Are mandatory disclosure decisions made strategically? The case of SAB 74 estimates preceding adoption of FIN 48

SEC Staff Accounting Bulletin No. 74 (SAB 74, U.S. Securities, 1987) requires registrants to provide information about the predicted financial statement effect of an enacted but not yet adopted accounting standard. The objectives of SAB 74 disclosures are to inform users the registrant will be required to adopt a new standard, and to assist users in assessing the impact of adoption on the registrant’s financial statements. Investors find SAB 74 disclosures useful for their decision-making (Davis-Friday et al., 1999 and Davis-Friday et al., 2004). Some evidence suggests that the SEC also uses such disclosures (SEC, 2005). We investigate whether firms strategically disclose SAB 74 estimates in the context of one recently enacted accounting standard (ASC Topic 740, colloquially “FIN 48”).Our results indicate substantial variation in how companies complied with SAB 74 when adopting FIN 48. For example, we find that less than 20% of companies provide dollar estimates of the standard’s adoption effect. Controlling for other factors, we find that firms that are more tax aggressive and those for which adoption increases tax liabilities are less likely to provide SAB 74 estimates. This suggests that managers likely responded strategically in making their SAB 74 disclosure decisions related to FIN 48 adoption.