ABSTRACT This paper examines interpretation of accounting standards that provide implementation guidance via affirmative or counter examples. Based on prior psychology research, we predict that practitioners engage in “example‐based reasoning” such that they are more likely to conclude that their case qualifies for the same treatment as the example. We test our predictions in two experiments in which participants judge the appropriateness of income‐statement recognition. Experiment 1 uses Masters of Business Administration (MBA) students and varies example type (affirmative, counter) and case (revenue recognition, expense recognition) in a 2 × 2 design. Experiment 1 supports our predictions. Experiment 2 uses more experienced practitioners, and varies example type (affirmative, counter, both) in a 1 × 3 design. Experiment 2 supports the use of example‐based reasoning, and indicates that practitioners in the “both” condition respond as if they had only received an affirmative example. These results have implications for understanding how guidance that accompanies accounting standards can result in aggressive or conservative application of standards.

Prior research provides evidence that information affects financial statement users' judgments less when that information is provided in a less accessible format (e.g., information disclosed in a footnote or less prominent financial statement rather than being recognized on the income statement [Maines and McDaniel 2000]). We provide evidence that, conditional on users performing the analysis necessary to transform the financial statements to appear as if disclosed information had been recognized, that information may affect users' judgments more than it would have if it had been recognized initially. Our experiments are set in the context of constructive capitalization of operating leases. The first experiment manipulates three variables that we hypothesize will contribute to this effect: choice to use transformed financial statements, effort spent on the transformation process, and reconciliation of pre- and post-transformation numbers. We provide evidence that, in the constructive-capitalization setting we operationalize, information has a greater effect on judgments when effort was expended to obtain the information and the information is displayed in a reconciled format. The second experiment focuses on the effort effect and replicates it with additional controls. These results have implications for standard-setters who consider the relative benefits of recognition and disclosure, and for financial statement users who transform financial statements as part of their analyses.