Fact-Weighting Guidance and the Biasing Effect of Examples in Accounting Standards

• In Event: Standard Setting and Regulatory Actions

Abstract

Accounting standards often contain examples as implementation guidance. In some cases, guidance also indicates whether certain transaction facts should be weighted more or less heavily than others. In this paper, we investigate whether preparers using examples and fact-weighting guidance to determine the appropriate treatment for an ambiguous transaction rely on a biased reasoning process. Using an experiment, we find that participants focus excessively on transaction facts that are similar to those in the example. Further, although participants adjust their judgments in the direction indicated by weighting guidance, overweighting of similar features persists. Thus, despite the partial debiasing effect of guidance about appropriate weighting, participants consistently overestimate the likelihood that a transaction qualifies for the same treatment as an example. These findings have implications for standard setters, who develop examples and fact-weighting guidance to aid implementation of accounting standards, and for accounting preparers, who rely on examples and fact-weighting guidance in classifying transactions.

Authors

• Gregory Paul Capps, The University of Texas at Austin

• Lisa Koonce, The University of Texas at Austin

• Brian Joseph White, The University of Texas at Austin