MANDATED ACCOUNTING CHANGES AND MANAGERIAL DISCRETION

Implementation methods mandated by the FASB allow firms to report equity-increasing changes as income and equity-decreasing changes as adjustments to stock-holders' equity. These findings are consistent with the argument that the FASB, to reduce its political costs, attempts to minimize firms' costs of implementation. We find that the FASB permits flexibility in timing of adoption of mandated changes. Firms experiencing lower changes in return on assets (ROA) before adoption and expecting higher adoption income effects accelerate implementation. Early adopters select the year of adoption when their change in ROA is lowest and their change in leverage is highest.