  guidelines or practices
standards

Operational Characteristics

Clear                          Clear, concise, simple


Provides                       Improves guidance, provides
implementation                 rules, codification
guidance

Benefits exceed                Benefits exceed cost, easy to
cost                           implement

Flexible                       Allows flexibility or judgment,
                               general

Verifiable results             Easy to audit, verifiable



Formational Characteristics

Uses external                  Includes external input in
input                          formation, utilizes task force,
                               utilizes research

Timely                         Timely, issued quickly


Subject to sunset              Subject to sunset


Short                                    Keywords for
Explanation                           Evaluation of Worst

Informational Characteristics

Economic reality               Lacks economic logic, fails to
                               recognize a liability/obligation/
                               asset/benefit

Provides better                Not decision-relevant, does not
information                    improve information/reporting

Adheres to                     Ignores conceptual framework,
conceptual                     no conceptual basis, violates
framework                      accrual basis

Solves a problem               Wrong answer, does not solve
                               problem, does not correct or
                               improve current condition

Increases                      Reduces comparability, does not
comparability                  provide standardization

Favors current                 Ignores current values, increases
value                          gap between book and fair
                               market value

Provides proper                Allows smoothing, ignores an
income                         expense
recognition

Conforms to                    No corresponding worst
international                  characteristic mentioned by
standards                      participants

Operational Characteristics

Clear                          Complex, not clear, too detailed


Provides                       Arbitrary, vague, lacks rules or
implementation                 guidance
guidance

Benefits exceed                Costly, not operational, hard to
cost                           maintain records

Flexible                       Does not allow flexibility,
                               micro-manages

Verifiable results             No corresponding worst
                               characteristic mentioned by
                               participants

Formational Characteristics

Uses external                  No corresponding worst
input                          characteristic mentioned


Timely                         No corresponding worst
                               characteristic mentioned

Subject to sunset              No corresponding worst
                               characteristic mentioned

Short
Explanation                    Source (a)

Informational Characteristics

Economic reality               K5, R2, S1,
                               W1, W3


Provides better                K1, K2, L2,
information                    W2

Adheres to                     K4, L5, R1,
conceptual                     S3, S4
framework

Solves a problem               L1, R4, R7,
                               W4


Increases                      S2
comparability

Favors current                 K6
value


Provides proper                K7, K8
income
recognition

Conforms to                    R6, W7
international
standards

Operational Characteristics

Clear                          R1, R3, W9,
                               W10

Provides                       S5
implementation
guidance

Benefits exceed                L3, R1, W6
cost

Flexible                       W8


Verifiable results             K3



Formational Characteristics

Uses external                  L4, R5
input


Timely                         R9, W5


Subject to sunset              R8, W11


(a)Accounting Horizons articles: Knutson and Napolitano (1998),
Linsmeier et al. (1998), Rogero (1998), Smith (1998), and Wulff and
Koski-Grafer (1998).
TABLE 2

Characteristics Present in the Pronouncements


                                            Frequency of  Frequency of
Short Explanation              Category     Best Rating   Worst Rating

Economic reality               Information       48            35
Provides better information    Information       38            11
Clearly stated                 Operation         22            23
Adheres to conceptual          Information       22            22
 framework
Provides implementation        Operation         11            30
 guidance
Solves a problem               Information       27            11
Increases comparability        Information       18             4
Not politically motivated (a)  Formation          1            16
Favors current value           Information       10             5
Has longevity (a)              Formation         12             0
Benefits exceed cost           Operation          5             5
Provides proper income         Information        7             0
 recognition
Needed amendment (a)           Formation          0             7
Flexible in implementation     Operation          4             2
Uses external input            Formation          2             0
Conforms to international      Information        1             0
 standards
Issued on timely basis         Formation          0             0
Subject to sunset              Formation          0             0
Verifiable results             Operation          0             0

                                 Total
                               Frequency
Short Explanation              of Mention

Economic reality                   83
Provides better information        49
Clearly stated                     45
Adheres to conceptual              44
 framework
Provides implementation            41
 guidance
Solves a problem                   38
Increases comparability            22
Not politically motivated (a)      17
Favors current value               15
Has longevity (a)                  12
Benefits exceed cost               10
Provides proper income              7
 recognition
Needed amendment (a)                7
Flexible in implementation          6
Uses external input                 2
Conforms to international           1
 standards
Issued on timely basis              0
Subject to sunset                   0
Verifiable results                  0

(a)Items addressed by conference participants, but not in the Accounting
Horizons commentaries. Items with frequencies of 10 or above are bolded.
TABLE 3

Number of Best and Worst Votes

Statement
Number     Statement Topic                  Total     Best  Worst

106        Postretirement Benefits            39       37     2
           Other than Pensions
 95        Statement of Cash Flows            20       20     0
  5        Accounting for Contingencies       20       16     4
107        Fair Value of Financial            10       10     0
           Instruments
 87        Employers' Accounting              22 (c)   14     8
           for Pensions
 14 (d)    Segments of a Business              8        6     2
           Enterprise
 91        Nonrefundable Costs of              3        3     0
           Loans and Leases
119        Derivative Financial                3        3     0
           Instruments
125        Transfers of Assets and             5        4     1
           Extinguishments of
           Liabilities
 48        Revenue Recognition When            2        2     0
           Right of Return Exists
 88        Curtailment of Defined              2        2     0
           Benefit Pension Plans
114        Impairment of a Loan                2        2     0
  7        Development Stage Enterprises       1        1     0
 30        Information about Major             1        1     0
           Customers
105        Financial Instruments               1        1     0
 52        Foreign Currency Translation       12 (c)    6     6
 94        Consolidation of Majority-Owned    10 (c)    5     5
           Subsidiaries
115        Investments in Debt and            14 (c)    7     7
           Equity Securities
 43        Compensated Absences                1        0     1
 80        Future Contracts                    1        0     1
121        Impairment of Long-Lived            3        1     2
           Assets
 34        Capitalization of Interest          4        1     3
           Cost
109        Accounting for Income Taxes         8        3     5
 89        Changing Prices                     5        1     4
  2        Research and Development Costs     19        4    15
 15        Troubled Debt Restructuring        13        0    13
123        Stock-Based Compensation           17        1    16
 13        Leases                             30        3    27

Statement
Number     Statement Topic                  Difference

106        Postretirement Benefits              35 (a)
           Other than Pensions
 95        Statement of Cash Flows              20 (a)
  5        Accounting for Contingencies         12 (a)
107        Fair Value of Financial              10 (a)
           Instruments
 87        Employers' Accounting                 6
           for Pensions
 14 (d)    Segments of a Business                4
           Enterprise
 91        Nonrefundable Costs of                3
           Loans and Leases
119        Derivative Financial                  3
           Instruments
125        Transfers of Assets and               3
           Extinguishments of
           Liabilities
 48        Revenue Recognition When              2
           Right of Return Exists
 88        Curtailment of Defined                2
           Benefit Pension Plans
114        Impairment of a Loan                  2
  7        Development Stage Enterprises         1
 30        Information about Major               1
           Customers
105        Financial Instruments                 1
 52        Foreign Currency Translation          0
 94        Consolidation of Majority-Owned       0
           Subsidiaries
115        Investments in Debt and               0
           Equity Securities
 43        Compensated Absences                 -1
 80        Future Contracts                     -1
121        Impairment of Long-Lived             -1
           Assets
 34        Capitalization of Interest           -2
           Cost
109        Accounting for Income Taxes          -2
 89        Changing Prices                      -3
  2        Research and Development Costs      -11 (b)
 15        Troubled Debt Restructuring         -13 (b)
123        Stock-Based Compensation            -15 (b)
 13        Leases                              -24 (b)

The following pronouncements received neither best nor worst votes: 3,
4, 6, 10, 11, 16, 18, 21, 22, 23, 24, 27, 28, 29, 35, 37, 38, 42, 47,
49, 57, 58, 62, 64, 68, 76, 77, 78, 79, 84, 85, 98, 102, 104, 110, 111,
112, 113, 118, 124.

(a)Best pronouncements.

(b)Worst pronouncements.

(c)Controversial pronouncements.

(d)Superseded by FAS No. 131 after study was conducted.
TABLE 4

Characteristics of the Best and Worst Pronouncements

                                                  Best
Statement No.                          5       95        106

Informational

Economic reality                       3       0         22
Provides better information            1       11         5
Adheres to framework                   3       1          8
Solves a problem                       1       5          7
Increases comparability                1       8          1
Favors current value                   0       0          0
Proper income recognition              1       0          2
Conforms to international standards    0       0          0

Operational

Clearly stated                         6       4          2
Provides implementation guidance       3       2          0
Benefits exceed cost                   1       2          1
Flexible in implementation             4       0          0

Formational

Not politically motivated              0       0          1
Has longevity                          5       1          2
Needed amendment                       0       0          0
Uses external input                    0       0          0

                                                  Best
Statement No.                        107       52        87

Informational

Economic reality                      1        0         7
Provides better information           6        1         3
Adheres to framework                  0        0         4
Solves a problem                      2        0         2
Increases comparability               1        1         1
Favors current value                  5        0         1
Proper income recognition             0        1         1
Conforms to international standards   0        1         0

Operational

Clearly stated                        1        1         1
Provides implementation guidance      0        0         1
Benefits exceed cost                  0        0         0
Flexible in implementation            0        0         0

Formational

Not politically motivated             0        0         0
Has longevity                         0        1         0
Needed amendment                      0        0         0
Uses external input                   0        0         1

                                             Best            Worst
Statement No.                        94        115         52

Informational

Economic reality                     1          1           2
Provides better information          0          1           0
Adheres to framework                 1          0           5
Solves a problem                     2          2           0
Increases comparability              1          0           0
Favors current value                 0          4           0
Proper income recognition            0          0           1
Conforms to international standards  0          0           0

Operational

Clearly stated                       0          0           1
Provides implementation guidance     0          0           6
Benefits exceed cost                 0          0           0
Flexible in implementation           0          0           0

Formational

Not politically motivated            0          0           1
Has longevity                        0          1           0
Needed amendment                     0          0           0
Uses external input                  0          0           0

                                                 Worst
Statement No.                        87        94        115

Informational

Economic reality                     2         0          2
Provides better information          1         3          0
Adheres to framework                 1         1          1
Solves a problem                     0         1          0
Increases comparability              0         0          0
Favors current value                 0         0          0
Proper income recognition            1         0          0
Conforms to international standards  0         0          0

Operational

Clearly stated                       3         1          2
Provides implementation guidance     2         0          2
Benefits exceed cost                 0         0          1
Flexible in implementation           0         0          0

Formational

Not politically motivated            1         0          2
Has longevity                        0         0          0
Needed amendment                     0         0          0
Uses external input                  0         0          0

                                                 Worst
Statement No.                        2         13        15

Informational

Economic reality                     8         6         5
Provides better information          3         0         0
Adheres to framework                 1         3         3
Solves a problem                     1         2         1
Increases comparability              1         0         1
Favors current value                 2         0         2
Proper income recognition            1         0         0
Conforms to international standards  0         0         0

Operational

Clearly stated                       0         9         0
Provides implementation guidance     0         10        1
Benefits exceed cost                 0         1         1
Flexible in implementation           0         2         0

Formational

Not politically motivated            0         1         3
Has longevity                        0         0         0
Needed amendment                     0         6         1
Uses external input                  0         0         0

                                       Worst
Statement No.                        123

Informational

Economic reality                      7
Provides better information           0
Adheres to framework                  2
Solves a problem                      3
Increases comparability               0
Favors current value                  0
Proper income recognition             3
Conforms to international standards   0

Operational

Clearly stated                        0
Provides implementation guidance      1
Benefits exceed cost                  0
Flexible in implementation            0

Formational

Not politically motivated             7
Has longevity                         0
Needed amendment                      0
Uses external input                   0

Items occurring five or more times are bolded.

Submitted: June 2000

Accepted: January 2002

(1.) Linsmeier et al. (1998) list five basic quality issues; Smith (1998) discusses five evaluation proposals; Knutson and Napolitano (1998) identify eight evaluation criteria; Rogero (1998) describes three content characteristics and six process characteristics; and Wulff and Koski-Grafer (1998) identify 11 criteria for assessing proposed standards. A sixth article (Kaplan and Fender 1998) in the series is omitted because it primarily addresses comment letters.

(2.) Characteristics are combined based on similar concepts addressed in the commentaries and serve primarily to focus our discussion of the underlying policy issues. The accuracy of combination and classification of these characteristics are limited by the subjective judgments of the authors.

(3.) The references in Table 1 are to the corresponding characteristics identified in the Appendix. For example, R5 in Table 1 refers to the fifth characteristic identified in Rogero (1998).

(4.) Because the order in which respondents identified pronouncements provides limited ordinal information (see Reither 1998, footnote 2), pronouncements are considered to be "best" or "worst" if they ranked in the top or bottom three.

(5.) Note that each participant identified only six pronouncements (three best and three worst). Thus, the maximum number of citations is 342 (57 participants x 6 citations - 342).

(6.) Three normative characteristics mentioned in the AH commentaries are not cited by participants: issuance on a timely basis, subject to sunset requirements, and having verifiable results. Two characteristics, used external input and conforms to international standards, are cited only twice and once, respectively.

(7.) Note that this summary result is similar to that reported in Reither (1998).

(8.) The relative difference in frequency of citation between best and worst across the three categories--informational, operational, and formational--is significantly different at the 0.01 level. When the frequency of citations involving the four "controversial" pronouncements is included in both the "best" and "worst" classifications, the relative difference in proportions is significant at p < 0.001.

REFERENCES

Beresford, D. R. 1997. How to succeed as a standard setter by trying really hard. Accounting Horizons 11 (September): 79-90.

Imhoff, E. A., Jr. 1998. Six commentaries on characteristics of high quality accounting standards. Accounting Horizons 12 (June): 160.

Kaplan, D., and E. A. Fender. 1998. The development of comment letters on FASB proposals by the AICPA Accounting Standards Executive Committee. Accounting Horizons 12 (June): 184-187.

Knutson, P. H., and G. U. Napolitano. 1998. Criteria employed by the AIMR Financial Accounting Policy Committee in evaluating financial accounting standards. Accounting Horizons 12 (June): 170-176.

Levitt, A. 1998. The importance of high quality accounting standards. Accounting Horizons 12 (March): 79-82.

Linsmeier, T. J., J. R. Boatsman, R. H. Herz, R. G. Jennings, G. J. Jonas, M. H. Lang, K. R. Petroni, D. Shores, and J. M. Wahlen. 1998. Criteria for assessing the quality of an accounting standard. Accounting Horizons 12 (June): 161-162.

Reither, C. L. 1996. Survey results: Best and worst accounting standards. 1996. AAA/FASB Financial Reporting Issues Conference. December 11, 1996.

-----. 1998. What are the best and the worst accounting standards? Accounting Horizons 12 (September): 283-292.

Rogero, L. H. 1998. Characteristics of high quality accounting standards. Accounting Horizons 12 (June): 177-183.

Smith, J. T. 1998. Responding to FASB standard-setting proposals. Accounting Horizons 12 (June): 163-169.

Wulff, J. K., and S. Koski-Grafer. 1998. Characteristics of high quality accounting standards: Perspective of the corporate preparer. Accounting Horizons 12 (June): 188-191.

Denton L. Collins is an Assistant Professor at the University of Houston, William R. Pasewark is a Professor at Texas Tech University, and Jerry R. Strawser is Dean of Accounting at Texas A&M University.

The authors wish to acknowledge the helpful comments of Steven Buchheit and an anonymous reviewer.

Corresponding author: William R. Pasewark

Email: pasewark@ba.ttu.edu