An Axiomatic Theory of Accounting Measurement—Part II

Willett (1987) described a transactions based theory of funds accounting. This paper extends the theory to explain asset and profit measurement. Eight axioms are listed which, when interpreted in the context of cost structures, are sufficient to justify the logic underlying the generation of accounting numbers in financial statements. Although the theory is expressed using deterministic concepts, one of its implications is that many derived accounting measurements used in practice (e.g. income calculations) are of an inherently probabilistic nature. The theory identifies the main stochastic variables which determine the statistical characteristics of such accounting numbers.     

Earnings Management Using Asset Sales: An International Study of Countries Allowing Noncurrent Asset Revaluation

Bartov (1993) demonstrates that US firms time asset sales to smooth income and affect debt/equity relationships. This study examines earnings management behavior through asset sales in countries that allow asset revaluation: Australia/New Zealand (ANZ) and the United Kingdom (UK). Earnings management behavior differs across these two country groups when their accounting rules differed prior to 1993, but is similar during the 1993–95 period when the UK implemented FRS 3 . The results also find that revaluer companies do not use asset sales to smooth income in ANZ nor in the UK after FRS 3 was implemented in 1993. UK revaluers (prior to FRS 3 ) and both countries' non-revaluers sell assets consistent with income smoothing.     

ACCRUAL ACCOUNTING AND CASH ACCOUNTING: RELATIVE MERITS OF DERIVED ACCOUNTING INDICATOR NUMBERS

The purpose of this study was to evaluate the relative merits of performance indicators derived from either an income statement and a balance sheet both based on accrual accounting, or cash flow accounting. The balance sheet number showed lower variability and a higher persistency than the cash flow accounting and the income statement numbers. This phenomenon was attributed to an income smoothing distortion and a selective market response hypothesis. One implication for the standard setting bodies may be to favour an asset/liability view of earnings rather than either a revenue/expense or cash flow view.     

Political costs and an intraperiod accounting choice for export tax credits

This study examines the effects of political and debt contracting costs on an intraperiod accounting choice. Export tax credits that New Zealand companies receive may be credited to sales ot to income tax expense. Compared to the credit to sales method, the tax reduction method reduces a company's reported tax rate and interest coverage ratio, both of which could have adverse economic consequences. The results indicate the credit to sales method is preferred by large companies that attract political scrutiny because of their low tax rates. The level of a firm's interest coverage is also related to that accounting choice.     

“激进的收入确认”抑或“真实的销售操控”

由于收入项目通常是会计收益构成中的最大数字,研究A股上市公司如何影响会计收入项目以及利润的问题尤其重要。选择A股微利和微亏公司为研究对象,分别运用计量模型计算异常操纵应收账款和异常经营现金流以度量激进的收入确认和真实的销售操控。检验结果显示,微利公司选择了真实的销售操控行为,微利公司比非微利公司有相对更少的经营现金流,但微利公司在2002到2006年并未采用激进的收入确认以影响会计报表收入项目;进一步检验显示微亏公司也选择了真实的销售操控行为,微亏公司与微利公司的异常操纵应收账款和异常经营现金流均无统计差异。     

Simulation of Controlled Financial Statements

Many accounting and finance studies investigate the time-series properties of historical accounting records from corporate financial statements. Some of them have recognized the potential benefits of using disaggregated monthly accounting records. Disaggregated data are beneficial because one can use more data points within a relatively short period of time, thus reducing the chance of structural change. The added data points and reduction of the number of variables needed to accommodate potential structural changes can enhance the statistical power of any subsequent analysis. The use of disaggregated data may also improve the predictive ability of time-series analytic approaches. In order to systematically assess various financial indicators and investigate the effects of different organizational characteristics, a large number of monthly statements with certain predetermined characteristics are desirable. However, such statements are not readily available. At best, monthly statements can be obtained from a few volunteer companies. Under this circumstance, simulation of controlled financial statements seems to be a reasonable solution. This research explores a methodology for simulating complete monthly financial statements based on actual company quarterly financial statements. The methodology incorporates the interrelationships among accounting numbers and the effects of exogenous variables. To test the empirical validity and whether the monthly results derived from the quarterly data can accurately track the real monthly figures, we compare the results simulated by the proposed method and those generated by a naive random walk model. We test both complete financial statements for three companies and sales statistics from the retail industry. The results of both tests demonstrate the superiority of the method proposed by this study over a naive random walk model. The proposed simulation method provides an opportunity for researchers to examine the time-series properties of financial statement elements by using the monthly data of a large number of companies. In addition, the simulation approach allows researchers to perform cross sectional comparisons on companies with different characteristics (e.g., sales behavior patterns and degrees of stability) in their financial and economic activities. Moreover, it enables the researchers to manipulate some of these characteristics to test various hypotheses.     

New Light on Accrual, Aggregation and Allocation, Using an Axiomatic Analysis of Accounting Numbers' Fundamental and Statistical Character

The general nature of basic accounting measurement procedures is analysed from the perspective of their representational faithfulness rather than, as is normally nowadays done, from the perspective of relevance to user decision models. The character of accounting numbers is examined using an axiomatic framework based in statistical theory to demonstrate that statistical properties of the numbers are created by the process of preparing, constructing, the numbers. These properties, deriving from the process of constructing the numbers, are there regardless of the uses to which the numbers may be put, and therefore knowledge of them informs not only preparers of the numbers but also those who decide whether and how to disclose them to others, and those who make use of them for any purpose.
The article argues, with axiomatic analysis and examples, that accounting numbers are statistics having properties such as distribution and variance that affect their usefulness in general and that may be examined separately from any use. Such an examination is helpful partly because it then avoids confounding the understanding of accounting measures' technical nature with issues of disclosure choice and use. The necessary axiomatic framework is presented briefly to establish its perspective on measurement questions, then the value of the framework for examining vexing accounting issues is illustrated with examinations of accrual accounting and matching, cross-sectional and time-series allocation, and accounting-relevant market values.     

EVIDENCE ON EVA

EVA has attracted considerable attention as an alternative to traditional accounting earnings for use in both valuation and incentive compensation. With a host of consultants now marketing related metrics, numerous claims have been made—most based on anecdotal evidence or in-house studies. This paper summarizes the authors' independent evidence regarding EVA's alleged advantages.
The authors begin by reviewing the theory that links the underlying concept of residual income to shareholder value. Second, they discuss how Stern Stewart modifies residual income to produce its proprietary EVA metric and show how median EVA compares with residual income, net income, and operating cash flows over the period 1988–97. Third, they examine the claim that EVA is more closely associated with stock returns and firm value than is net income. Their evidence indicates that EVA does not dominate net income in associations with stock returns and firm values. Fourth, they examine a second claim that compensation plans based on residual income motivate managers to take actions consistent with increasing shareholder value. Here the evidence (from a study by Wallace) suggests that managers do respond to residual income-based incentives by, for example, increasing asset sales, cutting capital expenditures, repurchasing stock, and producing higher levels of residual income. The authors conclude by arguing that a metric such as EVA can be effective for internal incentive purposes even if it conveys little news to market participants regarding the firm's valuation.     

Income smoothing among European systemic and non-systemic banks

There is scant research on the financial reporting behaviour of global systemically-important banks (G-SIBs) and non-global systemically-important banks (non-G-SIBs). We examine the link between financial reporting and financial system stability given the understanding that income smoothing is a stability mechanism for banks. We empirically examine whether the way G-SIBs use loan loss provisions (LLPs) to smooth income differ compared to non-G-SIBs and the incentive to do so. We examine 231 European banks and find that income smoothing is pronounced among G-SIBs in the post-crisis period and pronounced among non-G-SIBs in the pre-crisis period. Also, G-SIBs exhibit greater income smoothing when they: (i) have substantial non-performing loans, (ii) are more profitable and meet/exceed minimum regulatory capital ratios (iii) engage in forward-looking loan-loss provisioning and during recessionary periods. The implication of our findings is that capital regulation and abnormal economic fluctuations create incentives for systemic banks to use accounting numbers (loan loss provisions) to smooth income, which also align with the financial system stability objective of bank regulators. Our findings are useful to accounting standard setters in their evaluation of the role of reported accounting numbers for financial system stability, given the current regulatory environment in Europe which focuses on systemic banks.     

Accounting Choices: Variation in Managerial Opportunism

This study focuses on variation in managers' accounting choices given motivations to use accounting accruals opportunistically. Prior research identifies a number of motivations arising from accounting–based contracts that encourage opportunistic reporting by managers. However, prior research implicitly assumes all managers respond identically to the same contractual motivations. This study identifies variation in managers' responses to contractual motivations involving accruals that is related to managers' stewardship of corporate assets. Evidence shows that modeling how managers use corporate assets enhances the explanation of their accounting choices given motivations to (a) use accruals opportunistically, and (b) to smooth income via accruals. Managers with high ratings on judicious use of corporate assets are less responsive to motivations to use accruals opportunistically, and to smooth income via accruals, than managers with low ratings. This evidence suggests that not all managers are equally opportunistic, and that modeling this factor helps explain cross–sectional differences in managers' accounting choices.     

On the IASB comprehensive income project: an analysis of the case for dual income display

The IASB is presently involved in a project on reporting comprehensive income. Since the IASB accounting model mixes two income determination systems, namely, historical cost accounting and fair value accounting, an interesting question pertains to whether the display of comprehensive income should reflect the existence of these two paradigms. This article scrutinizes, from both the points of view of accounting theory and a valuation perspective, the typical arguments made by proponents of historical cost net income and comprehensive fair value income. It finds that claims for exclusive reliance on a single concept of income are untenable. The analysis provides arguments in defence of an income display that explicitly features both income concepts. Such a dual income display would correspond to a categorization of comprehensive income that is currently investigated in the IASB performance reporting project. However, given the importance of summarization in financial analysis, as is most extremely reflected in the focus on the earnings per share (EPS) number, the case for a dual income display should also be considered at the highest level of summarization of financial performance reporting. In other words, mandatory publication of two EPS numbers, one for net income, and one for comprehensive income, should be considered. Possible effects on perception and actual use of financial reports that should enter such a consideration are suggested as topics for experimental research.     

Risk analysis for accounting models: A spreadsheet simulation approach

Risk analysis can be performed on accounting models using spreadsheet add-ins having statistical forecasting and simulation capabilities. Modeling uncertainty, performing a simulation, and viewing probability distributions of key output variables present to students the risk within a modeled relationship. This use of technology for accounting instruction is presented for capital budgeting, budgeted cash flow, and a budgeted income statement.     

The impact of firms' internationalization on financial statement presentation: Some French evidence

Historically, the format of financial statements has varied from one country to another. Recently, due to the attractiveness of their capital markets, the strength of their accounting professions and the influence of their institutional investors, Anglo-American countries have seen a steady increase in the impact of their accounting practices on other nations, even influencing the actual format of financial statements. Given that French accounting regulations allow a certain degree of choice in consolidated balance sheet format (‘by nature’ or ‘by term’) and income statement format (‘by nature’ or ‘by function’), this study examines a sample of 199 large French listed firms in an attempt to understand why some of these firms choose not to use the traditional French formats (‘by nature’ for the balance sheet and ‘by nature’ for the income statement), instead preferring Anglo-American practices that we call ‘alternative’ (‘by term’ format for the balance sheet and ‘by function’ format for the income statement). We first analyze the balance sheet and income statement formats separately using a logit model, then combine the two and enrich the research design with a generalized ordered logit model. Our results confirm that opting for one or two alternative formats is related to internationalization, influenced by several factors: size, international auditor, accounting standards, foreign listing and international sales. When distinguishing the decision to adopt at least one versus two alternative-format financial statements, our findings also provide evidence that not all variables play the same role: ‘Accounting standards’ and ‘Foreign listing’, which are important in explaining the use of at least one alternative format, are irrelevant in explaining the use of two alternative-format financial statements.     

Corporate derivatives use policy and information environment

We provide evidence consistent with the notion that prudent use of financial derivatives improves firms’ information environment. We show that firms with sophisticated and comprehensive derivatives use policies display lower levels of uncertainty about future cash flows, volatility of future income and sales growth, and equity mispricing than those that do not use derivatives. However, we also show that policies that consist of large positions in a single type of derivative contract are not likely to produce similar benefits. These results remain intact even after accounting for the endogenous nature of derivatives use policy and information risk and mispricing.     

Financial reporting and firm valuation: relevance lost or relevance regained?

In this study, I examine whether balance sheet and income statement numbers have lost or regained their relevance over the last 30 years. Institutional and macroeconomic factors like the global trend towards strengthening regulation and harmonising financial reporting, the extended use of fair values over historical cost, and the recurring occurrence of accounting scandals, market bubbles, and financial crises make it likely that the role of financial reporting for firm valuation has changed. Following prior research, I estimate four models for the concurrent relation between market value and accounting numbers, and then examine the pattern in explanatory power over time. I find that the loss in relevance of the income statement continues in recent years and is present in a large international sample, in particular in countries with strong institutions. While the overall relevance of the balance sheet remains stable, I find a downward trend during the first sample half, which reverses in the second half, especially in common law countries with strong investor protection, strict disclosure requirements, and integrated markets. Even though several caveats apply, the results suggest that changes in the economy, the institutional environment, and in how firms operate affect the relative importance of accounting information for the use in firm valuation by outside stakeholders.     

剩余收益模型与股票未来回报

本文采用Hou et al.(2012)公司基本面盈余预测模型并结合剩余收益模型对上市公司的内在价值进行估计,并分析内在价值与市价比率(V/P)与股票未来回报之间的关系。我们发现基于V/P分组的投资组合,在未来一至三年规模调整的持有超额回报套利分别达到15.2%、37.9%和55.9%;在控制了市账比等因素以后,V/P对股票未来回报仍然具有显著的预测作用。本文的研究克服了以往文献中运用证券分析师盈余预测进行剩余收益模型估值的内在局限,并提供了我国资本市场背景下切实可行的基于剩余收益模型估值的投资组合策略。     

Hicksian Income in the Conceptual Framework

In seeking to replace accounting conventions by concepts in the pursuit of principles‐based standards, the FASB/IASB joint project on the conceptual framework has grounded its approach on a well‐known definition of income by Hicks. We welcome the use of theories by accounting standard setters and practitioners, if theories are considered in their entirety. Cherry‐picking parts of a theory to serve the immediate aims of standard setters risks distortion. Misunderstanding and misinterpretation of the selected elements of a theory increase the distortion even more. We argue that the Boards have selectively picked from, misquoted, misunderstood and misapplied Hicksian concepts of income. We explore some alternative approaches to income suggested by Hicks and by other writers, and their relevance to current debates over the Boards' conceptual framework and standards. Our conclusions about how accounting concepts and conventions should be related differ from those of the Boards. Executive stock options (ESOs) provide an illustrative case study.     

线上销售与未来股票收益

本文通过分析相关上市公司在电商平台的线上销售数据,发现线上销售增长可以预测未来股票收益。根据线上销售增长率构建投资组合可以获得月均1.27%的超额收益,经三因子、五因子模型调整后收益率分别为1.40%和1.35%,并且该超额收益在较长时间内不会逆转。横截面回归结果显示,线上销售增长与未来股票收益显著正相关,并在控制其他市场异象因子后仍然显著。此外,本文还发现线上销售数据的预测能力主要集中在投资者关注有限、线上销售占比高以及套利成本高的公司,其投资价值来源于对公司未来基本面信息的预测能力。进一步研究表明,同时利用线上销售指标和营业收入指标进行投资可以获得更高的超额收益。在考虑业绩预告和业绩快报对线上销售指标预测能力的潜在影响后,结果依然稳健。     

Bank earnings management and performance reporting of comprehensive income

FASB’s ASU 2011-05 mandated that comprehensive income (CI) and other comprehensive income (OCI) be reported in performance statements (a single income statement or a separate statement of CI) rather than equity statements. Employing a difference-in-differences research design with ASU 2011-05 as the treatment, I find that presenting accounting information in different statements affects bank earnings management, specifically, presenting CI and OCI in performance statements (especially in single-statements with net income) reduces earnings management through selective sales of available-for-sale (AFS) securities in the banking industry. I also find that the influence of ASU 2011-05 is primarily on banks with high equity incentives in the CEO’s compensation package or less CEO job security. Additional analyses suggest that performance reporting of CI and OCI increases the predictive ability of realized gains and losses of AFS securities; however, banks may manage loan loss provision as a substitute strategy when they have to decrease selective sales of AFS securities.