Materiality Judgments and Disclosure of Retiree Health Care Costs Under SFAS No. 81

Generally, researchers have difficulty empirically examining materiality judgments because amounts designated as immaterial are not disclosed. However, reporting requirements under SFAS No. 106 provide a unique opportunity to evaluate expense amounts designated immaterial under SFAS No. 81. We use the cumulative effect associated with the adoption of SFAS No. 106 to evaluate prior management materiality judgments. Univariate and logistic regression results suggest that the decision to disclose SFAS No. 81 costs is positively related to our measures of plan materiality. However, our results also suggest that voluntary disclosure factors may have influenced the disclosure decision.     

Accounting for complex investment transactions

This case study exposes students to complex investment transactions. You must document the following: (1) apply the appropriate accounting literature along with its provisions and justify the order of its application; (2) identify and interpret key facts to classify the given investments and relations; (3) discuss the choice of key assumptions that are central to the analysis; (4) interpret the nature of all investment relations with Holdings; discuss all Owner level and below relations; (5) discuss how accounting for varied levels of influence impact the items reported on/off the face of investors' financial statements; (6) from DT's perspective, discuss the potential positives and negatives of its arrangement with Owner with respect to Holdings; and (7) after analyzing additional facts, discuss the nature of the relations of Simon and Herb III with Owner.     

Introduction to and overview of SFAS No. 158: A visual presentation

This short teaching note introduces a visual exhibit to help accounting students understand and learn SFAS No. 158 accounting for defined pension plans.     

The Effect of SFAS No. 131 on the Cross-segment Variability of Profits Reported by Multiple Segment Firms

Our study assesses whether SFAS No. 131 improved disclosure about the diversity of multiple segment firms’ operations. We find a post-SFAS No. 131 increase in cross-segment variability of segment profits, an increase in the association between reported and inherent cross-segment variability, and an increase in association between reported variability and capital market incentives to disclose. We interpret the results as evidence that SFAS No. 131 increased the transparency of segment profitability disclosures, and as indicating SFAS No. 131 allowed firms depending more on external financing to disclose more about differences in segment profitability.

The influence of disclosure policy on analyst behavior: The case of segment data

More transparent disclosure reduces the effort required to process reported information. The adoption of Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information, increased the transparency of segment information reported by diversified firms. Using a long sample window (1988–2007) and a difference-in-difference design, this paper examines the association between corporate diversification and analysts' efforts—as reflected in analysts' idiosyncratic information precision and analyst consensus—across the old SFAS No. 14 and the new SFAS No. 131 segment reporting regime. Results indicate that SFAS No. 131 has improved segment reporting such that analysts need to invest relatively less effort generating idiosyncratic information when issuing forecasts for diversified firms. Given that analysts' information gathering efforts are costly, these findings are of interest to policy makers when assessing whether the intended reporting objectives of SFAS No. 131 are being met in a cost effective manner.     

Managerial discretion and the economic determinants of the disclosed volatility parameter for valuing ESOs

This study investigates the determinants of the expected stock-price volatility assumption that firms use in estimating ESO values and thus option expense. We find that, consistent with the guidance of FAS 123, firms use both historical and implied volatility in deriving the expected volatility parameter. We also find, however, that the importance of each of the two variables in explaining disclosed volatility relates inversely to their values, which results in a reduction in expected volatility and thus option value. This can be interpreted as managers opportunistically use the discretion in estimating expected volatility afforded by FAS 123. Consistent with this, we find that managerial incentives or ability to understate option value play a key role in this behavior. Since discretion in estimating expected volatility is common to both FAS 123 and 123(R), our analysis has important implications for market participants as well as regulators.

Improving consistency in interpreting SFAS 5 probability phrases

Statement of Financial Accounting Standard No. 5, Accounting for Contingencies (SFAS No. 5), relies on verbal probability phrases to guide recognition or disclosure decisions for loss contingencies. One of the challenges facing accountants is that verbal probability terms are vague and may have multiple meanings; thus, different accountants may interpret the same probability phrase differently. Given this background, our study addresses the difficulty of interpreting verbal probability phrases and explores a simple way to improve judgment quality. Evidence from our experiment suggests that supplementing verbal probabilities with their corresponding numerical values reduces interpersonal variability in interpreting SFAS No. 5 terms.     

Do investors misprice components of net periodic pension cost?

We examine whether and how investors misprice the components of net periodic pension cost under SFAS No. 87 and 158. We find that investors appear to have difficulty in understanding the transitory feature of other net periodic pension cost (PPOPCC) and thus overestimate its persistence, which in turn leads to the mispricing of PPOPCC in the pre‐158 period. We also find that SFAS No. 158 appears to reduce the mispricing of PPOPCC, suggesting a positive effect of SFAS No. 158 on investors' valuation of pension items in the income statement. Additional analysis suggests that investors also overestimate the persistence of, and thus misprice, pension‐related cash flows and accruals in the pre‐158 period and that SFAS No. 158 reduces the mispricing of pension‐related cash flows and accruals.     

Accountability Beyond the Headlines: Why Not‐for‐profit Organisations Need to Communicate Their Own Expenditure Stories

This paper analyses the expenditure patterns of 97 Australian international aid and development organisations, and examines the extent to which they disclose information about their expenditure in order to discharge their accountability. Not‐for‐profit (NFP) expenditure attracts media attention, with perceptions of excessive costs potentially damaging stakeholder trust in NFP organisations. This makes it important for organisations to be proactive in communicating their expenditure stories to stakeholders, rather than being judged on their performance by standardised expenditure metrics. By highlighting what it costs to ensure longer‐term operational capability, NFP organisations will contribute to the discharge of their financial accountability and play a part in educating all stakeholders about the dangers of relying on a single metric.     

Fair value disclosures and crash risk

In response to the public criticism of the inadequate disclosures mandated by SFAS No. 157, Fair Value Measurements, the FASB issued ASU (Accounting Standards Update) 2010–06, Improving Disclosures about Fair Value Measurements, and ASU 2011–04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements, in an effort to increase the reporting transparency. We examine whether the increased fair value disclosures required by these two updates effectively decrease crash risk, defined as the frequency of extreme negative stock returns. In support of the hypothesis, we find that increased transparency from these updates reduces crash risk among U.S. banking firms and that the reduction is greater in banks that have a higher level of Level 3 financial assets.     

Economic consequences of mandatory GAAP changes: The case of SFAS No. 158

This study examines management's reaction to the SFAS No. 158 requirement to recognize previously disclosed post-retirement benefit obligations on the balance sheet. The results indicate that managers attempted to mitigate the impact of the standard by increasing the assumed pension discount rate in subsequent periods. Further, the discount rate choice was related to the magnitude of the SFAS No. 158 balance sheet adjustment. Specifically, firms with larger required liability adjustments and more volatile pension assets and obligations were more likely to increase their discount rates. The findings have important implications for research regarding the economic consequences of accounting regulations and in particular the debate surrounding recognition versus disclosure since they indicate that managers react to the relocation of information from the financial statement footnotes to the balance sheet.     

Information content of mandatory quarterly foreign sales data of U.S. multinational companies under SFAS 131

This paper investigates the information content of mandatorily disclosed quarterly foreign sales data of U.S. multinational companies under SFAS No. 131. We examine two types of companies. Predisclosing companies had voluntarily disclosed quarterly foreign sales data prior to implementation of SFAS No. 131. Non-predisclosing companies had not voluntarily disclosed quarterly foreign sales data prior to implementation of SFAS No. 131. We analyze the behavior of stock prices surrounding the filing date of the 10Q using short-window event study methodology and the market model for the initial years after enacting SFAS No. 131. We discover that the quarterly foreign sales data has information content to investors for both predisclosing firms and non-predisclosing firms except for 1 year. The data has no information content for non-predisclosing companies during the first year of implementation of SFAS No. 131. Except for the first year of implementation of SFAS No. 131, we find no difference in the information content of this data between predisclosing and non-predisclosing companies.     

Voluntary Disclosures as a Mechanism for Defining Entity Status in Australian Not‐for‐Profit Organisations

This study examines managerial efforts to portray an entity's not‐for‐profit (NFP) status based on voluntary disclosure practices. The annual report text of 61 NFPs are analysed in accordance with Salamon and Anheier's (1997) NFP definitional framework. Results indicate a predominant application of the structural‐operational definition. Furthermore, the ‘organised’ attribute of this definition prevails over the ‘non‐profit‐distributing’ criterion that has been advocated by various parties. Standard‐setting bodies may want to consider: (1) NFP management perspectives in any revised NFP definition; and (2) greater clarity in conceptual framework and standard‐setting arrangements to improve overall transparency in NFP reporting practices.     

The change in the value relevance of accounting information after mergers and acquisitions: evidence from the adoption of SFAS 141(R)

This study examines how and why investors change the use of their information sources in valuation between book value and earnings after mergers and acquisitions (M&A) in both pre- and post-SFAS 141(R) periods. We find that investors generally put less weight on earnings but more weight on book value after M&A than before M&A, and that such a change is particularly strong after the adoption of SFAS 141(R). By looking at goodwill, other intangible assets and other balance sheet accounts that SFAS 141(R) amended, we further find that SFAS 141(R) improves the value relevance of book value components after M&A.     

Not‐For‐Profit Ratios for Financial Resilience and Internal Accountability: A Study of Australian International Aid Organisations

Not‐for‐profit (NFP) financial ratio research has focused primarily on organisational efficiency measurements for external stakeholders. Ratios that also capture information about stability, capacity (liquidity), gearing and sustainability enable an assessment of financial resilience. They are thus valuable tools that can provide a framework of internal accountability between boards and management. The establishment of an Australian NFP regulator highlights the importance of NFP sustainability, and affirms the timeliness of this paper. We propose a suite of key financial ratios for use by NFP boards and management, and demonstrate its practical usefulness by applying the ratios to financial data from the 2009 reports of ACFID (Australian Council for International Development) affiliated international aid organisations.     

Characteristics of UK firms related to timing of adoption of Statement of Standard Accounting Practice No. 20

This study examines whether the timing of adoption of the UK Statement of Standard Accounting Practice No. 20 ‘Foreign Currency Translation’ depended on firms’ financial characteristics. Consistent with US studies, we find that early adopters tended to be larger firms, and that variables, such as growth options, profitability, leverage and management payout, have strong predictive power. In general, the decision to adopt the Statement of Standard Accounting Practice No. 20 did not appear to adversely affect the profitability measures or dividend payout. Firms tended to adopt when the adverse economic consequences of the adoption were likely to be minimal. They also appeared to defer the adoption of the standard to influence their financial performance and, hence, to achieve certain corporate financial objectives.     

Defining the Reporting Entity in the Not‐for‐profit Public Sector: Implementation Issues Associated with the Control Test

This paper reports the main findings of a research project carried out on behalf of the Australian Accounting Standards Board (AASB) and the New Zealand Financial Reporting Standards Board. The purpose of the research is to inform standard setters about implementation issues that had been encountered in the not‐for‐profit (NFP) public sector when applying the control concept in AASB 127, Consolidated and Separate Financial Statements. The intention is to use the findings to inform proposed implementation guidance for AASB 10, Consolidated Financial Statements. Data were collected via a literature review and meetings with various NFP public sector constituents. Identified issues were either conceptual in nature (for example, who are the relevant users of NFP public sector general purpose financial statements and what are their needs?) or related to implementation concerns (for example, is the power exerted by one NFP public sector entity over another of an ‘ownership’ or a ‘regulatory’ form?). The findings give rise to several suggested actions that standard setters could take in providing useful guidance to NFP public sector constituents.     

Managing specific accruals vs. structuring transactions: Evidence from banking industry

This study investigates earnings management through managing specific accruals vs. structuring transactions in the banking industry. This paper explores the circumstances under which banks manipulate loan loss provisions vs. circumstances that lead banks to structure loan sales and securitizations for the purpose of achieving earnings benchmarks. Empirical results show that banks manage earnings through loan loss provisions, before resorting to structuring transactions, to avoid small earnings decreases and or just meet or beat analysts' forecasts. The findings imply that structuring loan sales and securitizations is more likely to be used as a secondary instrument. In addition, I find that the earnings of banks with lower discretionary loan loss provisions and higher discretionary gains from loan sales and securitizations are priced more negatively, suggesting that investors impose incremental penalties on the joint use of loan loss provisions and gains from loan sales and securitization to meet or beat earnings benchmarks.     

Australian not‐for‐profit sector views on the conceptual framework,accounting standards and accounting information

In this paper, we examine the conceptual framework, accounting standards and accounting information relevant to the not‐for‐profit (NFP) sector. Based on the responses of 242 Australian NFP managers, we find support for the inclusion of accountability in the conceptual framework, and for a common set of accounting standards across NFP and for‐profit sectors with additional standards or paragraphs to recognise NFP specific issues. Respondents also rated information within general‐purpose financial reports to be useful for decision making within their organisations. We offer suggestions as to what our findings mean for the development of accounting standards for the NFP sector.     

What drives firms' decisions to lobby and determinants of their lobbying positions: Evidence from firms' comment letter submissions during FASB's stock option expensing proposal in 2004

I examine what drives firms' decisions on whether or not to lobby and, if so, whether to oppose or support FASB's 2004 option expensing proposal. Given that the accounting treatment in place and the political climate were different in 2004 than in 1993, it becomes interesting to examine whether the incentives driving managerial lobbying process have changed. Indeed, in contrast to prior research that finds top managers' option compensation being the main incentive to oppose option expensing in 1993, firms' closeness to debt constraints is the main incentive to oppose option expensing in 2004. I also find that firms that are smaller, that are in an industry with peers who have lobbied, that have board interlocks with firms that have lobbied, and that have higher board independence are more likely to self-select to lobby. While prior accounting lobbying research has examined firms' decisions to lobby and firms' decision on their lobbying positions independently, this study improves on prior research methodology by using a two-level nested logit model and examines both decisions.