Abstract
This paper summarizes the asset/liability approach described in Accounting Standard Codification Topic 740 and highlights the flaws in the current accounting standards. The paper proposes an alternative to the asset/liability method, offering improvements in the current standard and avenues for future research. Industry specific empirical evidence for this alternative is provided for the pre- and post-financial crisis periods. The results generally demonstrate decreases in the debt-equity ratio, improving the relevance and reliability of this important benchmark in investment decisions. In February 2013, the Financial Accounting Foundation selected ASC-740 for its post-implementation review process. The review will assess the standard’s effectiveness in both the accounting guidance it provides and information disclosed to investors. The adoption of the accounting method proposed in this paper will address the deficiencies inherent in ASC-740 and provide input to the post-implementation review of ASC-740.