Have accounting standards caused a decline in “matching” over time?
Many accounting academics think that matching expenses to their associated revenues produces an earnings pattern that is useful to decision makers. As a result, these academics think that any decline in matching will produce less useful earnings information for financial statement users. Along these lines, a recent study by Dichev and Tang (2008) in The Accounting Review examines the correlation between contemporaneous revenues and expenses and finds that this correlation has declined in the last 40 years. The authors suggest that this result indicates that matching has declined over the last 40 years and they provide indirect evidence that changes in account standards are primarily responsible for this decline.
However, a more recent study by Donelson, Jennings, and McInnis (2011) in The Accounting Review sheds important light on these earlier findings. Donelson et al. examine individual expense lines to discover which line items are most responsible for the decline in the revenue-expense correlation over time. They disaggregate total expenses into cost of goods sold, SG&A expense, depreciation, taxes, other income/expenses, and special items. They find that the decline in the revenue-expense correlation over the past 40 years is primarily attributable to one line item—special items, which consists of asset impairments, restructuring charges, and gains/losses from asset sales. When the authors factor out the effect of special items, they find that the changes in the revenue-expense correlation are substantially reduced (as much as 90% in some cases). The authors go on to provide additional evidence suggesting that the cause of most special items is from changes in the incidence of underling economic events, and not from changes in accounting standards.
So why should this matter to financial reporting standard setters? For those who don’t agree with the idea that matching is an important concept in accounting, the results of these two studies are probably not that useful. But for those standard setters who may still hold on to traditional ideas on matching, and who may deplore any decline in matching over the years, these two studies suggest that new accounting standards have contributed very little to any decline in matching. Instead, it is the changes in the underlying economics of businesses that have caused any decline in matching. Standard setters probably wouldn’t want to undo financial reporting that actually captures changes in underlying economics, would they?