Economic Consequences

Question 1

What is it?

Answer 1

impact of accounting reports on the decision-making behavior of business, government, unions, investors, and creditors

Question 2

Argument

Answer 2

accounting standard setters must take into consideration economic consequences when deciding on accounting questions

Question 3

Examples: Accounting for exploration costs in oil and gas industries

Answer 3

Successful Efforts Concept: companies capitalize costs of successful projects and expense unsuccessful costs

Problem: small oil and gas producers lobbied in opposition

Net income lower under successful efforts

Full Cost Concept: all costs should be capitalized, regardless of success

Problem: reduce exploration activities because of the negative impact on a company’s earnings reports

Question 4

Non-Accounting Authorities Impacting Standard Settings Process

Answer 4

American Electric Power: unfavorable debt-equity ratios from tax credits reported as liabilities

Banks: opposed inclusion of bad-debt provisions and losses on sales of securities in net income figures

FTC and Dept of Justice: opposed pooling-of-interests approach for business combinations

Question 5

Why Should Economic Consequences Be Considered in Accounting Policy Creation?

Answer 5

Corporations have an increasing responsibility for the social, environmental, and economic consequences of their actions.

Impact of accounting principles on the volatility and level of earnins as well as key financial figures and ratios

Behavioral implications of accounting numbers for those with a motive to influence earnings trends

Question 6

Impact on FASB

Answer 6

Standard setters are expected to take possible adverse effects into consideration

They must prove benefits outwith adverse consequences of implementation

Political forces may seek to intervene when adverse consequences are outweighed

FASB members will still remain experts in accounting and should focus efforts to reflect this expertise.