Accounting Standards, Implementation Guidance, and Example-Based Reasoning

DOI: 10.1111/j.1475-679X.2007.00248.
x
Journal of Accounting Research
Vol. 45 No. 4 September 2007
Printed in U.S.A.
Accounting Standards,
Implementation Guidance, and
Example-Based Reasoning
S H A N A C L O R - P R O E L L ∗ A N D M A R K W. N E L S O N ∗
Received 10 November 2005; accepted 7 September 2006
ABSTRACT
This paper examines interpretation of accounting standards that provide

implementation guidance via affirmative or counter examples. Based on prior
psychology research, we predict that practitioners engage in “example-based
reasoning” such that they are more likely to conclude that their case qualifies
for the same treatment as the example. We test our predictions in two exper-
iments in which participants judge the appropriateness of income-statement
recognition. Experiment 1 uses Masters of Business Administration (MBA)
students and varies example type (affirmative, counter) and case (revenue
recognition, expense recognition) in a 2 × 2 design. Experiment 1 supports
our predictions. Experiment 2 uses more experienced practitioners, and varies
example type (affirmative, counter, both) in a 1 × 3 design. Experiment 2 sup-
ports the use of example-based reasoning, and indicates that practitioners in
the “both” condition respond as if they had only received an affirmative ex-
ample. These results have implications for understanding how guidance that
accompanies accounting standards can result in aggressive or conservative
application of standards.
∗ S. C. Johnson Graduate School of Management, Cornell University. We thank Rob Bloom-

field, Tom Dyckman, Merle Erickson, Tom Fields, Max Hewitt, Frank Hodge, Jane Kennedy, Bob
Libby, Kathy Rupar, Steve Salterio, Nicholas Seybert, William Tayler, an anonymous reviewer,
and workshop participants at Cornell University and the University of Washington for helpful
comments. We also thank Cornell’s Johnson Graduate School of Management for financial
support.
699
Copyright
C , University of Chicago on behalf of the Institute of Professional Accounting, 2007
700 S. CLOR-PROELL AND M. W. NELSON
1. Introduction
Accounting standards in the United States currently consist of a mix of
principles and rules (SEC [2003]), and the Financial Accounting Standards
Board (FASB [2002]), International Accounting Standards Board (IASB
[2002]), and Securities and Exchange Commission (SEC [2003]) have re-
cently advocated moving to a more “principles-based” financial-reporting
system that avoids bright-line rules and requires more professional judg-
ment to determine appropriate accounting. Much research suggests that
practitioners sometimes employ the latitude inherent in standards to make
choices consistent with their incentives, such that regulators need to strike
the right balance of incentives to encourage accurate reporting when lati-
tude exists (Nelson [2003]). We examine whether, even when practitioners
intend to report accurately, the process by which they deal with latitude
might produce inaccurate reporting.
We focus on practitioners’ use of examples when determining appro-
priate application of standards. In practice, examples can be provided by
standard setters as implementation guidance when the standard is issued
(e. g., Statement of Financial Accounting Standards (SFAS) No. 106 (FASB
[1990]), SFAS No. 123(R) (FASB [2004]), SFAS No. 133(FASB [1998])).
Examples also can be provided by standard setters subsequent to issuance
(e. g., Emerging Issues Task Force (EITF) 94-3 (FASB [1994]) and EITF
99-19 (FASB [1999])), by regulators via enforcement actions (e. g., Ac-
counting and Auditing Enforcement Release (AAER) 108 (SEC [1986])),
and by the business press. We use the term “example-based reasoning”
to refer to the psychological process by which practitioners apply such
examples.
Prior psychology research examining similarity judgments (e. g., Tversky
[1977]) and priming (e. g., Higgins, Bargh, and Lombardi [1985]) suggests
that practitioners may conclude that the treatment illustrated by the exam-
ple is more appropriate for their situation than is actually justified by the
underlying facts. Thus, a practitioner might tend to conclude that a particu-
lar accounting treatment is appropriate for their case when presented with
implementation guidance that provides an example of acceptable report-
ing (which we call an “affirmative example”), and for the same case might
tend to conclude that a particular accounting treatment is not appropri-
ate for their situation when presented with implementation guidance that
provides an example of unacceptable reporting (which we call a “counter
example”).
Two features of the accounting setting make it difficult to infer that re-
sults from prior psychology research generalize, and also present design
challenges for our experiments. First, unlike the generic contexts used
in prior psychology research, in which examples are abstract and not in-
tended to communicate decision thresholds, a unique feature of the ac-
counting context is that standard setters may choose specific examples
to communicate thresholds or conditions that they deem necessary for
EXAMPLE-BASED REASONING 701
a treatment to be appropriate. For instance, an affirmative example in

which two facts favor revenue recognition and two do not could commu-
nicate to participants that at least 50% of case facts must favor revenue
recognition for recognition to be appropriate. Results that a participant
is more likely to recognize revenue when presented with that example
could be attributed either to the psychological factors we hypothesize
or to the participant’s case meeting the threshold communicated by the
example.
To discriminate between psychological and threshold-based explanations,
our experiments present participants with affirmative examples in which all
facts favor recognition (thus setting a very high threshold for recognition
that discourages concluding that recognition is acceptable), and/or with
counter examples in which all characteristics favor nonrecognition (thus
setting a very low threshold for recognition that encourages concluding that
recognition is acceptable). In this design, the psychological and threshold-
based explanations yield opposite results, because recognition is more likely
for affirmative examples than counter examples under the psychological ex-
planation, but less likely under the threshold-based explanation. As a conse-
quence, this design biases away from finding support for the psychological
effects that we predict, and in fact requires that the effect of example-based
reasoning be strong enough to offset any threshold-based reasoning that
occurs.
A second distinctive feature of the accounting context is that account-
ing practitioners may have incentives to report inaccurately. Three aspects
of our experiments allow us to discriminate between psychological and
incentive-based explanations. First, we inform participants that their goal
is to report accurately, and we use comprehension checks and pre-example
judgments to identify the extent to which participants internalize that goal,
so we can compare responses between those who internalize the accuracy
goal and those who do not. Second, we gather data both from Masters of
Business Administration (MBA) students (for whom setting an accuracy
goal might be relatively easier) and from experienced practitioners in ac-
counting and finance to determine if results are robust to potential intru-
sion of more knowledge of financial reporting and incentives. Third, and
most important, we design our experiments to insure that, while report-
ing incentives may affect the general levels of behavior we observe, they
cannot produce the specific directional predictions that underlie our hy-
pothesis tests. We also test for and do not find patterns of results that would
be implied if participants’ judgments were driven by incentives to report
inaccurately.
We report the results of two experiments. Experiment 1 utilizes a 2 × 2
between-subjects design in which MBA students judge the appropriateness
of income-statement recognition, varying case (revenue, expense) and ex-
ample type (affirmative, counter). Participants receive a case in which they
must determine how likely it is that the transaction in question will qualify
for revenue or expense recognition, basing their judgment on either an
affirmative example in which recognition was allowed or a counter example

in which recognition was not allowed.
Results from experiment 1 indicate that, for both the revenue- and
expense-recognition cases, participants are more likely to believe recog-
nition is appropriate when given an affirmative example than when given
a counter example. From the perspective of the net income implied by
participants’ judgments, participants are on average slightly conservative,
but example type and case interact, with net income higher when revenue
standards use affirmative examples and when expense standards use
counter examples. Debriefing data indicate that these results were obtained
when participants reported using a similarity-based or priming-based
judgment process, but not when participants reported using another
judgment process.
Experiment 2 focuses on the revenue-recognition context, and examines
whether results from experiment 1 generalize to more experienced finance
and accounting practitioners. Experiment 2 also investigates whether pro-
viding practitioners with both an affirmative and a counter example can
reduce the effects of example-based reasoning. Accordingly, experiment 2
utilizes a 1 × 3 between-subjects design in which practitioners judge the
appropriateness of revenue recognition, varying example type (affirmative,
counter, both).
Results from experiment 2 indicate that the results of experiment 1 gen-
eralize to more experienced participants that have several years of post-MBA
experience in accounting and finance. Results also indicate that providing
both affirmative and counter examples is not an effective method of reduc-
ing the effects obtained in experiment 1, since practitioners who receive
both an affirmative and a counter example respond as if they only attend to
the affirmative example.
Overall, these results indicate that, even when practitioners are encour-
aged to report accurately, and even when examples provided in imple-
mentation guidance communicate relatively extreme thresholds, reporting
judgments are influenced by the psychological processes that underlie ap-
plication of implementation guidance in ways that may not be intended by
standard setters. Our results also indicate that providing a balance of affir-
mative and counter examples may not be an effective approach to reducing
example-based reasoning. Therefore, standard setters may want to consider
the directional effect of example-based reasoning (conservative or aggres-
sive) created by the combination of accounting standard and example type
included in any implementation guidance that they provide, particularly if
latitude in standards and implementation guidance increases with a shift
towards a more principles-based regime.
The next section provides the background information and develops our
predictions. The third and fourth sections describe the experiments used to
test our predictions and present the results of each experiment. Section 5
discusses the implications.
2. Background and Hypotheses

Prior accounting research has investigated various aspects of auditors’ use
of examples. 1 Salterio [1996] provides evidence that, when presented with
a set of precedents that uniformly indicated a particular treatment, auditors
are more likely to rely on precedents that they perceive to be similar to their
case, regardless of source of precedent or client preference. Extending this
work, Salterio and Koonce [1997] provide evidence that, when presented
with a set of conflicting precedents, auditors are more likely to rely on
precedents that favor their client’s preferred treatment, similar to other
research indicating significant effects of incentives when standards do not
clearly specify a particular reporting alternative (e. g., Hackenbrack and
Nelson [1996], Kadous, Kennedy, and Peecher [2003], Nelson, Elliott, and
Tarpley [2002]).
In contrast to these studies, our focus is not on the extent to which re-
porting preferences affect practitioners’ reliance on examples. 2 Rather, our
focus is on determining whether practitioners’ use of examples might be af-
fected by the psychological processes underlying example-based reasoning,
holding constant that practitioners intend to report accurately. Specifically,
we investigate whether practitioners who apply implementation guidance
may tend to believe that an example included in that guidance is more
relevant to their own situation than actually may be the case.
Two streams of psychology research underlie our hypotheses. First, an
extensive literature in psychology examines similarity comparisons and clas-
sification judgments. A simple model developed by Tversky [1977] provides
a useful framework. In that model, the similarity between two items, A and
B, is a function of the features that A and B share, less the features that
A and B do not share. Prior research suggests that the weight associated
with shared features is often overstated, and the weight associated with un-
shared features is often understated when unshared features are diagnostic
(Frederick and Libby [1986], Smith and Kida [1991], Church [1991], Bam-
ber, Ramsay, and Tubbs [1997]) but overstated when they are not (Nisbett,
Zukier, and Lemley [1981], Hackenbrack [1992], Glover [1997], Hoffman
and Patton [1997], Shelton [1999]). Assuming the features of an example
are all relevant, prior research thus suggests that the similarity between the
1 A related literature examines analogical reasoning, whereby decision makers solve prob-
lems by identifying an analog that is structurally similar to their decision problem and mapping
elements of the analog to their own problem (Novick [1988], Holyoak and Thagard [1997]).
Prior accounting research has examined this type of analogical reasoning in tax, auditing, and
managerial accounting settings (Marchant [1989], Marchant et al. [1991, 1993], Matsumura
and Vera-Munoz [2005]), providing evidence about the circumstances in which accountants
are most likely to identify and apply solutions implied by an analog.
2 We use the term “example” rather than “precedent” because implementation guidance may
also consist of examples that describe hypothetical transactions for the purpose of providing
implementation guidance.
example and the transaction under consideration is likely to be overstated,

which could encourage practitioners to conclude that the treatment indi-
cated by the example is appropriate for their transaction.
A second relevant psychology literature involves priming, whereby some
stimulus activates associations in memory that affect subsequent processing
of information. Prior research on priming in the attitude and impression-
formation literatures has found that the priming of an applicable construct,
such as an evaluative tone, can increase the likelihood that the construct
is used to process a subsequent stimulus (Higgins, Bargh, and Lombardi
[1985], Levin, Schneider, and Gaeth [1998]). If an example establishes such
an evaluative tone, an example for which recognition was allowed (not al-
lowed) could lead practitioners to conclude that there is a higher likelihood
of recognition (nonrecognition) for the transaction under consideration,
regardless of the specific facts of the transaction.
Key for our purposes is that both of the example-based processes de-
scribed above (similarity assessment and priming) offer the same directional
prediction about practitioners applying implementation guidance that in-
cludes examples: practitioners believe the treatment used in an example is
more appropriate for their situation than is actually the case, because they
overstate the similarity between their case and the example and/or because
the example primes them to focus on the outcome indicated in the exam-
ple. If a case is being compared with an affirmative example, practitioners
are more likely to conclude that the accounting treatment used in the ex-
ample is allowable for the case. In contrast, if the case is being compared
with a counter example, practitioners are more likely to conclude that the
accounting treatment is not allowable for the case. Thus, example-based
reasoning implies a main effect of example type (affirmative/counter) in
judged appropriateness of accounting treatment:
H1: Practitioners provided with an affirmative (counter) example are
more (less) likely to conclude that an accounting treatment is
appropriate.
The practical effect on net income of support for H1 depends on whether
the accounting treatment in question involves revenue or expense recogni-
tion. Income is higher when revenues are recognized and lower when ex-
penses are recognized. Therefore, if H1 is supported, lower income should
result from providing counter examples to guide revenue-recognition de-
cisions and affirmative examples to guide expense-recognition decisions,
since those are the circumstances that discourage revenue recognition
and encourage expense recognition. Likewise, support for H1 implies that
higher income should result from providing affirmative examples to guide
revenue-recognition decisions and counter examples to guide expense-
recognition decisions. This reasoning suggests that H1 can be restated as
an interaction between example type (affirmative/counter) and case (rev-
enue/expense) in predicting the income resulting from example-based
reasoning:
H2: The net income implied by practitioners’ reporting judgments for

a revenue (expense) case is higher after receiving an affirmative
(counter) example than after receiving a counter (affirmative)
example.
The example-based reasoning perspective also suggests that more accu-
rate reporting might be encouraged by providing an equal mix of both affir-
mative and counter examples. If practitioners tend to overweight shared fea-
tures when making similarity comparisons, overstated similarity assessments
between the practitioner’s case and an affirmative example could be coun-
terbalanced by overstated similarity assessments between the practitioner’s
case and a counter example. If practitioners are influenced by priming, the
positive prime provided by the affirmative example is counterbalanced by
the negative prime provided by the counter example. 3 Therefore, in ad-
dition to replicating the results of experiment 1 with more experienced
practitioners, experiment 2 tests the following hypothesis concerning the
use of both affirmative and counter examples in a revenue case:
H3: Practitioners provided with an affirmative (counter) example are
more (less) likely to conclude that an accounting treatment is ap-
propriate than are practitioners provided with both an affirmative
and a counter example.
3. Experiment 1
3.1 METHOD
3.1.1. Design Overview. Experiment 1 employs a 2 × 2 between-subjects de-
sign, crossing two example conditions (Affirmative/Counter) and two case
conditions (Revenue/Expense). Affirmative examples describe the facts of
an accounting transaction that is likely to qualify for revenue/expense recog-
nition. Counter examples describe the facts of an accounting transaction
that is not likely to qualify for revenue/expense recognition. The revenue
case requires a recognition determination for a “bill-and-hold” sale. The
expense recognition case requires a technological feasibility determination
for a computer software product.
3.1.2. Participants. One hundred twenty-five MBA students enrolled in
an MBA-level intermediate-accounting course participated voluntarily in
this study. Using MBA students as participants allowed us to enhance ex-
perimental power by reducing intrusion from experienced practitioners’
reporting incentives and their knowledge of existing specific standards and
precedents. Data collection occurred at the start of the course (January,
3 Salterio and Koonce [1997] provide evidence that auditors provided with mixed prece-
dents attend more to the precedents supporting the reporting position favored by their client.
We focus on circumstances where a practitioner’s preference is accurate application of the
standard (rather than attaining a favored reporting position).
2005), before coverage of bill-and-hold sales or software capitalization, to

ensure that participants were familiar with financial accounting and basic
revenue- and expense-recognition standards but lacked knowledge of the
specific accounting guidance relevant to our experiment.
Experiment 1 participants have an average of five years of work ex-
perience and are an average of 29 years old. Seventy-three percent are
male. The students all self-selected to take at least one elective financial-
accounting course that prepares them for financial-reporting or financial-
analysis responsibilities.
3.1.3. Manipulation of Case. The purpose of the case manipulation is to

vary the direction of the net-income implications of participants’ judgments,
with recognition resulting in higher net income for the revenue case and
lower net income for the expense case. We choose to examine bill-and-hold
sales and software development cases because extant accounting guidance
(AAER 108 (SEC [1986]) and Staff Accounting Bulletin (SAB) 101 (SEC
[1999]) for bill-and-hold sales; SFAS No. 86 (FASB [1985]) for software)
indicates multiple characteristics that affect the likelihood that recognition
is appropriate. In both cases, participants determine the probability that
a transaction by Capital Auto Parts, Inc. (CAP) qualifies for revenue (or
expense) recognition. Participants given the revenue case receive facts re-
lating to a recent “bill-and-hold” sale, and must consider whether the seller
(CAP) should recognize (versus defer) revenue for a product that the buyer
has purchased for delivery in the following period. Participants given the
expense case receive facts relating to CAP’s recently developed computer
software product, and must consider whether CAP should recognize as ex-
pense (versus capitalize) software-development costs (according to SFAS
No. 86 (FASB [1985]), software costs can be capitalized after technological
feasibility has been reached). While the revenue and expense cases may dif-
fer in a number of respects that influence participants’ assessments of the
probability that recognition is appropriate, the important difference for our
purposes is the directional effect of case on net income—revenue recogni-
tion increases income while expense recognition decreases net income.
Each case provides four key facts relating to the transaction in question.
Two facts support concluding that recognition is appropriate and another
two facts support concluding that recognition is inappropriate, so it is un-
clear from only the case materials whether recognition is appropriate. Facts
provided in the revenue case are adapted from AAER 108 (SEC [1986]);
facts provided in the expense case are adapted from SFAS No. 86 (FASB
[1985]). The order of facts and whether a given fact supports recognition is
balanced between subjects. 4 Pilot tests confirmed that the facts are similar
4 Specifically, to balance any order effects, facts presented in each case appear in 16 different
orders. The orders are selected so that each fact appears in each position an equal number
of times. Each fact is either in favor of or against recognition an equal number of times. Each
in terms of the extent to which they provide important information that

does or does not support recognition.
Each case is also accompanied by a statement of basic revenue- or expense-
recognition principles (adapted from Kieso, Weygandt, and Warfield
[2004]). The statement was designed to provide participants with a sim-
plified version of an accounting standard that contains some latitude. This
statement was identified as the “relevant standard,” but participants were
also informed that various aspects affect the likelihood that recognition is
appropriate, and that no individual aspect guarantees that recognition is
appropriate.
3.1.4. Manipulation of Example. An important feature of the accounting

setting is that standard setters provide examples as implementation guid-
ance to communicate information to practitioners. Consequently, any ex-
ample provided in a standard could be used by a practitioner in at least
two ways: It could provide the basis for an example-based comparison, or it
could impart information about some decision threshold. For instance, if an
affirmative example contains two positive facts (consistent with recognition)
and two negative facts (inconsistent with recognition), it can be viewed as
indicating the decision threshold of “two elements are sufficient for recog-
nition to be allowed.” Practitioners applying that example to a mixed-fact
case could conclude that recognition is allowed, either because they are
applying example-based reasoning or because the case satisfies the decision
threshold communicated by the example.
As our focus is on example-based reasoning, we wanted to use examples
that only support our hypothesis when an example-based process is used,
and not when a decision threshold is being applied. Therefore, the affir-
mative (counter) example used in the experiment describes a situation in
which all four of the key facts relating to the transaction support recog-
nition (nonrecognition). The decision threshold that can be extrapolated
from these examples is “recognition is likely to be allowed (disallowed)
when all four elements are present (absent),” which biases against conclud-
ing that recognition is (is not) justified for a case that has a mix of positive
and negative elements. Thus, to the extent the examples communicate a
decision threshold, the threshold biases away from our hypothesis, because
the affirmative example sets a high threshold for recognition (all four fea-
tures present) and therefore discourages recognition, while the counter
example sets a low threshold for recognition (all four features not present)
and therefore encourages recognition. However, to the extent participants
pursue example-based reasoning as we hypothesize, they are more likely to
fact is not always followed or preceded by the same other fact. The orders are selected so that
each fact is sometimes consistent with and sometimes in opposition to each other fact in the
case. Finally, the orders are selected so that facts indicating recognition are always followed
by facts indicating nonrecognition and vice versa. Two recognition facts never appear next to
each other and two nonrecognition facts never appear next to each other.
conclude recognition is justified in the affirmative example case than in the

counter example case. 5
3.1.5. Materials and Procedure. Appendices 1 and 2 include task and case
information, the standard, the affirmative example, and the counter exam-
ple used in the revenue and expense treatments, respectively. Participants
first read a case that considers the appropriate accounting treatment for
either a “bill-and-hold” sale (Revenue case) or costs related to the develop-
ment of a computer software product (Expense case). Each case contains
background financial information and the specific facts of the transaction
in question. The background financial information is based on the CAP
case used by Nelson, Smith, and Palmrose [2005] and adapted from Braun
[2001] and Libby and Kinney [2000]. The background information is in-
tended to indicate to participants that the treatment of the transaction in
question has a relatively large financial impact on the profitability of the
company. Specifically, recognizing revenue or expense from the transac-
tion in question results in a change in net income that is almost 5% of the
prior year’s net income and 0.5% of the prior year’s total assets.
Participants are provided a case and a relevant standard (but not an exam-
ple that provides implementation guidance). Participants are informed that
they have an incentive to report net income accurately rather than conser-
vatively or aggressively, and asked to indicate their incentive to reinforce it
and provide data for a comprehension check. Participants also are informed
that, given the case materials and standard, they should think that the like-
lihood of qualifying for recognition is 50%. Participants are then asked to
indicate on a 100-point scale the probability that the transaction in the case
qualifies for revenue or expense recognition. The lower (upper) end of the
scale is marked numerically as 0 (100) and the description associated with
the number is “definitely does NOT qualify” (“definitely qualifies”). This
judgment serves as a pretest baseline to assess the effect of examples, and
also provides evidence about whether participants internalized instructions
that conveyed an accuracy goal and a 50% pre-example likelihood of the
case qualifying for recognition. 6
Next, participants are asked to assume that the standard is accompanied
by an example that is intended to provide further guidance. The example is
5 The affirmative and counter examples are consistent with each other, because the affirma-
tive example indicates that all positive attributes allow recognition and the counter example
indicates that all negative attributes do not allow recognition. Thus, the processes that we in-
vestigate are distinct from the effects of “counter-factual reasoning” as investigated by Heiman
[1990], Koonce [1992], and Kadous, Krische, and Sedor [2005], in which considering incon-
sistent evidence debiases optimism or overconfidence.
6 By encouraging participants to hold a prior belief around 50% and then eliciting this prior
belief, our design enables us to decrease the amount of noise in the pretest judgment while
still allowing participants to set their own prior, which has been found to play an important
role in prior belief-revision research (McMillan and White [1993]). It also minimizes the risk
of ceiling or floor effects.
either an affirmative example or counter example as dictated by the treat-

ment condition. After reviewing this information, participants are again
asked to indicate the probability that the transaction in the CAP case quali-
fies for recognition as revenue or as expense, depending on the treatment
condition. The experiment concludes with participants completing a short
debriefing questionnaire.
3.2 RESULTS
3.2.1. Comprehension Checks. The case materials indicate to participants
that they should have an incentive to report net income accurately (i.e.,
unbiased) rather than conservatively (i.e., understated) or aggressively (i.e.,
overstated). The results of a comprehension-check question reveal that 10
participants (8%) do not indicate they have an accuracy incentive. Dropping
these participants from the analysis does not affect the results that follow,
so all analyses include these participants.
The case materials also indicate that, prior to receiving an affirmative
or counter example, there is a 50% probability that the transaction quali-
fies for recognition. The results of the pre-example judgment provide evi-
dence about the extent to which participants internalize the 50% prior. A
majority of participants (77) select 50% as the pre-example judgment, but
a significant minority (48) do not. Dropping these participants from the
analysis does not affect the results that follow, so all analyses include these
participants. 7
3.2.2. Hypothesis Tests. H1 predicts a main effect for participants’ judg-
ments of the probability that the transaction in the case qualifies for recogni-
tion, with participants’ judgments higher when presented with an affirmative
example than when presented with a counter example. Mean judgments are
shown in table 1, panel A for pre-example judgments, post-example judg-
ments, and the difference between pre- and post-example judgments. As
shown in table 1, panel B, a general linear model (GLM) with post-example
judgment as the dependent variable indicates a significant main effect of
example type (F = 11.37, p = 0.001), but an insignificant main effect of case
(F = 1.17, p = 0.194), and an insignificant interaction between example type
and case (F = 1.13, p = 0.289). 8, 9 This result supports H1 by indicating that
7 All analyses are presented using the post-example judgment as the dependent variable.
Results are similar if the dependent variable is the difference between the pre- and post-example
judgments, and when pre-example judgment is included as a covariate. In addition, using an
indicator variable set to one if the pre-example judgment is 50% and zero otherwise reveals
that the covariate does not significantly interact with example type or case, indicating that
results do not depend on whether participants’ initial judgment deviated from 50%. When the
pre-example judgment is the dependent variable, neither the main effects nor the interaction
are significant.
8 Order is not significant in any analyses, so it is dropped from analyses and is not discussed
further.
9 All data in both experiments are analyzed parametrically since the assumptions of normality
and equal variance are met. However, the same results of hypothesis tests are obtained when
rank-transformed data are used to perform nonparametric analyses.
710
TABLE 1
Results of Experiment 1: Judged Probability that Transaction Qualifies for Recognition
Panel A: Cell means
Revenue Case Expense Case Collapsed across Case
Pre- Post- Pre- Post- Pre- Post-
example example example example example example
Example Type N Judgment Judgment Diff. N Judgment Judgment Diff. Judgment Judgment Diff.
Affirmative 32 41.2 57.0 15.8 33 49.8 58.2 8.4 45.6 57.6 12.0
Counter 28 45.0 35.9 −9.1 32 53.3 47.2 −6.1 49.2 41.6 −7.6
Collapsed by type 43.1 46.5 3.3 51.5 52.7 1.2
Panel B: Test of H1
Sum of Mean
S. CLOR-PROELL AND M. W. NELSON
Source df Squares Square F Value p-Value

Case 1 1,205.15 1,205.15 1.71 0.194
Example 1 8,034.02 8,034.02 11.37 0.001
Case ∗ Example 1 800.69 800.69 1.13 0.289
Error 121 85,483.43 706.47
Participants in experiment 1 judge the probability that the transaction in the case qualifies for revenue or expense recognition. This table reports descriptive statistics and
hypothesis tests about participants’ judgments. Participants receive a basic revenue (expense) recognition standard and apply it to a case that always contains an equal mix of facts
supporting recognition and facts supporting nonrecognition. Participants make pre-example judgments (based on only the case information and general standard) and post-example
judgments (after receiving either an affirmative example in which all facts favor recognition and recognition is allowed, or a counter example where all facts favor nonrecognition
and recognition is not allowed), with the example serving as “implementation guidance” that supplements the standard.
the judged probability of recognition is higher when provided an affirma-

tive example than when provided a counter example.
Another way to consider the effects of example-based reasoning is to
focus on the effect of recognition judgments on net income. H2 predicts
that example type and case interact in determining income-recognition
judgments, such that the probability of making an income-increasing judg-
ment for a revenue (expense) case is greater after receiving an affirmative
(counter) example than after receiving a counter (affirmative) example.
Participants judge the probability that the transaction in question qualifies
for recognition of revenue or expense, so to analyze H2, the dependent
variable needs to be converted to the probability that the recognition judg-
ment is income increasing. In the revenue case the dependent variable
does not require a transformation because judging a higher probability of
qualifying for revenue recognition is equivalent to judging a higher proba-
bility of increasing income. However, in the expense case, judging a higher
probability of qualifying for expense recognition implies a lower probabil-
ity of increasing income. Therefore, we subtract the probability of qualify-
ing for expense recognition from 100 to obtain the probability of making
an income-increasing judgment. The transformed means are presented in
table 2, panel A for pre-example judgments, post-example judgments, and
the difference between pre- and post-example judgments, and are shown in
figure 1 for post-example judgments and the difference between pre- and
post-example judgments.
Using the transformed post-example judgment, a GLM procedure in-
dicates a significant case by example interaction (F = 11.37, p = 0.001).
Table 2, panel B provides the complete analysis of variance (ANOVA) ta-
ble. Focusing only on the revenue case, simple-effects tests indicate that
income-increasing judgments are significantly more probable when partic-
ipants are provided an affirmative example than when they are provided
a counter example (t = 3.07, p = 0.001). Focusing only on the expense
case, simple-effects tests indicate that income-increasing judgments are sig-
nificantly more probable when participants are provided a counter exam-
ple than when they are provided an affirmative example (t = 1.67, p =
0.049). 10 These results support H2. The main effect for case is insignificant
(F = 0.03, p = 0.858), as is the main effect for example (F = 1.13, p =
0.289). 11
10 Alternatively, focusing only on affirmative examples, simple-effects tests indicate that
income-increasing judgments are significantly more probable when participants are provided
a revenue case than an expense case (t = 2.31, p = 0.011). Focusing only on counter examples,
simple-effects tests indicate that income-increasing judgments are significantly more probable
when participants are provided an expense case than a revenue case (t = 2.46, p = 0.008).
11 We make no prediction about whether the absolute differences between pre- and post-
example judgments differ between case and example types. The data reported in table 2,
panel A suggest a larger absolute difference for the revenue case than for the expense case
and for affirmative examples than for counter examples, which implies that participants react
TABLE 2
712
Results of Experiment 1: Implied Income Effects

Panel A: Cell means
Revenue Case Expense Case Collapsed across Case
Pre- Post- Pre- Post- Pre- Post-
example example example example example example
Example Type N Judgment Judgment Diff. N Judgment Judgment Diff. Judgment Judgment Diff.
Affirmative 32 41.2 57.0 15.8 33 50.1 41.8 −8.3 45.7 49.4 3.7
Counter 28 45.0 35.9 −9.1 32 46.7 52.8 6.1 45.9 44.4 −1.5
Collapsed by type 43.1 46.5 3.3 48.4 47.3 −1.1
Panel B: Test of H2
Sum of Mean
Case 1 22.66 22.66 0.03 0.858
Example 1 800.69 800.69 1.13 0.289
Case ∗ Example 1 8,034.02 8,034.02 11.37 0.001
Error 121 85,483.43 706.47
Simple effect of example for revenue-recognition case:
S. CLOR-PROELL AND M. W. NELSON
Standard p-Value
Parameter Estimate Error t Value (One-Tailed)
Revenue 21.14 6.88 3.07 0.001
Simple effect of example for expense-recognition case:
Standard p-Value
Expense 10.99 6.59 1.67 0.049
Participants in experiment 1 judge the probability that the transaction in the case qualifies for revenue or expense recognition. This table transforms results reported in table 1 to report descriptive statistics
and hypothesis tests about the probability of making an income-increasing judgment implied by participants’ judgments. For the revenue case the means indicate the probability of qualifying for revenue
recognition. For the expense case the means indicate 100 – the probability of qualifying for expense recognition. Participants receive a basic revenue (expense) recognition standard and apply it to a case that
always contains an equal mix of facts supporting recognition and facts supporting nonrecognition. Participants make pre-example judgments (based on only the case information and general standard) and
post-example judgments (after receiving either an affirmative example in which all facts favor recognition and recognition is allowed, or a counter example where all facts favor nonrecognition and recognition is
not allowed), with the example serving as “implementation guidance” that supplements the standard.
Post-example Judgment
60.0
P(income increasing)
50.0
40.0
30.0 Affirmative
Counter
20.0
Revenue Expense
Difference
20.0
Affirmative
15.0
Counter
10.0
5.0
0.0
-5.0
Revenue Expense
-10.0
-15.0
FIG. 1.—Results: Experiment 1. Participants in experiment 1 judge the probability that the
transaction in the case qualifies for revenue or expense recognition. Participants receive a
basic revenue (expense) recognition standard and apply it to a case that always contains an
equal mix of facts supporting recognition and facts supporting nonrecognition. Participants
make pre-example judgments (based on only the case information and general standard) and
post-example judgments (after receiving either an affirmative example in which all facts favor
recognition and recognition was allowed, or a counter example where all facts favor nonrecog-
nition and recognition is not allowed), with the example serving as “implementation guidance”
that supplements the standard. This figure shows mean judgments of the appropriateness of
making an income-increasing judgment. For the revenue case the means indicate the prob-
ability of qualifying for revenue recognition. For the expense case the means indicate 100 –
the probability of qualifying for expense recognition. “Difference” is mean post-judgment less
mean pre-judgment.
3.2.3. Testing Alternative Explanations

3.2.3.1 Effect of reporting threshold implied by example. One alternative
explanation for the results is that an example provided as implementation
more strongly to examples in the revenue case than in the expense case, and to affirmative
examples than to counter examples. To test this possibility, we perform an ANOVA in which
the absolute value of the difference is the dependent variable and case and example type are
the independent variables. The results reveal insignificant main effects for case (F = 0.99, p =
0.322) and example type (F = 0.72, p = 0.398), and an insignificant interaction (F = 0.18, p =
0.674). This analysis indicates that participants do not react significantly differently to examples
in the revenue and expense cases and do not react significantly differently to affirmative and
counter examples.
guidance could communicate a threshold necessary for a particular account-

ing treatment to be allowed. As discussed previously, the examples used in
experiment 1 are relatively extreme, with affirmative examples indicating
the accounting treatment is appropriate when all of the four facts in the
example favor the treatment, and counter examples indicating the account-
ing treatment is not appropriate when none of the four facts in the exam-
ple favor the treatment. To the extent that these examples communicate a
threshold, affirmative examples communicate a high threshold for recogni-
tion (i.e., implying “if have all facts favoring recognition, can recognize”),
while counter examples communicate a low threshold (i.e., implying “if
don’t have any facts favoring recognition, do not recognize”). Therefore,
threshold-based reasoning biases against support for our psychological ex-
planation, because practitioners are likely to judge recognition as more
appropriate when provided a counter example (that implies a low thresh-
old) than an affirmative example (that implies a high threshold), such that
income is lower when affirmative examples are provided in the revenue
case and when counter examples are provided in the expense case. In fact,
threshold-based reasoning would produce a main effect of example type on
judged appropriateness of recognition that is opposite to that which was pre-
dicted by H1 and supported by our results, and would produce an interaction
between example type and case on the income resulting from participants’
judgments that is opposite to that predicted by H2 and supported by our
data. Thus, the data do not support a threshold-based explanation for the
results.
3.2.3.2. Effect of nonaccuracy incentives. Application of an example to a

reporting decision can also be affected by preferences that a practitioner has
for particular effects on net income. For example, many practitioners might
be accustomed to preferring income-increasing alternatives. We can test in
two ways for an effect of practitioners’ perceptions of reporting incentives.
First, recall that our instructions are designed to convey an accuracy in-
centive along with a case that suggests a 50% probability of qualifying for
recognition. To the extent that participants’ knowledge of incentives or re-
porting practices affects their judgment within the experiment, we expect
their pre-example judgment to deviate from 50%. Of the 48 participants
who do not select 50% as their pre-example judgment, 27 receive the rev-
enue case and provide a mean pre-example judgment of 34.8% likelihood
of revenue recognition, and 21 receive the expense case and provide a mean
pre-example judgment of 55.6% likelihood of expense recognition, indicat-
ing a slight preference for conservative reporting among those who deviate
from a 50% pre-example judgment. However, as discussed in footnote 7,
results of hypothesis tests do not depend on whether participants express a
50% pre-example judgment. Thus, analyses of pre-example judgments do
not suggest an intrusion of knowledge or reporting incentives that affects
our results.
Second, our design allows us to test for an incentive-based pattern of
post-example judgments. Participants who perceive an income-increasing
incentive tend to recognize revenue and not expense, and participants who
perceive an income-decreasing incentive tend to recognize expense and not
income. Therefore, incentive-based reasoning would produce a main effect
of case and no main effect or interaction between case and example type
both on judged appropriateness of recognition and on the income resulting
from participants’ judgments. Results of tests of H1 and H2 show no main
effect for case, but rather the predicted main effect for example type for H1
and the predicted interaction between example type and case for H2. Thus,
the data do not support an incentive-based explanation for the results.
3.2.3.3. Effect of individual facts indicating recognition or nonrecognition. Two

of the four facts presented in the revenue and expense cases support recogni-
tion, while the other two do not support recognition. Whether a particular
fact supports recognition is manipulated between subjects in four combi-
nations of facts. To ensure that the results are not driven by any specific
combination of facts, we analyze the transformed post-example judgments
in a model that includes example, case, and a four-level categorical “pattern”
variable. The analysis reveals an insignificant three-way interaction between
case, example, and pattern (F = 0.43, p = 0.855), and our predicted signifi-
cant interaction between case and example (F = 9.44, p = 0.003), indicating
that our primary result does not depend on the specific fact pattern provided
to participants.
3.2.4. Evidence About Process Used to Make Judgment. To provide insight

about process, a debriefing question elicits participants’ perception of the
process they use to make their recognition judgment. Participants are asked
to choose one of three alternatives that best describes how they use the ex-
ample provided in the standard to decide whether to recognize revenue
or expense. One option describes a similarity-based process: “I based my
judgment on the amount of similarity that existed between the CAP case
and the example provided in the standard. I thought the CAP case was
somewhat similar to the example, so I thought it was more likely that the
CAP case should be treated similar to how the example was treated.” A sec-
ond option describes a priming-based process: “Regardless of the degree
of similarity between the CAP case and the example, I based my decision
on whether revenue (expense) recognition was allowed for the example. If
revenue (expense) recognition was allowed for the example, I concluded
it was more likely that revenue (expense) recognition would be allowed in
general. If revenue (expense) recognition was not allowed in the example,
I concluded it was less likely that revenue (expense) recognition would be
allowed in general.” A third option was “Other (please explain).” The order
of options 1 and 2 is balanced between subjects.
One participant does not indicate which process he uses to make his
judgment. Sixty-two (50%) of the remaining 124 participants indicate they
use a similarity-based process, 44 participants (35%) indicate a priming-
based process, and 18 participants (15%) indicate another process. Includ-
ing a three-level categorical variable for judgment process in our analysis
of the income implied by post-example judgments, we find a significant
three-way interaction among case, example, and process (F = 2.28, p =

0.041). Further analyses indicate that the three-way interaction occurs be-
cause the interaction between case and example is present for participants
who indicate a priming- or similarity-based process, but not present for par-
ticipants who indicate another process. 12 This analysis suggests that a self-
reported similarity-based or priming-based process is consistent with our
results. Participants who self-reported some other process provide a differ-
ent pattern of results, indicating that the process variable is at least somewhat
informative as to the process underlying our results.
3.3 DISCUSSION
The results of experiment 1 provide support for example-based reason-
ing, in that participants who receive an affirmative example are more likely
to conclude that revenue or expense recognition is appropriate for the case
than are participants who receive a counter example. As a consequence, in-
come is higher (lower) when affirmative examples are provided for revenue-
(expense-) recognition cases than when counter examples were provided.
These results are different from those that would be predicted by threshold-
based or incentive-based reasoning. Additional analysis reveal that partici-
pants who report using either a similarity-based process or a priming-based
process provide results that are consistent with our predictions.
4. Experiment 2
In experiment 1, student participants are used to enhance experimental
power by avoiding intrusion from experienced practitioners’ knowledge of
existing standards and precedents. However, it is also important to deter-
mine the extent to which results generalize to circumstances where experi-
enced practitioners’ existing knowledge combines with provided examples
when applying implementation guidance. Therefore, while we do not posit
particular effects of experienced practitioners’ knowledge, one purpose of
experiment 2 is to generalize the results of H1 and H2 to a more experienced
population.
The pattern of results in experiment 1 also suggests a potential means for
encouraging accurate reporting. Specifically, practitioners could be pro-
vided with both affirmative and counter examples. As predicted by H3, so
long as practitioners focus equally on both types of examples, effects of
example-based reasoning are counterbalanced. We focus on only the rev-
enue case in experiment 2 because the results of experiment 1 indicate
12 Specifically, if we exclude the 18 participants who self-reported an “other” process, such
that “process” is now a two-level indicator variable discriminating between a priming- and a
similarity-based process, we find an insignificant three-way interaction among case, example,
and process; a significant case by example interaction; and insignificant main effects of process,
case, and example. The interaction between case and example is present for both the similarity-
based- and priming-based-process participants when analyzed separately.
a somewhat larger effect of example type for the revenue case than for
the expense case (although not significantly so). Therefore, we reason that
the revenue case is more likely to produce the larger effect of example
type and therefore provides the greater effect to debias for purposes of
testing H3.
4.1 METHOD
Except as noted otherwise, the method used in experiment 2 is the same
as the method used in experiment 1.
4.1.1. Design Overview. All participants receive the same “bill-and-hold”
revenue case as was used in experiment 1. The experiment employs a
1 × 3 between-subjects design with three example conditions (affirmative,
counter, both). The affirmative and counter example conditions are the
same as in experiment 1. In the “both” condition, participants receive both
the affirmative and counter example.
4.1.2. Participants. Two hundred sixty practitioners working in
accounting- and finance-related fields are selected from an alumni
database, contacted via email, and asked to participate in the experiment.
A total of 166 practitioners (64%) participate. Experiment-2 participants
have an average of 10 years of work experience, are an average of 35 years
old, and received an MBA an average of six years prior to participation.
Eighty-two percent are male. Participants are randomly assigned to one of
three treatments. Data collection occurred during June and July of 2005.
4.1.3. Manipulation of Example. The example is manipulated as in experi-
ment 1 for the affirmative and counter conditions. For the “both” condition,
participants receive both an affirmative and a counter example instead of
receiving one or the other. The order in which each example type appears
in the case is balanced between subjects.
4.1.4. Materials and Procedure. Whereas experiment 1 utilized a paper-
and-pencil task, experiment 2 is administered via a Web-based instrument.
Participants access the materials by clicking on a link supplied in the email
that solicits their participation. The instrument is split into three sequential
sections. Participants are not able to change their answers after submitting
each section of the instrument, but before submitting the section can scroll
throughout the section to allow them to repeatedly access the information
in that section.
The first section of the instrument presents participants with the case and
standard, and requires participants to submit their pre-example judgment
before continuing to the next section of the instrument. Once submitted,
participants are directed to the next section of the experiment, which in-
cludes all information provided in the prior section and also includes the
example manipulation. After reviewing this information, participants are
required to submit their post-example judgment before being directed to
the debriefing questionnaire, which concludes the experiment.
4.2 RESULTS
4.2.1. Comprehension Check. The case materials indicate to participants
that they should have an incentive to report net income accurately (i.e.,
unbiased) rather than conservatively (i.e., understated) or aggressively (i.e.,
overstated). The results of a comprehension check question reveal that 15
participants (9%) do not indicate they have an accuracy incentive. Dropping
these subjects from the analysis does not affect the results that follow, so all
analyses include these subjects.
The case materials also indicate that, prior to receiving the example(s),
there is a 50% probability that the transaction qualifies for recognition.
The results of the pre-example judgment provide evidence about the ex-
tent to which participants internalize the 50% prior. As in experiment
1, a majority of participants (89) indicates a pre-example judgment of
50%, but many (77) do not. Dropping these participants from the anal-
ysis does not affect the results that follow, so all analyses include these
participants. 13
4.2.2. Test of H1 and H2. Participants judge the probability that the trans-
action in question qualifies for revenue recognition. Because all participants
receive the revenue-recognition case, the same analysis provides a test of H1
(the effect of example type on probability of recognition) and H2 (the ef-
fect of example type on the net income implied by participants recognition
judgment).
The means are presented in table 3, panel A for pre-example judgments,
post-example judgments, and the difference between pre- and post-example
judgments, and are shown in figure 2 for post-example judgments and
the difference between pre- and post-example judgments. Using the post-
example judgment, a GLM procedure indicates a significant effect for ex-
ample type (F = 10.05, p < 0.000). Table 3, panel B provides the complete
ANOVA table. Contrasts comparing the cell means indicate that the affir-
mative example condition results in a judgment that is significantly greater
than the counter example condition (t = 4.00, p < 0.000), supporting H1
and H2. 14
4.2.3. Test of H3. The nonparametric Jonckheere-Terpstra test (Hollan-
der and Wolfe [1973]) for ordered cell medians indicates that the medians
13 All analyses are presented using the post-example judgment as the dependent variable.
Analysis of post-example judgments using as a covariate either the pre-example judgment or

an indicator variable set to one if the pre-example judgment was 50% and zero otherwise
reveals that the covariate never significantly interacts with example type, indicating that results
do not depend on whether participants’ initial judgment deviates from 50%. Similar results
are obtained when based on difference between pre- and post-example judgments, and when
based on only those participants who do not select 50% as their pre-example judgment.
14 The order of facts presented in the case is not significant in any analysis, and is not
discussed further. The data are analyzed parametrically since the assumptions of normality
and equal variance are met. However, H1 and H2 are also supported if the data is analyzed
nonparametrically using rank-transformed data, with a significant effect of example (F = 9.91,
p < 0.000) and the affirmative example condition resulting in a judgment that is significantly
greater than the counter example condition (t = 3.86, p < 0.000).
TABLE 3
Results of Experiment 2: Judged Probability that Transaction Qualifies for Recognition and Implied Income Effects
Panel A: Cell means
Pre- Post-
example example
Example Type Judgment Judgment Difference
Affirmative (N = 55) 43.6 46.5 2.9
Counter (N = 53) 33.6 25.2 −8.4
Both (N = 58) 42.6 45.3 2.7
Panel B: Test of H1 and H2
Sum of Mean
Example Type 2 15,500.38 7,750.19 10.05 0.000
Error 163 125,662.87 770.94
Planned comparisons:
Standard p-Value
Affirmative vs. both 1.29 5.23 0.25 0.403
Counter vs. both 20.07 5.28 3.80 0.000
Affirmative vs. counter 21.36 5.34 4.00 <0.000
Participants in experiment 2 judge the probability that the transaction in the case qualifies for revenue recognition. This table reports descriptive statistics and hypothesis tests
about participants’ judgments. Participants receive a basic revenue recognition standard and apply it to a case that always contains an equal mix of facts supporting recognition
and facts supporting nonrecognition. Participants make pre-example judgments (based on only the case information and general standard) and post-example judgments (after
receiving an affirmative example in which all facts favor recognition and recognition is allowed, a counter example where all facts favor nonrecognition and recognition is not
allowed, or both an affirmative and a counter example), with the example(s) serving as “implementation guidance” that supplements the standard. This table reports descriptive
statistics about participants’ judgments of the appropriateness of making an income-increasing judgment. Since this is a revenue case the means indicate the probability of qualifying
EXAMPLE-BASED REASONING
for revenue recognition. “Post-example judgment” refers to the mean probability judgment made after seeing implementation guidance. “Difference” is mean post-judgment less
mean pre-judgment.
719
Post-example Judgment
50.0
40.0
30.0
20.0
10.0
Affirmative Both Counter
Difference
4.0
2.0
0.0
Affirmative Both Counter
-2.0
-4.0
-6.0
-8.0
-10.0
FIG. 2.—Results: Experiment 2. Participants in experiment 2 judge the probability that the
transaction in the case qualifies for revenue recognition. Participants receive a basic revenue
recognition standard and apply it to a case that always contains an equal mix of facts supporting
recognition and facts supporting nonrecognition. Participants make pre-example judgments
(based on only the case information and general standard) and post-example judgments (af-
ter receiving an affirmative example in which all facts favor recognition and recognition is al-
lowed, a counter example where all facts favor nonrecognition and recognition is not allowed,
or both an affirmative and counter example), with the example(s) serving as “implementa-
tion guidance” that supplements the standard. This figure reports descriptive statistics about
participants’ judgments of the appropriateness of making an income-increasing judgment.
“Difference” is mean post-judgment less mean pre-judgment.
are ordered in the predicted sequence (Z = 3.3606, p = 0.000). However,

planned contrasts indicate that the mean in the affirmative example treat-
ment is not significantly greater than the mean in the “both” condition
(t = 0.25, p = 0.403), and that the counter example condition is signifi-
cantly less than the “both” condition (t = 3.80, p < 0.000). Therefore, it
appears that participants in the “both” condition focus on the affirmative
example and largely ignore the counter example. 15 This result does not
support H3. 16
15 In the “both” condition, the order in which the affirmative and counter example appear
in the case is not significant in any analysis, and is not discussed further.
16 The planned comparisons are conducted parametrically since the assumptions of
normality and equal variance are met. However, conducting the planned comparisons
4.2.4. Testing Alternative Explanations

4.2.4.1. Effect of reporting threshold implied by example. As in experiment 1,
the examples used in experiment 2 bias against support for H1 and H2,
so finding support for H1 and H2 suggests that any threshold-based rea-
soning is not sufficient to counteract the example-based reasoning that we
hypothesize.
4.2.4.2. Effect of nonaccuracy incentives. As in experiment 1, we can test in
two ways for an effect of practitioners’ perceptions of reporting incentives.
First, of the 77 participants who do not select 50% as their pre-example
judgment, 24 are in the affirmative example treatment and provide a mean
pre-example judgment of 35.4% probability of revenue recognition, 26 are
in the counter example treatment and provide a mean pre-example judg-
ment of 16.5%, and 27 are in the “both” treatment and provide a mean
pre-example judgment of 34.1%, suggesting a general preference for con-
servative reporting. 17 However, as in experiment 1 and as discussed in foot-
note 13, results of hypothesis tests do not depend on whether participants
express a 50% pre-example judgment. Thus, analyses of pre-example judg-
ments do not suggest that an intrusion of knowledge or reporting incentives
explains our results.
Second, as in experiment 1, our design allows us to provide evidence
about whether the pattern of results is consistent with an incentive-based
explanation. Participants who perceive an income-increasing incentive tend
to recognize revenue regardless of example type, so incentive-based reason-
ing does not predict a main effect of example type. Results of tests of H1 and
H2 show a main effect for example type, suggesting that reporting incentives
do not explain our results.
A final way to consider the potential effects of intrusion of knowledge
about existing reporting practices or reporting incentives is to compare re-
sults between experiment 1 (using MBA students) and experiment 2 (using
more experienced practitioners). Results from experiment 2 are presum-
ably more vulnerable to potential intrusion. To compare results between
the two experiments, we conduct an additional analysis using only the rev-
enue/affirmative example and revenue/counter example conditions from
both experiments. Using the post-example judgment as the dependent vari-
able, a GLM procedure indicates a significant main effect for example type
(F = 24.24, p < 0.000), a significant main effect for experiment (F = 5.40,
nonparametrically with rank-transformed data yields similar results, again not supporting H3.
The mean in the affirmative example treatment is not significantly greater than the mean in
the “both” condition (t = 0.02, p = 0.493), but the counter example condition is significantly
less than the “both” condition (t = 3.89, p < 0.000).
17 Despite the fact that all participants are presented with the same information prior to
providing pretest judgments, and that participants are assigned randomly to treatments, par-
ticipants in the counter-example treatment have a mean pretest that is lower than the pretest
for participants in the affirmative example and “both” treatments. When the pre-example judg-
ment is used as a dependent variable, the main effect for example type is marginally significant
at p = 0.080 (F = 2.57).
p = 0.021), and an insignificant example type by experiment interaction

(F = 0.00, p = 0.981). 18 Statistical comparisons between experiments 1 and
2 necessarily confound differences in participants (MBA students in experi-
ment 1, more experienced practitioners in experiment 2) with differences in
data-collection timing and method (e. g., experiment 1 is a paper-and-pencil
task, experiment 2 is a Web-based study), so results must be interpreted with
care. With that caveat in mind, the significant main effect for experiment
suggests that the more experienced practitioners assess the probability of
recognition as lower than do the MBA students, such that more experi-
enced practitioners’ judgments are more conservative. Most important, the
lack of significant interaction between example type and experiment sug-
gests that the effect of example type does not differ between the two groups
of participants.
Debriefing data also allow two other analyses to examine the extent to
which results generalize across experience levels. First, to provide evidence
that the results from experiment 2 hold for participants who have more
professional experience, we split the sample into two groups. Seventy-two
participants (43%) are categorized as more recent graduates (graduating
between 2001 and 2003), and 94 (57%) are categorized as less recent grad-
uates (graduating between 1991 and 2000). Results for each group are very
similar to the results of the combined analysis.
We also examine whether the pattern of results in experiment 2 holds
for participants regardless of the extent to which they deal with accounting
standards or revenue recognition in their current jobs. The debriefing ques-
tionnaire asks participants to indicate how often their job requires them to
think about each of these two items. Possible responses are daily, weekly,
monthly, less than once a month, or never. Results are similar to the overall
analysis when based on only the participants who have the most relevant ex-
perience (i.e., the 62 participants who indicate that they think about either
accounting standards or revenue recognition daily or weekly in their current
job), and when based on the group that has the least relevant experience
(i.e., the 57 participants who indicate that they think about either account-
ing standards or revenue recognition less than once a month or never in
their current job).
4.2.5. Evidence About Process Used to Make Judgment. As in experiment 1, we

include a debriefing question to elicit participants’ perception of the pro-
cess they use to make their recognition judgment. The question is worded
slightly differently than in experiment 1 because of the existence of the
“both” condition and to allow participants to indicate “I did not use ex-
amples provided in the standard.” Two participants do not indicate which
process they use to make their judgment. Ninety (55%) of the remaining
164 participants indicate they use a similarity-based process, 33 participants
18 Results are similar when the dependent variable is the difference between the pre- and
post-example judgments, and when the pre-example judgment is included as a covariate.

(20%) indicate a priming-based process, 18 participants (11%) indicate they

do not use examples, and 23 (14%) indicate another process.
Including a four-level categorical variable for judgment process in our
main analysis of post-example judgments, we find a significant two-way in-
teraction between example type and process (F = 3.31, p = 0.039), along
with an insignificant main effect of process (F = 1.53, p = 0.219), and a
significant effect of example type (F = 9.65, p < 0.000). Further analyses in-
dicate that the interaction occurs because the main effect of example type is
present for participants who indicate a priming- or similarity-based process,
but not present for participants who indicate either not using the exam-
ple or using another process. 19 Overall, and consistent with experiment
1, these results suggest that participants reporting either a similarity-based
or priming-based process are more likely to provide results consistent with
example-based reasoning than are participants reporting another process-
ing strategy.
5. General Discussion
This paper examines application of examples provided as implementa-
tion guidance for accounting standards. The results of two experiments
indicate that, consistent with prior results in psychology, many participants
engage in example-based reasoning, such that concluding recognition is
appropriate is more (less) likely after viewing an affirmative (counter) ex-
ample. From a net income perspective this result indicates that example type
and case interact, such that the probability of making an income-increasing
judgment for a revenue (expense) case is greater after receiving an af-
firmative (counter) example than after receiving a counter (affirmative)
example. Additional analyses indicate that these results occur when partici-
pants self-report a similarity-based process, and also when participants self-
report a priming-based process, but not when participants report another
process.
These results appear to be robust. By design we preclude support for our
hypotheses being explained by participants extracting a decision threshold
from the example, and analyses indicate that responses are inconsistent with
the thresholds implied by examples. Further analyses indicate that results are
not driven by participants’ pre-example priors, by nonaccuracy incentives,
by the order in which facts are examined, or by the identity of particular
fact combinations in the cases they evaluate. These results hold regardless of
whether participants are MBA students focused on finance and accounting
19 Analysis of only the participants who specify a similarity-based process reveals a significant
main effect of example type (F = 8.09, p = 0.001). Analysis of only the participants who specify
a priming-based process again reveals a significant main effect of example type (F = 5.42,
p = 0.010). Analysis of only those participants who self-report that they do not use the example
reveals an insignificant main effect of example type (F = 0.59, p = 0.568). Analysis of only those
participants who self-report an “other” process reveals an insignificant main effect of example
type (F = 0.60, p = 0.558).
or experienced practitioners who deal with these issues on a daily or weekly

basis.
The results of experiment 2 also indicate that providing participants with
both an affirmative example and a counter example is not an effective
method of reducing over-reliance on examples. Rather, participants who
are presented with both affirmative and counter examples act as if they re-
ceived only an affirmative example. On the surface this result might appear
similar to Salterio and Koonce’s [1997] finding that auditors facing con-
flicting precedents tend to rely on the precedent that supports the position
favored by their clients. However, there are two important differences be-
tween our study and theirs: our participants are provided an accuracy goal,
rather than a goal of achieving a particular treatment, and the examples
included in our “both” treatment do not conflict, but rather illustrate ex-
amples of cases that do or do not qualify for revenue recognition. Future
research should consider further why participants who receive both affirma-
tive and counter examples tend to focus on the affirmative example.
Experiment 2 uses only the revenue case to examine the effect of pro-
viding participants with both an affirmative and a counter example. It
is possible that, had we used the expense case in experiment 2 rather
than the revenue case, the debiasing technique would have been effec-
tive due to the slightly weaker effect that example type has in the expense
case. Future research could examine whether providing both affirmative
and counter examples is a more effective debiasing technique in other
circumstances.
These results may have implications for standard setters who are con-
cerned about the consequences associated with implementation guidance
that accompanies accounting standards. Likewise, our results may have im-
plications for practitioners, such as controllers, CFOs, auditors or analysts,
who seek to format information in ways that improve judgment. Specifically,
the results suggest that reporting judgments tend to be more conservative
when implementation guidance provides counter (affirmative) examples
for revenue (expense) recognition standards. Thus, an unintended conse-
quence of providing examples of allowed reporting that highlight charac-
teristics consistent with appropriate recognition could be that practitioners
are relatively more likely to recognize than they would be if they were fo-
cusing on the (high) decision threshold that is implied by the examples.
These effects are possible whenever standards contain latitude and exam-
ples are used to inform reporting decisions. To the extent that movement to
a principles-based standard-setting regime increases latitude, all else equal
we expect these effects to be more pronounced, because examples would
play a more important role in application of the standard.
Our experiments are subject to several limitations that provide opportu-
nities for future research. First, our experiments are designed to minimize
variation in participants’ reporting incentives to determine the extent to
which an example-based process affects judgment when participants lack
incentives to report inaccurately. Much recent regulatory activity (e.g., the
Sarbanes-Oxley Act of 2002) 20 is designed to provide incentives to report ac-

curately, but particular practitioners’ incentives may still favor reporting
aggressively or conservatively. While we find that our results are not affected
by the intrusion of nonaccuracy incentives, future research could examine
how our results would be affected if participants had more explicit incen-
tives to report inaccurately. Second, our results are consistent with two psy-
chological explanations: similarity-based processing and priming, and our
debriefing data indicate that some participants use each of these processes.
Future research could attempt to discriminate further between these two
explanations, and determine whether other psychological processes also
affect example-based reasoning. Third, our experiments intentionally pro-
vide participants with relatively extreme affirmative and counter examples,
to allow us to be sure that our results are not explained by participants re-
sponding to thresholds communicated by examples. Although we believe
that extreme affirmative examples are broadly representative of existing im-
plementation guidance (i.e., providing a list of requirements that must be
met before recognition is allowed, as in EITF 94-3 (FASB [1994]) or EITF
99-19 (FASB [1999])), extreme counter examples are not as broadly repre-
sentative of existing implementation guidance. Therefore, future research
could seek to generalize our results to less extreme examples.
APPENDIX 1
Revenue-Recognition Case, Standard, Example, and Counter Example
Selected task and case information:

As part of the process for determining Net Income in 2004, you are con-
sidering how to treat a “bill and hold” transaction in which CAP is agreeing
to sell auto parts to a buyer and then holding them for the buyer until the
parts are delivered at a later date. You must determine whether to recognize
revenue at the time the agreement is signed or to recognize revenue at a
later date when the product is delivered to the customer.
On November 27, 2004, CAP agreed to sell auto parts costing $14.5 mil-
lion to manufacture. The agreed upon sales price was $20 million. CAP
has much experience with this customer, and you are convinced that CAP
will receive payment for the auto parts by December 27, 2004, as is typi-
cal for such orders, so cash collection is not an issue. Delivery is to occur
in 2005. Some key considerations related to the transaction include the
following.
r There is a clear business purpose for handling the sale on a bill and
hold basis.
20 Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 116 Stat. 145 (2002).
r The auto parts will not be delivered on a fixed schedule.

r There is a written sales contract.
r The goods have not been physically separated.
Standard:
Revenues are generally recognized (1) when they are realized or realiz-
able and (2) when they have been earned. Revenues are considered real-
izable when assets received or held are readily convertible into cash or
claims to cash. Revenues are considered earned when the entity has sub-
stantially accomplished what it must do to be entitled to the benefits
represented by the revenues. With respect to bill and hold sales, various
aspects of a contract affect the likelihood that revenue recognition is ap-
propriate at contract signing. No individual aspect of a contract guarantees
that a bill and hold sale qualifies for revenue recognition upon contract
signing.
(Note: Provision of example vs. counter example manipulated between
participants.)
Example: Now assume that the accounting standard is accompanied

by the following additional example, intended to provide further
guidance:
With respect to bill and hold sales, various aspects of a contract affect the
likelihood that revenue recognition is appropriate at contract signing.
No individual aspect of a contract guarantees that a bill and hold sale
qualifies for revenue recognition upon contract signing, but it is likely
that revenue recognition at contract signing would be appropriate for
the following example:
On December 1, 1997, the Seller arranged to sell $10,000 in widgets to
the Buyer. The Seller received the $10,000 payment prior to period end,
but delivery was scheduled for after period end. There is a clear business
purpose for handling the sale on a bill and hold basis. The auto parts will
be delivered on a fixed schedule. There is a written sales contract. The
goods have been physically separated.
Counter Example: Now assume that the accounting standard is accom-

panied by the following additional example, intended to provide further
guidance:
With respect to bill and hold sales, various aspects of a contract affect the
likelihood that revenue recognition is appropriate at contract signing.
No individual aspect of a contract guarantees that a bill and hold sale
qualifies for revenue recognition upon contract signing, but it is not likely
that revenue recognition at contract signing would be appropriate for the
following example:
On December 1, 1997, the Seller arranged to sell $10,000 in widgets
to the Buyer. The Seller received the $10,000 payment prior to period
end, but delivery was scheduled for after period end. There is not a clear
business purpose for handling the sale on a bill and hold basis. The auto
parts will not be delivered on a fixed schedule. There is not a written sales
contract. The goods have not been physically separated.
APPENDIX 2
Expense-Recognition Case, Standard, Example, and Counter Example
Selected task and case information:
As part of the process for determining Net Income in 2004, you are con-
sidering how to treat a computer software project in which CAP intends to
sell the final product. Various research and development costs related to the
project have been incurred. If you determine that the project has reached
technological feasibility, some of the costs related to the project will be cap-
italized. If you determine that the project has not reached technological
feasibility, all costs incurred to date that are related to the project will be
expensed.
The costs in question total $5.5 million. Some key considerations related
to the project include the following.
r The product design has been completed.
r The program design has not been checked against the product
specifications.
r CAP has ascertained that they have available the expertise and tech-
nology necessary to produce the product.
r Uncertainties related to high-risk development issues have not been
resolved through testing.
Standard:
All costs incurred to establish the technological feasibility of a computer
software product are research and development costs. These costs should
be charged as an expense when incurred. After the product is viewed as
technologically feasible, further development costs are capitalized. With re-
spect to computer software projects, various aspects of a project affect the
likelihood that technological feasibility has been attained. No individual as-
pect of a project guarantees that it meets the requirements to be considered
technologically feasible.
(Note: Provision of example vs. counter example manipulated between
participants.)
Example: Now assume that the accounting standard is accompanied
by the following additional example, intended to provide further
guidance:
With respect to computer software projects, various aspects of a project
affect the likelihood that technological feasibility has been attained. No
individual aspect of a project guarantees that it meets the requirements

to be considered technologically feasible, but it is likely that expense
recognition would be appropriate for the following example (meaning
that technological feasibility was not attained):
On December 1, 1997 ABC Co. needed to determine how to account
for a $10,000 computer software project that had the following character-
istics. The product design has not been completed. The program design
has not been checked against the product specifications. The company
has not ascertained that it has the expertise and technology necessary
to produce the product. Uncertainties related to high-risk development
issues have not been resolved through testing.
Counter Example: Now assume that the accounting standard is accom-

panied by the following additional example, intended to provide further
guidance:
With respect to computer software projects, various aspects of a project
affect the likelihood that technological feasibility has been attained. No
individual aspect of a project guarantees that it meets the requirements
to be considered technologically feasible, but it is not likely that expense
recognition would be appropriate for the following example (meaning
that technological feasibility was attained):
On December 1, 1997 ABC Co. needed to determine how to account
for a $10,000 computer software project that had the following charac-
teristics. The product design has been completed. The program design
has been checked against the product specifications. The company has
ascertained that it has the expertise and technology necessary to produce
the product. Uncertainties related to high-risk development issues have
been resolved through testing.
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Accounting Standards, Implementation Guidance, and Example-Based Reasoning

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Accounting Standards, Implementation Guidance, and Example-Based Reasoning

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DOI: 10.1111/j.1475-679X.2007.00248.

Received 10 November 2005; accepted 7 September 2006

This paper examines interpretation of accounting standards that provide

∗ S. C. Johnson Graduate School of Management, Cornell University. We thank Rob Bloom-

a treatment to be appropriate. For instance, an affirmative example in

affirmative example in which recognition was allowed or a counter example

2. Background and Hypotheses

example and the transaction under consideration is likely to be overstated,

H2: The net income implied by practitioners’ reporting judgments for

2005), before coverage of bill-and-hold sales or software capitalization, to

3.1.3. Manipulation of Case. The purpose of the case manipulation is to

in terms of the extent to which they provide important information that

3.1.4. Manipulation of Example. An important feature of the accounting

conclude recognition is justified in the affirmative example case than in the

either an affirmative example or counter example as dictated by the treat-

Source df Squares Square F Value p-Value

the judged probability of recognition is higher when provided an affirma-

10 Alternatively, focusing only on affirmative examples, simple-effects tests indicate that

Results of Experiment 1: Implied Income Effects

3.2.3. Testing Alternative Explanations

guidance could communicate a threshold necessary for a particular account-

3.2.3.2. Effect of nonaccuracy incentives. Application of an example to a

3.2.3.3. Effect of individual facts indicating recognition or nonrecognition. Two

3.2.4. Evidence About Process Used to Make Judgment. To provide insight

three-way interaction among case, example, and process (F = 2.28, p =

12 Specifically, if we exclude the 18 participants who self-reported an “other” process, such

Analysis of post-example judgments using as a covariate either the pre-example judgment or

are ordered in the predicted sequence (Z = 3.3606, p = 0.000). However,

4.2.4. Testing Alternative Explanations

p = 0.021), and an insignificant example type by experiment interaction

4.2.5. Evidence About Process Used to Make Judgment. As in experiment 1, we

post-example judgments, and when the pre-example judgment is included as a covariate.

(20%) indicate a priming-based process, 18 participants (11%) indicate they

or experienced practitioners who deal with these issues on a daily or weekly

Sarbanes-Oxley Act of 2002) 20 is designed to provide incentives to report ac-

Selected task and case information:

r The auto parts will not be delivered on a fixed schedule.

Example: Now assume that the accounting standard is accompanied

Counter Example: Now assume that the accounting standard is accom-

individual aspect of a project guarantees that it meets the requirements

Counter Example: Now assume that the accounting standard is accom-

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