An Empirical Study of Net Assets Disclosure: Inflation Accounting Revisited
Yang, David C., Vasarhelyi, Miklos A., Liu, Caixing, Shima, Kim, International Journal of Business
This paper analyzes the differences in methods of calculating and disclosing net assets between Statement of Financial Accounting Standards #33 (FAS33) and other existing current cost and constant dollar methods. Furthermore, this paper provides empirical evidence on the methods employed by a sample of 78 companies that calculate net assets for FAS33 reporting. We found there are many methods being applied to determine net assets. The lack of uniformity reduces the effectiveness of net assets disclosure required by FAS33. This study demonstrates that the Financial Accounting Standards Board should issue statements that are more well-defined and less ambiguous about preferred net asset disclosure methods.
Keywords: Owner's equity; Net assets; FAS 33; Constant dollar method; Current cost method
The primary objective of net assets reporting is to provide useful information about net assets to those who are interested in it. More specific objectives can be found in FASB Statement of Financial Accounting Concepts No. 1:
"Financial reporting should provide information about an enterprise's economic resources, obligations, and owner's equity. That information helps investors, creditors, and others identify the enterprise's financial strengths and weakness and assess its liquidity and solvency.--also provides a basis for investors, creditors, and others to evaluate information about the enterprise's performance during a period.--provides direct indications of the cash flow potentials of some resources and of the cash needed to satisfy many, if not most, obligations" (para. 41, underlining added)
To make net assets disclosure useful, comparability of accounting information is essential.
Comparability is one of the characteristics of information addressed in FASB Statement of Financial Concepts No. 2 that make it useful, and is one of the qualities considered when accounting choices are made. Comparability of accounting information enables users to identify and to explain the differences or similarities between two or more sets of economic facts. Differences and similarities in economic facts can be obscured by the use of incomparable accounting methods.
In the United States, the first statement issued by FASB that set the standard for reporting the effects of inflation on business enterprises was Statement of Financial Accounting Standards No. 33 (FAS33), Financial Reporting and Changing Prices, in 1979. FAS33 required certain companies to disclose supplementary information on both a current cost basis and on a constant dollar basis. However, it was felt that the guidelines were not sufficiently focused so that the disclosure of supplemental information would have become standard. One of the main areas of concern was the determination of net assets. There appeared to be many interpretations of FAS33 on the measurement of net asset amounts after the effects of changing prices have been taken into account.
In 1986, a time when the U.S. economy was experiencing little inflation, FAS33 was superseded by Statement of Financial Accounting Standard No. 89, Financial Reporting and Changing Prices (FAS89). FAS89 made the supplementary disclosure of current cost and constant dollar information voluntary. However, with crude oil prices surging past an unprecedented $55 a barrel in the fall of 2004 and oil prices more than 70 percent higher than the previous year, it might be time to re-examine the impact of price changes on net assets disclosure. This study has two purposes, which are: (1) to examine the nature of differences in net asset figures between the current cost and constant dollar methods, and (2) to use FAS33 financial reporting information to study the comparability of net asset disclosures.
Section II will deal with the relationship between price changes and net assets disclosure using the constant dollar and current cost methods. …