Does the Balance Sheet Approach Improve the Usefulness of Accounting Information?

The purpose of this study is to investigate the effects of a change in the accounting model on accounting information for decision making. Especially, this study shows that net income (earnings) does not play an important role in providing useful information for decision making if the accounting model changes from flow-based accounting to stockbased accounting. If the IASB and the FASB adopt stock-based accounting and measure assets and liabilities at fair value, earnings persistence and predictive ability will decrease, and the usefulness of income information will be impaired due to the increasing transitory earnings and the effects of earnings volatility. Stock-based accounting that emphasizes the balance sheet will impair the valuation role of financial reporting because the combined usefulness of accounting information of the book value of net assets and earnings does not improve; the usefulness of stock information (the balance sheet) for decision making does not necessarily improve, and the usefulness of flow information (net income) decreases. This finding indicates that the balance sheet approach does not necessarily improve the usefulness of accounting information.