Accounting and Finance Seminars: Professor Patricia O'Brien
Professor Patricia O'Brien (University of Waterloo)
G.15, 15-19 Tyndalls Park Road
The Standard-setters' toolkit: Can principles prevail over bright lines?
We study lease accounting in an international panel data set to examine how accounting outcomes vary with two features of accounting standards: the emphasis on using professional judgement to apply principles, and the presence or absence of 'bright-line' tests. We study four countries: Australia, Canada, the UK, and the US, and companies in two lease intensive industries, retail and transportation. Our primary study period spans the time when Australia and the UK switched from domestic to international accounting standards, and in one test we also consider Canada’s transition to international standards. We find that neither an explicit requirement to apply a principle nor omitting bright-line tests materially increases the use of capital lease treatment. Overall, we conclude that financial reporting outcomes are relatively insensitive to these standard-setting tools.