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- W4386002057 abstract "AbstractWe study the transition disclosures in firms’ 10-K filings preceding the mandatory adoption of Accounting Standards Codification 842 on leases. We find that ASC 842 transition disclosures become more unreadable and dissimilar the closer to adoption, potentially because the SEC guidance on transition disclosures emphasizes detail on the specifics of the standard and whether it has material effects on future financial statements. As a result, firms’ ASC 842 transition disclosures reflect an increasing amount of technical and complex language over the transition period. Firms’ increasing use of technical and complex language may not benefit all investors and the market as a whole. Based on tests of the change in analysts’ earnings forecast delay and market uncertainty in stock returns, we find that ASC 842 transition disclosures mostly favor investors with superior information processing skills. This is contrary to the statutory goal of the SEC to increase transparency for all investors who may prefer firms’ use of clear and straightforward language to describe the effects of future accounting changes.Keywords: ASC 842Latent Dirichlet allocationNew lease standardTransition disclosuresJEL codes:: G32K22M41 AcknowledgmentsSeveral individuals helped improve the substance of this paper. We especially thank Lisa Baudot, Dirk Black, Sam Bonsall, Tami Dinh, Florian Eugster, Elia Ferracuti, Andrei Filip, Ole-Kristian Hope, Zhongwei Huang, Alan Jackson, Jae Kim, Michael Magnan, Francine McKenna, Ken Merkley, Brian Miller, Mani Sethuraman, Elvira Scarlat, Anup Srivastava, Rong Zhao, Jingjing Wang, Jacob Weidner (discussant), Yue Zhao (discussant), seminar participants at Concordia University and the University of St. Gallen, Switzerland, and reviewers for and/or participants at the sessions of the European Accounting Association Congress 2021, the Canadian Academic Accounting Association 2021, AFAANZ 2021, the national meetings of the American Accounting Association 2021, and HARC 2022. We also thank Dragoş Sabău, Oana Vancea, and Jonas Goliasch for data collection and research assistance. We are also indebted to Editor Maria Correia and two anonymous reviewers, whose guidance and comments have been invaluable.Disclosure statementNo potential conflict of interest was reported by the author(s).Supplemental Data and Research MaterialsSupplemental data for this article can be accessed on the Taylor & Francis website, https://doi.org/10.1080/09638180.2023.2244990.Online Appendix A. LDA Topic Modeling Procedure.Online Appendix B. Examples of Lease Transition Disclosures and the Corresponding Text-based Variables.Online Appendix C. Search Structure or Word Lists for Material Words.Online Appendix D. LDA Topics, Labels, and Examples of Representative Paragraphs.Notes1 ASC 842 Leases modified through ASU No. 2016-02, hereafter, ASC 842 (FASB, Citation2016).2 Staff Accounting Bulletin (SAB) Topic 11.M (SEC, Citation1998/Citation2017) codified SAB No. 74 Disclosure Regarding Accounting Standards Issued but Not Yet Adopted, issued by the SEC in 1987 (SEC, Citation1998/Citation2007). IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (paragraphs 30–31) includes a similar requirement as part of IFRS. A lack of textual data makes examining our research question under IFRS challenging.3 Firms may also have responded to Topic 11.M guidance of lease disclosure in detail to reduce the cost of a possible SEC staff inquiry regarding potentially deficient compliance without regard to whether the benefits of transition disclosure distribute evenly or unevenly across the different classes of investors.4 Specifically, the word pairing of ‘investment efficiency’ does not show up in any lease transition disclosures in our data. The pairing of ‘business practice’ shows up in 11 firm-year lease transition disclosures, with ten observations using this phrase to say either that ASC 842 generates no changes in business practices or that management is still assessing the impact of the standard on business practices. Only one firm discloses that the new lease standard has led to changes in business practices, but without being specific.5 The FASB issued ASU 2016-02 that created Topic 842 under the title ‘ASU No. 2016-02 Leases (Topic 842)’. We expect companies to refer to the title of the standard update when discussing upcoming adoption. Within the title, the keyword ‘2016-02’ is uniquely specific to indicate the relevant disclosure.6 We do not record the location of this disclosure since many firms repeat this disclosure in Item 7 (MD&A) and Item 8 of the 10-K (e.g., Cazier & Pfeiffer, Citation2016; Li, Citation2019).7 For example, assume a 10-K for FY2017 is filed on March 14, 2018, and analyst A posts a forecast for FY2018 on 20 March 2018, and a forecast for Q1-2018 on 22 March 2018. We retain the forecast on 20 March 2018, and compute the difference in days between 20 March 2018, and 14 March 2018, as analyst forecast delay.8 Implementing a Fama-French three-factor model or Fama-French three-factor with momentum instead of the market-adjusted model to compute idiosyncratic return volatility leaves our inferences unchanged.9 We also re-do these tests after computing the change in forecast delay as analysts’ 2018 forecast delay minus the average of 2015–2017 (or 2016–2017) analyst forecast delay. The results are similar to those reported in Table 5.10 An increase in market-related information uncertainty could also relate to managers’ uncertainty about their actions conditional on the future adoption of ASC 842 (Chen et al., Citation2022; Yoon, Citation2021). Knowledge of managers’ uncertainty about their future actions in a transition disclosure could also have an offsetting impact on market-related information uncertainty if viewed as a sign of transparency.Additional informationFundingThis work was supported by Social Sciences and Humanities Research Council of Canada [Insight grant number 435-2021-0487]." @default.
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- W4386002057 date "2023-08-19" @default.
- W4386002057 modified "2023-10-18" @default.
- W4386002057 title "Clarification or Confusion: A Textual Analysis of ASC 842 Lease Transition Disclosures" @default.
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