From Voluntary to Mandatory: Critical Accounting Estimate Disclosure

This study examines how the SEC’s 2020 Critical Accounting Estimates (CAE) disclosure mandate affects firms’ disclosure quality, information environment, and voluntary disclosure behavior. CAE disclosures address the implications of uncertainties associated with the methods, assumptions, and estimates underlying a firm’s accounting measurements. Focusing on revenue recognition-related CAE disclosures, we find that firms that did not disclose CAE prior to the mandate provide significantly longer disclosures with greater uncertainty-related discussion relative to firms that previously disclosed CAE voluntarily. However, these disclosures also exhibit greater textual overlap with significant accounting policy disclosures in the financial statement notes, suggesting a tendency to duplicate rather than supplement existing disclosures. Despite this overlap, non-disclosers make greater year-over-year updates to their CAE disclosures, as evidenced by larger textual changes relative to prior-year disclosures. We further find that the CAE mandate improves the information environment. Specifically, analysts following firms that previously did not disclose CAE experience lower overall and common uncertainty, as well as reduced forecast errors and forecast dispersion, following the mandate. Finally, we document a decline in management forecast activity among these firms, consistent with proprietary cost concerns associated with expanded mandatory disclosure. Overall, our findings suggest that the CAE mandate improves the communication of accounting estimate uncertainty and analysts’ information environments, while also creating a tradeoff between enhanced transparency and reduced voluntary disclosure.