Issues in the Recognition versus Disclosure of Financial Information Debate

Aleš Novak


Empirical evidence from the academic literature on capital market effects of
financial information placement (i.e., recognition on the face of the primary
financial statements versus disclosure in the notes to the financial statements)
is not straightforward. Therefore, the purpose of this paper is to contribute to
the recognition versus required disclosure debate in a standard-setting context
by exploring possible reasons for perceived differences between recognized and
disclosed amounts. These differences, in our view, arise due to demonstrated
auditors’ greater tolerance for misstatement in disclosed amounts, allowed noncompliance
with disclosure requirements even in strong enforcement regimes,
lesser care that preparers of financial statements devote to disclosures relative to
recognized items as well as behavioural factors and differential processing costs
related to the users of financial information. We believe that these arguments
strengthen the case for the general preference for the recognition of financial
information in the standard-setting context. The original scientific contribution
of this paper is to systematically identify the reasons for the differences between
recognized and disclosed amounts in financial statements. As such, this paper
may provide a suitable basis for the justification of certain conceptual changes in
the field of international accounting standards that are currently underway.


Auditing, disclosure, financial information, notes, recognition

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