How managerial discretion in SAB 74 disclosure timing mitigates uncertainty under ASC 606

This study examines the timeliness of mandatory pre-adoption (Staff Accounting Bulletin [SAB] 74) disclosures related to the new revenue recognition standard, ASC 606. It aims to understand managerial incentives that affect the timeliness of disclosure and the ability of market participants to understand and predict accrual information under new accounting standards. We identified 131 firms that were materially affected by ASC 606. We collect SAB 74 disclosures to measure the timeliness of disclosure preceding ASC 606 implementation. We examine whether managers delay disclosure based on the direction of the new standard’s anticipated net income effect and the subsequent impact of the disclosure’s timeliness on analysts’ forecasting accuracy and dispersion. Managers delay disclosure of the anticipated ASC 606 effects when they are expected to negatively impact net income. Analysts’ forecasts are less accurate overall following ASC 606 adoption, but more so for materially affected firms. Timelier SAB 74 disclosures mitigate the negative impact on forecast accuracy and reduce forecast dispersion among affected firms. This study contributes to the literature on voluntary disclosure by examining a setting that is outside of management’s control and has no impact on underlying economics but induces uncertainty about future reporting. Although accounting standards have no direct economic impact, managers tend to delay disclosure of future accounting change impacts when the change reduces reported earnings. Early disclosure regarding new standards reduces uncertainty, allowing sophisticated market participants to anticipate the effects of the new standard. The findings emphasize the importance of timely disclosure, providing insights for regulators, managers and investors.