Choice of Accounting Method for Valuation of Investment Securities: Evidence from Hong Kong Firms

This study examines whether Hong Kong managers choose “benchmark” or “alternative” valuation method for investment securities, after the Hong Kong SSAP 24 became effective starting with fiscal‐year ending December 31, 1999. Tests are conducted on a sample of 292 firms, out of which 155 Hong Kong firms reported unrealized gains and losses and 128 firms that did not report holding gains/losses, but reported investment securities. The findings indicate that firms with strong relative performance, i.e. current year's EPS higher than that of the last year, chose the alternative valuation method when the investment securities had holding gains and recognized the unrealized holding gains in the equity section of the balance sheet. This finding is consistent with the Cookie Jar hypothesis because these holding gains would be used in the income statement in future periods, when needed. With regard to firms with strong relative performance and holding losses, the findings indicate that the benchmark valuation was used. The losses were reported in the income statement to the extent that they did not reduce the EPS below that of the last year. This finding is consistent with the Income Smoothing Hypothesis, because the use of benchmark valuation reduced EPS of the current year to bring it in line with that of the last year. Evidence on firms with weak economic performance and holding gains or losses provided weak support to the Income Smoothing Hypothesis and Big Bath Hypothesis. Additionally, the results indicate that the firms with high debt‐equity ratio preferred the benchmark method and recorded securities at cost. This treatment provided managers with an opportunity to liquidate or reclassify the securities in future periods and use the accrued gains, when needed. The findings are inconclusive with regard to the impact of bonus plan on the choice of valuation method.     

Selective Trading of Available-for-Sale Securities: Evidence from U.S. Commercial Banks

This paper examines the selective trading of available-for-sale (AFS) securities by U.S. banks after the implementation of fair value accounting under Statement of Financial Accounting Standards No. 115, Accounting Standards Codification Topic 320. Our findings suggest firms still engage in earnings management through selective selling of AFS securities despite the mandatory disclosure of unrealized security holding gains and losses in their financial statements. Such activities do not appear to be driven by the lack of reliability of the fair value measure. Instead, the degree of earnings management varies significantly with the reporting format of unrealized AFS security holding gains and losses. We find evidence of earnings management among banks that choose to report unrealized holding gains and losses in the statement of shareholders’ equity. By contrast, we find no such evidence among banks disclosing unrealized holding gains and losses in the income statement.     

基于新会计准则的会计信息价值相关性分析

新会计准则在上市公司实施后,资产负债表和利润表的会计信息的价值相关性有了提高,其中利润表的会计信息价值相关性的提高程度要好于资产负债表的会计信息价值相关性的提高程度。公允价值信息是新会计准则所产生的主要增量信息。新会计准则实施后,公允价值信息具有价值相关性。但是,由于资本市场在2008年受到了金融危机的影响,公允价值信息的相关性在该年表现不是很显著。可见,新会计准则的实施提高了会计信息的价值相关性,但是资产负债表观没有得到有效体现,公允价值信息的价值相关性容易受到资本市场环境的影响。     

The Impact of Unrealized Fair Value Adjustments on Dividend Policy

We examine the impact of unrealized fair value adjustments on dividend policy. Dividend payouts should include only persistent income [Lintner, J. (1956). Distribution of incomes of corporations among dividends, retained earnings and taxes. American Economic Review, 46(2), 97–113]. In our institutional setting, however, regulators recommend the non-distribution of any income from fair value adjustments, which suggests that they interpret them as transitory. We empirically demonstrate that fair value adjustments on investment property are persistent, while those on financial securities are transitory. We further show that only fair value adjustments from investment properties are distributed. We argue that managers perceive the persistence of the two fair value components correctly, and by doing so, they distribute income consistent with the Lintner framework rather than on regulatory recommendations. Finally, by focusing on managerial optimism, debt contracting, and insider ownership, we demonstrate the conditions under which firms choose to deviate from regulator recommendations and to distribute fair value profits.     

企业的利润结构与可持续增长 ——基于A股竞争性上市公司的经验证据

企业的可持续增长是社会经济可持续发展的基础,企业的可持续性增长能力与利润总额和利润构成密切相关.在新企业会计准则下,利润总额由核心利润、资产减值损失、公允价值变动损益、投资损益、营业外收支净额等五个部分构成,利润总额不同构成部分的来源不一样,稳定性和持久性也不一样.实证研究发现,盈利对企业增长的可持续性具有正面影响,利润总额的不同构成部分会对企业增长的可持续产生不同影响,利润结构可以提供有关企业可持续增长的增量信息,新企业会计准则下利润表项目的调整变化提高了利润表的信息含量.     

全面收益观发展动态及其在我国会计准则体系中的应用

本文认为,全面收益概念的出现标志着人们已从更广阔的意义上关注收益信息的披露。适应全面收益观对财务业绩报告进行改革是国际趋势,我国新发布的新企业会计准则体系也反映出了全面收益观的应用,引入了利得和损失概念,增加了所有者权益变动表,并对利润表的结构和内容进行了改革。     

The Decision Usefulness of Fair Value Accounting – A Theoretical Perspective

ABSTRACT

Regulators such as the SEC and standard setting bodies such as the FASB and the IASB argue the case for the conceptual desirability of fair value measurement, notably on the relevance dimension. Recent standards on financial instruments and certain non-financial items adopt the new measurement paradigm. This paper takes issue with the notion of decision usefulness of a fair-value-based reporting system from a theoretical perspective. Emphasis is put on the evaluation of the theoretical soundness of the arguments put forward by regulators and standard setting bodies. The analysis is conducted as economic (a priori) analysis. Two approaches to decision usefulness are adopted, the measurement or valuation perspective and the information perspective. Findings indicate that the decision relevance of fair value measurement can be justified from both perspectives, yet the conceptual case is not strong. The information aggregation notion that underlies standard setters' endorsement of fair value measurement turns out to be theoretically restricted in its validity and applicability. Also, comparative analysis of fair value accounting vs. historical cost accounting yields mixed results. One immediate implication of the research – a condition for the further implementation of fair value accounting – is the need to clarify standard setters' notion of accounting income, its presumed contribution to decision relevance and its disaggregation.     

Foreign Currency Translation Under Two Cases-Integrated and Isolated Economies

Beaver and Wolfson (1982 BW) identify economic interpretability and symmetry as desirable properties for financial statement translation. They then analyze translation methods with respect to these properties assuming perfect and complete markets between and within both countries (referred to, here, as the integrated economies case).
This study extends BW's analysis by examining isolated economies characterized by perfect and complete internal markets and a random relationship between prices and exchange rates. In BW's integrated economies case, inflation differentials drive exchange rate changes. No exchange risk exists, although monetary assets are exposed to the risk of unexpected inflation. Isolated economies expose monetary and nonmonetary items to both exchange and inflation risk.
In both cases, economic interpretability and symmetry can be achieved only by current value accounting translated at current exchange rates. In the integrated economies case, symmetry alone is achieved through current value accounting translated by current exchange rates for monetary items and historical costs translated by historical rates for nonmonetary items. In the isolated economies case, symmetry alone is achieved through current value accounting for monetary items and historical cost for non-monetary items, all translated at the current rate. In both cases, including translation gains or losses in income is a condition for these results.
This extension of BW demonstrates (1) the translation rate required for symmetry depends upon the assumed relationship between prices and exchange rates, (2) a well-defined economic scenario exists where historical cost accounting using current rate translation results in symmetry, and (3) the results depend on including translation gains and losses in income.     

An Experiment in Fair Value Accounting: UK Investment Vehicles

Abstract

We use the British real estate and investment fund industries as experimental settings where historic cost (HC) and fair value accounting (FVA) can be compared. Both industries have the majority of their assets marked to market and hence the difference between the two accounting systems is profound. However, as the valuation of real estate is arguably more subjective than that of investment funds, we are able to contrast fair value accounting in a near ideal setting with one where it remains important, but where valuation difficulties may permit bias. As this distinction is incorporated in the recently issued SFAS 157, which also formed the basis of the IASB's relevant discussion document, the results of our study may be particularly timely. As expected, we find that fair value income is considerably more value relevant than historic cost income. However, in the presence of changes in FVA balance sheet values, income measures become largely irrelevant. This implies that there is no obvious advantage from adopting FVA income accounting if FVA balance sheet values are available to the user. Furthermore, FVA for our real estate sample is considerably less value relevant than for the investment companies and the evidence for this sample, if not conclusive, is consistent with earnings management. We interpret these results as confirming that fair values are highly relevant and largely unbiased where the values are unambiguous. Where valuation is ambiguous, which will normally be the case, value relevance will be lower and biased accounting may be revealed.     

The Relevance of Financial versus Non-Financial Information for the Valuation of Venture Capital-Backed Firms

This study examines the relevance of financial and non-financial information for the valuation of venture capital (VC) investments. Based on a hand-collected data set on venture-backed start-ups in Germany, we investigate the internal due diligence documents of over 200 investment rounds. We document that balance sheet and income statement items capture as much economic content as verifiable non-financial information (e.g. team experience or the number of patents) while controlling for several deal characteristics (e.g. industry, investment round, or yearly VC fund inflows). In addition, we show that valuations based on accounting and non-accounting information yield a level of valuation accuracy that is comparable to that of publicly traded firms. Further analyses show that the industry-specific total asset multiples outperform the popular revenue multiples but lead to significantly less accurate results than those obtained from the more comprehensive valuation models. Overall, our findings might inform researchers and standard-setters of the usefulness of accounting information for investment companies and provide additional evidence to gauge the overall valuation accuracy in VC settings.     

The Value Relevance of Accounting Information during a Financial Crisis: Thailand and the 1997 Decline in the Value of the Baht

This study addresses whether the financial turmoil surrounding the devaluation of the baht affected the value relevance of Thai accounting information. Our results suggest a decline in the value relevance of Thai book values and earnings following the devaluation. Prior to mid 1997 the Bank of Thailand pegged the value of the baht to a basket of currencies of which 80% was weighted to the US dollar. In response to pressure by currency speculators the bank abandoned its peg on July 2 1997 in favor of a managed float. The devaluation was followed by volatile exchange rates. The change in value relevance of accounting information after the devaluation may be attributable to the initial recognition of foreign exchange losses and the subsequent recognition of foreign exchange gains as exchange rates fell and then recovered.     

The IASB's Discussion Paper on the Conceptual Framework for Financial Reporting: A Commentary and Research Review

Consistent with the mission of the International Association for Accounting Education and Research (IAAER) to “promote global excellence in accounting education and research, and to maximize accounting academics' contribution to the development and maintenance of high‐quality, globally recognized standards of accounting practice,” this paper provides a commentary and research review by an ad hoc committee of the IAAER on the IASB's Discussion Paper DP/2013/1—A Review of the Conceptual Framework for Financial Reporting. The comments focus on four main areas about which prior academic research can inform standard setters in their consideration of the revised Conceptual Framework: (1) recognition and derecognition, (2) measurement, (3) presentation and disclosure, and (4) other comprehensive income. The views expressed here by the ad hoc committee are those of the authors and do not necessarily reflect a consensus view of the IAAER membership or its Executive Committee. The paper supports the IASB's general objective of developing one set of globally acceptable accounting standards based on a cohesive and complete Conceptual Framework.     

企业收入实现及“实现”概念探析——论企业收入的已实现、可实现和未实现

"实现"是财务会计的一个重要概念,是收入实现(因出售商品或劳务而形成的现金流入)的基本标准。在对企业收入实现计量及收入确认标准等问题进行分析探讨后发现,财务会计中存在确认收入的三个"实现"概念,即已实现、可实现和未实现。已实现是已获得的现金净流入,可实现是有望在确定期间内按确定金额获得的现金净流入,未实现是期望获得的未来的现金净流入。     

The Impact of Standard Setting on Relevance and Reliability of Accounting Information: Lower of Cost or Market Accounting Reforms in China

During the period from 1998 to 2000, China implemented several new asset write‐down regulations that mandate lower of cost or market accounting (LCM) for most non‐cash assets. This is a study of the relevance and reliability of those regulations for investors in China. The study measures the association of net asset value with market value of equity and the association of accounting income with stock return, on both a historical cost accounting (HCA) basis and on an LCM basis. A fixed‐effects model controlling both year and firm effects is used in a balanced panel sample. The panel regressions show high levels of explanatory power. LCM values can be relevant but may be measured with sufficient error that they do not improve the prediction of firm values. Reliability is measured using non‐nested, overlapping model comparison tests (J and Cox). The paper also considers whether discretionary motivations influence the amount of write‐down. The study supports the relevance of LCM reforms, but finds that reliability is not increased over HCA during the period under study. Reliability appears to be reduced by the voluntary nature of LCM provisions during part of the period and by the effects of opportunism for some firms in the sample.     

Sooner or Later? – Paradoxical Investment Effects of Capital Gains Taxation under Simultaneous Investment and Abandonment Flexibility

This paper analyzes the impact of capital gains taxation on investment timing decisions for risky investment projects with entry and exit flexibility under differential tax rates for ordinary income and capital gains. We investigate whether capital gains taxation influences immediate and delayed investments asymmetrically, given the optimal abandonment decision. If capital gains taxation induces a lock-in effect, this effect is anticipated in the investment timing decision. In contrast to prior research, our numerical simulations show that this lock-in effect of capital gains taxation can induce normal as well as paradoxical effects on investment timing under simultaneous entry and exit flexibility. A paradoxical timing effect, i.e., investment accelerated by capital gains taxation, especially emerges for high liquidation proceeds or, more conservative tax accounting, low interest rates, and low volatilities. In these cases, capital gains taxation reduces the value of the option to invest and hereby increases the propensity to invest immediately. As a second paradoxical tax effect, capital gains taxation may favor delayed real investment over financial investment. Facing these results, tax legislators should not use capital gains taxation as a short-term tax policy instrument to influence investors' timing decisions.     

关于会计要素几个问题的思考

本文注意到会计要素的重要性及其在不同国家财务会计概念框架中的差异性,首先探讨了会计要素设置的决定因素,并分析了与此相关的一个典型问题——为什么现金流量表不设置会计要素。此外,本文还对收入与利得的区分及其经济后果进行了探讨,并分析了资产计价先于收益决定的逻辑基础。最后,本文还对资产的定义进行了综评。     

Analyst following,disclosure quality,and discretionary impairments: Evidence from China

Financial statement preparers’ discretion in fair value measurements is integral to asset impairment accounting. Firms may misuse this discretion to report more or less impairment loss than is warranted by underlying economic circumstances. Using data from a sample of publicly listed firms in China, this study finds that analyst following reduces abnormal impairment loss, the portion of reported impairment loss that cannot be explained by corporate economic circumstances and that this effect is more pronounced for firms with lower information disclosure quality. However, the reducing effects of analyst following and its interaction with disclosure quality are greater for income‐decreasing than for income‐increasing abnormal impairment loss. Additional analyses support the argument that these differences are attributable to the dominance of accounting’s contracting role over its informational role. Overall, the findings indicate that the influence of analyst following on discretionary impairment accounting decisions is moderated by disclosure quality and by the relative importance of accounting’s contracting and informational roles in an emerging market setting.     

Modelling and forecasting stock returns: exploiting the futures market,regime shifts and international spillovers

This paper proposes a vector equilibrium correction model of stock returns that exploits the information in the futures market, while allowing for both regime‐switching behaviour and international spillovers across stock market indices. Using data for three major stock market indices since 1989, we find that: (i) in sample, our model outperforms several alternative models on the basis of standard statistical criteria; (ii) in out‐of‐sample forecasting, our model does not produce significant gains in terms of point forecasts relative to more parsimonious alternative specifications, but it does so both in terms of market timing ability and in density forecasting performance. The economic value of the density forecasts is illustrated with an application to a simple risk management exercise. Copyright © 2005 John Wiley & Sons, Ltd.     

规范会计报表附注,提高会计报表附注的实用价值

会计报表附注作为财务报告的重要组成部分,其反映的内容及体现的作用对人们的投融资决策及了解企业的财务及经营状况十分重要,但是由于目前会计附注内容在规范设定及信息披露详细程度等方面的原因,使得现有会计报表附注的实用价值并未得到很好地应用。因此,应当对会计报表附注披露的要求及形式进一步规范,建立社会监督机制,为会计信息使用者提供可靠、有用的决策信息。     

Identifying Decision Useful Information with the Matrix Format Income Statement

We conduct an experiment to investigate the potential benefits of an alternative format for the income statement, the matrix format, initially developed by the International Accounting Standards Board (IASB) and UK Accounting Standards Board in their joint project on performance reporting. Sophisticated financial statement users (financial analysts and professional accountants) and less sophisticated financial statement users (MBA students) were asked to extract information from a set of financial statements that included an income statement either in the IAS 1 format or in the matrix format. We find that the matrix format improves the accuracy with which users extract financial information. This result is driven by greater accuracy, for all user groups, on “below‐the‐line” items. Furthermore, despite lack of familiarity with the matrix format, its use did not appear to affect the time taken, the ease of extracting financial information, or users' task completion confidence; further experience with the matrix format could lead to benefits along these lines as well. Our findings may assist the FASB and IASB in their joint project on financial statement presentation.