Procedural flexibility can have a substantial impact on reported costs, revenues, expenses, and balance sheet valuations. Until 1978 oil and gas companies had considerable flexibility in applying full cost and successful efforts. A unique opportunity to measure the income effect of firms' procedural choices occurred when the SEC specified the exact procedures that must be followed by oil and gas producers when they account for exploratory and development costs under both the full cost and successful efforts methods. In complying with the new rules firms were required to adjust retained earnings retroactively to reflect what it would have been if the new procedures had been in effect all along. These retained earnings adjustments provide a measure of the income effect of procedural choices. This study shows that economic incentives influence the procedural accounting choices which were made by oil and gas producers. The same economic incentives also influence the choice of full cost or successful efforts. Finally, the discriminatory ability of firms' economci incentives is most powerful when firms' reporting strategies are defined in terms of both choice of accounting methods and procedural applications within those methods.

Abstract Reviews the book "The Evolution of Consolidated Financial Reporting in Australia," by Greg Whittred.

Abstract ABSTRACT: A unique opportunity to investigate intramethod comparability arose recently when the Securities and Exchange Commission specified the procedures that must be followed by oil and gas producers accounting for exploratory costs under either the full cost or the successful efforts method. Although the Commission did not mandate which method registrants must use, it did define the specific applications to be followed under each method. Similarly, it required registrants to disclose the impact of retroactive application of the procedures on retained earnings and current net income. These adjustments provide a means to measure the magnitude of intramethod accounting differences that existed in the oil and gas industry before uniform applications were imposed. Results demonstrate that the choice of specific procedures within a supposed accounting method can have a material effect on net income, retained earnings, and asset balances. These results imply that intramethod uniformity can be vital in achieving the goal of intraindustry comparability of financial statements.

This study examines why firms settle their overfunded defined benefit pension plans. Under the new accounting standard (FASB Statement No. 88), companies ‘settling’ their overfunded pension plan can immediately recognize a portion of deffered pension gain as current earnings. Focusing on settlement transactions unaccompanied by asset reversions, we examine financial characteristics of settlement firms, including earnings, debt covenants, management incentive compensation, and firms' risk and financial structures. Our results suggest that firms undertake settlement to offset a decline in earnings and mitigate restrictive debt covenant constraints. However, a settlement firm's systematic risk (beta) does not change after settlement.

Abstract ABSTRACT: Both descriptive and statistical analyses of the pattern of accounting changes of successful and unsuccessful firms Indicate that unsuccessful firms am more likely than successful firms to make accounting changes that increase Income. Sample firms are matched by Industry membership to control for macroeconomic factors. Success is measured by the total market return to shareholders over a ten-year period. The empirical findings are consistent with the assertion that managers can modify reported Income through judicious accounting changes.

Implementation methods mandated by the FASB allow firms to report equity-increasing changes as income and equity-decreasing changes as adjustments to stockholders' equity. These findings are consistent with the argument that the FASB, to reduce its political costs, attempts to minimize firms' costs of implementation. We find that the FASB permits flexibility in timing of adoption of mandated changes. Firms experiencing lower changes in return on assets (ROA) before adoption and expecting higher adoption income effects accelerate implementation. Early adopters select the year of adoption when their change in ROA is lowest and their change in leverage is highest.