Valuation-based accounting research: Implications for financial reporting and opportunities for future research

This paper discusses the relation between financial reporting research and practice, particularly standard setters. Many studies addressing financial reporting issues use a valuation approach. The paper describes alternative approaches to valuation research and summarises the findings relating to four major current issues: fair value accounting for financial, tangible, and intangible assets, cash flows versus accruals, recognition versus disclosure, and international harmonisation of accounting standards. The summaries include identifying what standard setters and others would like to learn from research, what we have learned, and what is left to learn. The paper concludes with observations about future financial reporting academic research.     

Is older goodwill value relevant?

Although previous research has generally found that goodwill reported in firms’ financial reports is relevant to equity valuation, no known studies have directly examined whether the value‐relevance of purchased goodwill holds as it ages. We examine this issue in the Australian context to determine whether the market attaches different values to the components of Australian firms’ goodwill when it is disaggregated into different ‘ages’. Our results suggest that recently acquired goodwill has information content whereas ‘older’ goodwill does not. Our findings have implications for goodwill accounting practice and recent changes to goodwill accounting standards.     

Management control packages: a literature review and guidelines for public sector research

ABSTRACT

The effectiveness of a management control (MC) element, such as performance measurement, may depend on other MC elements, such as organizational values and training activities. This is why MC elements should be studied ‘as a package’, instead of as isolated elements. Although examining MC elements as a package has the potential to make significant contributions to ongoing debates, this approach is largely absent in the academic public sector management literature. This paper reviews the MC package literature, examines its implications for public sector research and practice, and aids future research by discussing research design choices and research directions.     

The Impact of Financial Accounting Practices on the Measurement of Profit and Equity: Australia Versus the United States

The purpose of this paper is to make a quantitative comparative analysis of differences between Australian financial reporting practices and U.S. GAAP. The empirical data consist of Form 20-F filings for thirteen Australian incorporated companies for the period 1985–93. Based on prior research, there is a test of the hypothesis that U.S. GAAP is more conservative than Australian financial reporting practice. The results of the empirical analysis offer little support for this hypothesis in the context of the reporting of profit. However, the hypothesis is supported for the reporting of shareholders’ equity. The most frequent and material differences in profits relate to asset measurement, equity consolidation and accounting for intangible assets. Generalizations relating to differences in shareholders’ equity are more difficult to make.     

Research horizons for public and private not‐for‐profit sector reporting: moving the bar in the right direction

The examination of public and private not‐for‐profit sector financial reporting has been a topic of interest on a cyclical basis in Australia over the last 30 years. Traditional topics have included examinations of the intended and unintended consequences of specific standards, the accountability value of financial reports, transaction neutrality, compliance with the accounting standards, and more recently, the prospective implications of new, differently focused reporting standards considering such issues as income measurement and outcomes reporting. With increased recent attention from standard setters and regulators, and greater data availability, the opportunities for undertaking impactful research in these and related areas are increasing. In this paper, we focus on research that has examined the following questions: (i) Which private and public NFPOs lodge financial reports and what is reported; (ii) Who are the users and what are their information needs? (iii) Which private and public NFPs should lodge financial reports and what should be included in them; and (iv) How should the accounting frameworks for NFP sector reporting be set? For each of these issues, we identify the research gaps and opportunities for further research.     

The Impact of Journal Rankings on Australasian Accounting Education Scholarship – A Personal View

Abstract

The higher education environment in which academics currently find themselves is one characterised by corporatisation and commodification. The pursuit of scholarly academic research is increasingly plagued by quantification, ranking pursuits, and what might be referred to as a ‘publication’ maximisation culture. This paper provides reflective insight into the impact felt of journal rankings on Australasian accounting education research. The paper challenges the short-termism and narrow focus currently adopted by many business faculty executives, who continue to use journal rankings as the sole measure of academic performance. The paper argues that this results in incentive schemes not too dissimilar to that recently found within the financial industry. The paper concludes that such a narrow approach to measurement should be abandoned in order to encourage creativity and innovation in business research that assists in solving business problems today and well into the future.     

The importance of being fair: An analysis of IFRS regulation and practice – a Comment

This paper examines the ‘present fairly’ (PF) requirement in IFRS. There were eight relevant developments from 2005 to 2008, and these are mostly not yet considered in the academic literature. The paper synthesises the resulting regulatory position, especially for UK companies. Contrary to official guidance, it is suggested here that the PF requirement and the conditions for using it as an override in IFRS are not the same as for a true and fair view. Examples of the use of the PF override in practice are critically examined, as is a recent Opinion on PF by legal Counsel. Developments in US regulation make US opposition to a PF override clearer. The implications for financial reporting and for research into it are examined.     

The CF and Accounting Standards: The Persistence of Discrepancies

The conceptual framework (CF) has introduced a set of ideals and broad criteria for financial reporting focusing on servicing users' information needs. In this article, each concepts statement is considered, in turn, and its consistency with selected accounting standards examined. Particular attention is paid to accounting standards issued for the first time, or in a revised form, subsequent to the release of the concepts statements. It is found that many standards have provisions that are at odds with the CF. These inconsistencies come as no surprise. The CF is incomplete; the issue of measurement remains unresolved, leaving ambiguity in the definitions of concepts such as revenue. The CF project has remained unfinished while standard setters have given priority to other tasks, such as international harmonization, in resolving contemporary financial reporting issues.     

Implications of the ‘IAS Regulation’ for Research into the International Differences in Accounting Systems

Meek and Thomas (2004) call for research on the continued relevance of ‘rediscovered’ dichotomous accounting classifications. We provide such evidence by examining how developments surrounding the ‘IAS Regulation’ (1606/2002) influenced international differences in accounting systems in the European Union. Since a sufficient time series of actual post-2005 International Financial Reporting Standards (IFRS) reporting practice is not yet observable, we propose an initial re-classification of accounting systems based on evidence available to date, that is, the degree of implementation of the IAS Regulation in the Member States. Consistent with Nobes (1998), we find that the degree of public accountability to outside investors (the ‘public/private’ criterion) is becoming the primary differentiator for accounting systems in Europe, surpassing country-level variables such as legal system and culture. The distinction between consolidated and individual financial statements is the second emerging differentiator. While consolidated accounting is becoming more uniform across countries, cross-country cultural differences are most likely to persist in individual accounting. Based on our analysis we highlight two important areas of future research beyond the consolidated financial statements of listed firms (e.g. Nobes, 2005; Schipper, 2005). First, at the country level, the interaction of IFRS and individual financial statements will need to be reassessed. In addition, research could help introduce a degree of differentiation into financial reporting regulation for unlisted firms, because these firms are not a homogeneous group. Also, the convergence of national GAAP systems with IFRS will benefit from fresh research insights. Second, at the firm level, future research could analyze the extent to which the determinants and consequences of IFRS adoption, an area well researched for publicly traded firms (e.g. Cuijpers and Buijink, 2005), generalize to unlisted firms. Such research will help detect emerging patterns of accounting systems within an international context. It will generate insights into the disconnect of consolidated accounts from national influences, the degree of uniformity of consolidated accounts among international firms, the continued relevance of traditional classifications of international accounting systems for individual accounts and accounts of unlisted companies, and the convergence of national standards with IFRS.     

In pursuit of legitimacy: A history behind fair value accounting

An examination of the history of attempts by regulators, practitioners and scholars from the mid nineteenth century to 2005 to establish an appropriate accounting measurement basis for financial reporting here leads to an evaluation of the likelihood of fair value accounting (FVA) practices becoming fully institutionalised. Using concepts drawn from theories of legitimation, it is shown here that historic cost accounting (HCA) only enjoyed an episodic legitimacy in the 1940s–70s and that prior and after this period mixed measurement incorporating market values is routinised. Although principles of FVA have been legitimised to an extent, it is argued here that this has resulted in the practice of mixed measurement bases being taken for granted.     

文化对会计的影响:文献述评及未来研究展望

文化作为区别不同民族成员的集体心理模式,对各国会计准则和会计实践都具有重要影响。目前国内关于文化对会计影响的研究文献很少,国外学者则采用理论分析和实证检验的方法对会计亚文化、文化对会计稳健性、财务披露和会计准则协调的影响进行了多方面的研究。本文对该领域的文献进行了系统的梳理和简要评论,并针对现有研究的不足提出了未来的研究方向和重要议题。     

Bank Earnings Management in Emerging Market Economies: The Case of Mexico

In the mid-late 1990s, developing countries in several parts of the world experienced severe currency devaluations that were accompanied by deep economic downturns. For some regions, international financial organizations have documented that deficient financial reporting standards and practices contributed to the onset and magnitude of the crises by understating banks’ problem loans and capital adequacy problems. However, little research has been conducted concerning the role of financial reporting in the post-devaluation reconstruction of financial systems. As such, this paper examines the role of financial reporting in the post-1994 devaluation restructuring of the Mexican banking system. Emphasis is placed on examining whether the country's three largest banks delayed the recognition of loan losses in the late 1990s. The results provide evidence that banks took advantage of weaknesses in financial reporting standards to delay the recognition of loan losses.     

Skinner's Thoughts on Professional Judgment and Recent Developments in Canadian Financial Reporting*/ LES RÉFLEXIONS DE SKINNER QUANT AU JUGEMENT PROFESSIONNEL ET LES RÉCENTS DÉVELOPPEMENTS DE L'INFORMATION FINANCIÈRE AU CANADA

In this commentary, we examine recent developments in Canadian financial reporting related to (1) the conceptual framework, (2) accounting standards, and (3) corporate governance issues, in light of Skinner's (1995) thoughts on professional judgment. We consider how effective these developments are in addressing several questions and concerns raised by Skinner.     

A basic user utility preference to reduce uncertainty: A dissent to reporting and asset measurement

Legitimacy and self-regulation of the accounting profession dictates that it typifies integrity and credibility in both the form and substance of its accounting standards. Unsound and dishonest business practices are not evident in the financial reports, nor are they the responsibility of accounting standard setters. Nevertheless, professional accountability is not enhanced if the financial reporting standards permit a great deal of choices, variation and interpretation, particularly in asset values. In pursuit of professional legitimacy and the credibility, accounting standards can reduce opportunities for intruding bias, inept judgement, or interpretation perspectives adding to user uncertainties. The thesis of this conceptual paper is that key user groups have an intrinsic homogeneous preference utility for information relating to financial risk, which can be satisfied by a simple asset value, based on a market bid. The balance sheet can contain a segregation of asset values, either in supplementary or classification form.     

Advances in the Financial Reporting of Mexican Banks: An Evaluation of Post-Devaluation Reporting Practices

In 1994, Mexico underwent a severe peso devaluation. Thereafter, the country’s financial system experienced severe financial stress as loan defaults forced the government to undertake a program to rescue the country’s banks and obtain international financial assistance. One of the measures involved the reformulation of the financial reporting principles used by the country’s banks. The standards, which are contained in the Mexican National Banking and Securities Commission’s Circular 1343 (1997), were designed to provide Mexican banks with a comprehensive set of financial reporting standards and to bring the financial reporting practices of Mexican financial institutions closer to international standards. However, while the standards contain several improvements in the fundamental aspects of financial reporting for Mexican banks, they lack some important measurement and disclosure provisions contained in international standards. Given this tendency, this paper examines the post-devaluation (1998) financial reporting practices of Mexican banks. Emphasis is placed on comparing the reporting practices contained in the banks’ 1998 financial statements with the requirements of Circular 1343, the standards published by the Mexican Institute of Public Accountants (MIPA), International Accounting Standards Committee (IASC) standards, and Financial Accounting Standards Board (FASB) rules.     

The Measurement of International Harmonisation in Financial Reporting

Several developments in the harmonisation of accounting standards are described in the accompanying article by Howieson. This article explains how harmonisation can be measured and refers to studies of the harmonisation of accounting standards and of financial reporting in practice. These studies have measured harmonisation in Europe, the US and Japan, as well as comparing accounting standards and reporting practices under Australian accounting standards (AASBs) and international accounting standards (LASS).     

Accounting for deferred tax in Japanese Banks and the consequences for their international operations

In recent years, financial reporting has changed in Japan towards the requirements of internationally recognized accounting standards. At the same time, banks suffered significant bad debts on their loans and it became difficult to maintain capital adequacy ratios at the level required for international operations. In this context, using as case studies the five major banking groups in Japan from 2002 to 2004, we address four related research questions concerned with the importance of deferred tax for the maintenance of regulatory capital. The responses of the government, regulatory agencies and auditors to problems with deferred tax accounting are also considered. We find that, without deferred tax assets, the five major banking groups would not have been allowed to operate internationally. We also suggest implications, and conclude that the solutions to these problems lie not just with the accounting profession but also with the government and regulatory agencies, as part of wider financial, rather than accounting, reform.     

Application of the Reporting Entity Concept in Australia

For decades, the reporting entity concept has been the foundation of differential reporting in Australia. Those entities classified as ‘reporting entities’ are, prima facie, required to produce full GAAP‐based financial reports while other (non‐reporting) entities are generally able to produce less complex and shorter ‘special purpose’ financial reports. In recent years, the application of the concept, as originally set out in the Statement of Accounting Concepts (SAC) 1 Definition of the Reporting Entity, has been criticized on several grounds—particularly, that it does not yield the reporting outcomes originally intended by regulators. Our analysis of 1,546 companies lodging financial statements with the corporate regulator in Australia (ASIC) shows the principles‐based criteria in SAC 1, designed to indicate the existence of a reporting entity, do not systematically explain its application by entities. Our findings are relevant for policy makers, researchers, and regulators concerned with how these choices might be more effectively regulated in future and whether this is best done through principles‐based or rules‐based approaches.     

Assessing the effectiveness of financial reporting harmonization for emerging market banks: The case of Banco Serfin

In the last decade there has been a proliferation of financial crises in emerging markets. To some extent, the suddenness and magnitude of some of these crises have been blamed on poor financial reporting standards for bank loan losses. As a result, prior to providing countries with “financial bailout” funds, international investors and international financial organizations have increasingly required that countries harmonize their bank financial reporting standards with international financial reporting standards.Given this trend, this case requires students to assess the effectiveness of efforts to harmonize loan financial reporting (with International Financial Reporting Standards) for Mexican banks during (and after) the country’s financial crisis of the late 1990s. Students are required to assess the extent to which both pre-crisis standards as well as new, post-crisis standards complied with international financial reporting standards. They are also required to assess the impact of the new standards on the reporting practices for loans of one particularly troubled financial institution. Through the examination of this institution’s accounting practices for loans, students obtain a familiarity of the shortcomings of emerging markets’ banks’ loan financial reporting as well as the factors which influence the adoption of international financial reporting standards by emerging market banks.