Accounting procedures have been suggested as a factor affecting the usefulness of reported earnings for the users of financial statements. However, little evidence exists to confirm the ways in which mandatory changes in income determination rules influence the way the market responds to accounting information. This study expands the existing literature by testing the notion that accounting method choice can affect earnings usefulness for firms engaged in research and development (R&D) activities. We test hypotheses concerning (1) changes in earnings usefulness for firms that switched their R&D accounting method as a result of Statement of Financial Accounting Standards No. 2 ( SFAS No. 2 ); and (2) differences in earnings usefulness between similar firms using different R&D accounting methods prior to the rule change. We find that for our sample of R&D firms, there is a statistically significant decline in earnings usefulness for firms forced to switch from capitalizing to expensing R&D outlays, and that the decline appears to persist over time. In addition, the comparison of earnings usefulness between firms using different R&D accounting methods before SFAS No. 2 indicates that capitalizing firms had significantly higher earnings usefulness than expensing firms. Résumé. L'on a dit des méthodes comptables qu'elles avaient une incidence sur l'utilité des bénéfices déclarés pour les utilisateurs des états financiers. Peu de travaux établissent cependant de quelles façons les modifications obligatoires des règles régissant le calcul des bénéfices influent sur la réaction du marché à l'information comptable. Les auteurs enrichissent la documentation existante en testant la notion voulant que le choix de la méthode comptable puisse influer sur l'utilité des bénéfices dans le cas des entreprises qui poursuivent des activités de recherche et développement (R&D). Ils testent des hypothèses qui ont trat 1) à la variation de l'utilité de l'information relative aux bénéfices dans le cas d'entreprises ayant changé de méthode de comptabilisation des frais de R&D par suite de la publication du SFAS n o 2 et 2) aux différences dans l'utilité de l'information relative aux bénéfices entre entreprises similaires recourant à des méthodes de comptabilisation des frais de R&D qui sont différentes, avant la modification des règles. Dans leur échantillon d'entreprises qui se consacrent à des activités de R&D, les auteurs observent un déclin statistiquement significatif dans l'utilité de l'information relative aux bénéfices chez les entreprises obligées de passer de la capitalisation à la passation en charges des frais de R&D et notent que ce déclin semble persister dans le temps. En outre, la comparaison des données observées chez des entreprises appliquant différentes méthodes de comptabilisation des frais de R&D avant la publication du SFAS n o 2 révèle que l'utilité de l'information relative aux bénéfices des entreprises qui capitalisent leurs frais de R&D est beaucoup plus grande que celle de l'information relative aux bénéfices des entreprises qui imputent ces frais à l'exercice.

[This study investigates the impact of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (FASB 1990, hereinafter, SFAS 106) for a sample of rate-regulated public utility firms. The results of a recent study by Espahbodi et al. (1991) of the market reaction to the issuance of the exposure draft for SFAS 106 suggest that, for a sample including both regulated and non-regulated firms, investors perceived the required disclosures as value-decreasing due to higher contracting costs. However, the unique institutional setting for rate-regulated firms implies that while a similar negative market reaction may result for some regulated firms, there is also a theoretical basis for predicting either no market reaction or a positive reaction to the proposed accounting standard. The no reaction hypothesis is motivated by the nature of the relationship between regulatory rate-setting process and special external financial reporting procedures; as a result, some regulated firms may be sheltered from the indirect costs attributed to SFAS 106. A prediction of a positive market reaction arises from the notion that accounting rules can have an effect on the way regulators set rates, resulting in a direct (positive) cash flow effect for some of the sample firms. Our results suggest that investors in public utilities did not, on average, view the proposed standard as a value-decreasing event. This result is in sharp contrast to the Espahbodi et al. (1991) finding of a large negative average reaction for firms affected by SFAS 106. We also find evidence that the market reaction at the exposure draft announcement varies cross-sectionally based on the market's exante expectation of regulators' actions and the resulting changes in revenues from the adoption (or non-adoption) of the accounting rule for ratemaking purposes. The results thus add to a growing body of literature which demonstrates differences in the market's assessment of accounting information across regulated and non-regulated industries. More importantly, the results point to the role of regulatory response in the market's assessment of impending accounting changes in regulated industries.]

[Economic and political events have led to utility regulation decisions which, in turn, provide an impetus for significant changes in industry accounting and reporting practices. The prospect of continuing change in the operating environment for utilities suggests that some deferred assets created by regulatory actions are subject to uncertain recovery. Accounting regulators have responded by imposing additional constraints on the firm's ability to record these so-called "regulatory assets." Our results indicate that investors' valuation of regulatory assets depends on the regulatory environment in which the utility is operating. That is, there are cross-sectional valuation differences arising from the market's assessment of the probability that regulators will ultimately allow for the full recovery of the deferred costs.]

Examines the market valuation of regulatory assets in public utilities. Description of the rate regulation process; Effects of the process on reported values of assets; Evolution of regulatory accounting.

Investigates the impact of the Financial Accounting Standards Board (FASB) Statement of Financial Accounting Standards (SFAS) No. 106, `Employers' Accounting for Postretirement Benefits Other Than Pensions' for a sample of rate-regulated public utility firms. Economic consequences of SFAS 106 for non-regulated firms; Expected impact of SFAS 106 on utility accounting and ratemaking.