The Value-Relevance Of The Cumulative Effect Reporting Method: Some Evidence In Support Of FAS 154

Abstract

The Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 154 (FAS 154), Accounting Changes and Error Corrections replacement of APB Opinion No. 20 and FASB Statement No. 3 (FASB 2005). The retrospective application reporting method of FAS 154 is a significant departure from the cumulative effect method of its predecessor standard, Accounting Principles Board Opinion No. 20 (APB No. 20) (AICPA 1971). This study examines the value relevance of the cumulative effect reporting method used a priori FAS 154. The results indicate that for most years the cumulative effect was not a significant variable in explaining the market value of a firm and there was inconsistency in the sign and size of the coefficient. Accordingly, these results suggest that FAS 154, aside from its other merits, eliminated from financial statements accounting information that was not relevant, thus providing support for the issuance of FAS 154.