TCU Neeley Research Highlight – Associate Professor Anne Albrecht partnered with experts to develop research insights for industry and academic leaders.
March 31, 2024
TCU Neeley’s Anne Albrecht alongside other experts find through research that changes in accounting estimates can make earnings reports more useful and responsive to investors, but also that companies may use these changes strategically to meet targets. While these changes are scrutinized and can be costly, improvements in disclosure practices and regulatory oversight are needed.
Abstract
This study provides insights into the efficacy of FASB ASC 250 by examining the impact of material changes in accounting estimates (MCEs) on the usefulness of earnings. We find that MCEs, on average, increase the usefulness of earnings measured by the predictive ability of earnings for future cash flows and investor responsiveness to earnings news. Although the results suggest that some firms time their implementation of MCEs to meet desired earnings targets, we also find that ASC 250 disclosures attract investors’ and regulators’ scrutiny, suggesting that MCEs are a costly earnings management tool. Collectively, our findings provide limited support for the widespread use of MCEs for earnings management and suggest that this use is much more nuanced than suggested by prior research. Finally, notwithstanding the benefits of ASC 250 disclosures, our descriptive analysis of related disclosures of accounting estimates suggests that there is room for further improvements in current disclosure practices and regulatory monitoring.
