Costs of Accounting to Lenders: Canadian Evidence

Do new accounting pronouncements impose costs on firms with accounting-based restrictions in their public lending agreements? Previous studies have not found significant, adverse share price reactions to such pronouncements. This paper posits that management is concerned with the total costs of the monitoring policies used for reporting to lenders, and that share price reactions are likely to comprise only a small portion of those costs. The episode of mandatory lease capitalisation in Canada is used to test some predictions that are consistent with this expanded view of the costs of accounting to lenders. Lessees ‘public lending agreements were examined to see if they stipulated restrictions based on accounting numbers; and, if they did, whether the constraints were based on GAAP (generally accepted accounting principles) or TAP (tailored accounting principles). The evidence strongly supports the hypothesis that there are costs of accounting to lenders; but these costs are unlikely to be observed by researchers who look only for adverse share price reactions to mandated accounting changes. It also indicates that Canadian standards setters were sensitive to lessees’ accounting costs.     

THE REACTION TO CURRENT COST ACCOUNTING PROPOSALS BY GOVERNMENT REGULATORY AUTHORITIES*

The aim of this paper is to investigate the reaction to recent pronouncements on inflation accounting by two government regulatory authorities who have been major users of accounting data — the Monopolies and Mergers Commission in the United Kingdom and the Prices Justification Tribunal in Australia. The evidence indicates that:

• 1 the Monopolies Commission reacted quickly to accounting pronouncements and either allowed or requested companies to present accounting data based on current values; and
• 2 the PJT reacted to the CCA (and other) proposals by stating continually that it would “take into account” the effect of inflation on company returns, but was in a quandary on how to allow for the extremely low and sometimes negative CCA rates of return. The paper concludes by examining some of the reasons why the CCA proposals are not suitable for calculating accounting rates of return for prices justification purposes.

     

Inconsistency in U.S. Accounting Standards: The Treatment of Interest

Consistency is an essential part of financial reporting: it applies both to the continuous use of the same accounting principles by an entity from period to period, and to consistency between various accounting principles used by the same entity. In the development of accounting standards, risks to users of inconsistencies can be reduced by good disclosure requirements, particularly so between various pronouncements. A study examining the treatment of interest found inconsistencies in two-thirds of the relevant U.S. GAAP pronouncements.     

Revenue and expense recognition cases developed from the accounting and auditing enforcement releases

This paper presents four revenue and expense recognition cases to be used in the intermediate accounting sequence. The cases are adapted from Accounting and Auditing Enforcement Releases, so they are based on real-world situations. Each case requires students to search accounting databases to find the appropriate pronouncements or other accounting guidance. Students must also synthesize the information to provide compelling arguments for their proposed solutions. The cases can help develop critical thinking skills in unstructured environments while reinforcing key financial accounting concepts.     

Exploring Accounting and Democratic Governance: A Study Comparing a Norwegian and a Russian County

Interpretations and explanations of experience that make consequences interpretable and actions imaginable are said to be given by accounts. Formal accounting systems used in economic, social and political institutions are seen as portraying their political realities. The purpose of this study is to explore connections and tensions between the realities portrayed in the accounting systems and the governance structures of local governments in two counties, one in Norway and one in Russia. The formal accounting and governmental systems of these two counties are described, analyzed and compared using accounting and democratic governance perspectives. The article ends with a discussion of interrelationships and tensions between accounting and democratic governance. Through comparing the democratic governing structures of these two counties with the accounting systems employed, three main conclusions are presented. Firstly, it is shown that principal–agent relations influence accounting procedures that symbolize democratic governance. Secondly, the accounting language applied does not portray local politicians. Thirdly, accounting norms do not reflect democracy and democratic governance. In summary, the study shows that even very formalized accounting offers flexibility by way of giving meaning to processes and structures in organizations characterized by strictly formalized structures.     

Accounting For Financial Instruments: An Overview

The explosion in the growth of derivative financial instruments in recent years is a major cause of concern for accounting standard-setters. This paper considers the reasons for the growth and identifies the accounting problems associated with these instruments. The relevant United States and Australian pronouncements are discussed. Major proposals in ED 59 Financial Instruments are outlined and two critical issues concerning the automatic writedown of financial assets and the treatment of anticipatory hedges are identified. ED 59 contains similar proposals to E 48 issued by the IASC. However, there are some differences between the two documents and these are discussed. The paper also considers possible developments in accounting for financial instruments.     

Incorporating authoritative pronouncements with intermediate and advanced accounting syllabi

Incorporating authoritative pronouncements with intermediate and advanced accounting syllabi is a relatively simple means of introducing students to research, familiarizing them with the primary authoritative sources for accounting standards, and teaching them to interpret, analyze, and apply technical material they will be using immediately on graduation. The incorporation insures that topics covered in the courses are updated with respect to developments occurring subsequent to the printing of the textbooks in use and may provide greater in-depth coverage of the topics than is otherwise possible.     

Analogical Reasoning and the case of Accounting for Cashback Programs in the Casino Industry

The primary objective of this instructional case is to develop students' analogical reasoning skills. This objective is accomplished by directing the students to resolve an actual accounting issue involving an unstructured, open-ended, and real situation for which there are no specific authoritative pronouncements. To resolve the issue, students must draw upon and apply their knowledge and understanding of accounting principles as embodied in GAAP. Students are likely to disagree on the proper accounting treatment to be used in this situation. Therefore, the case can also be used to expose them to issues arising in the context of resolving disagreements in a group setting.     

AN EMPIRICAL EVALUATION OF THE COMMUNICATION OF AUTHORITATIVE PRONOUNCEMENTS IN ACCOUNTING

The cloze procedure, a psycholinguistic technique, was used to empirically evaluate the communication of authoritative pronouncements in accounting. Three of the most recent pronouncements of five different authoritative bodies were tested via a random sample of 750 certified public accountants, 750 academic accountants, and 600 private accountants. Using the cloze procedure's 57% criterion level, evidence was found (contrary to expectations) that communication problems do not exist with either authoritative bodies or classes of accountants. However, evidence was found (as expected) that communication problems do exist with two of the fifteen authoritative pronouncements tested. I want to express my sincerest appreciation to the City University of New York PSC-BHE Research Award Program for the grant that made this project possible.     

Generic Skills in Audit Education

The academic literature and higher education benchmark statements identify groups of skills that are desirable both for students seeking employment and for employers seeking to recruit students. Professional accounting education pronouncements also stipulate skills that are necessary for an individual to possess in order to act as a competent accountant and auditor. Through a questionnaire survey, this research examines: (i) which of these skills audit and accounting practitioners expect UK universities to teach; (ii) which skills audit and accounting academics believe are important for students to acquire; (iii) which skills audit academics believe that employers require; and (iv) which skills audit academics teach in the UK. Institutional theory is used to develop and interpret this research.     

The birth of a nation: Accounting and Canada’s first nations, 1860–1900

The 1860–1900 period was both the “birth” of Canada but also the birth and institutionalization of a specific set of social relations between the federal government and First Nations peoples. This study examines the roles played by accounting and funding relations within the process of nation building. Throughout this formative period in Canada’s history, governance was attempted via the introduction of financial legislation and enacted by the Indian Department and agents in the field. As our analysis highlights, legislative initiatives, Indian Department pronouncements and the activities of agents imposed, enlisted and implied a variety of accounting technologies. This study not only explores how the federal government has used accounting/funding mechanisms in the attempt to translate government policy regarding indigenous peoples into practice but also provides a history of the present by examining the historical consequences of these interventions.     

Practice versus Prescription in the Disclosure and Recognition of Derivatives

The contentious issue of the recognition and measurement of derivative instruments is again high on the Australian standard-setting agenda, following pronouncements by the International Accounting Standards Committee (USC) and Financial Accounting Standards Board (FASB). This study investigates firms' disclosure of derivative accounting policies and measurement practices pursuant to the introduction of AASB 1033. A lack of clarity and completeness in the disclosures suggests that supplementary requirements are necessary. A preference for using hedge accounting is also apparent. Should an Australian standard disallow or impose conditions on hedge accounting, fims will need to alter their current accounting practices and risk management strategies and they will probably reassess their use of derivatives.     

Discourses surrounding the evolution of the IASB/FASB Conceptual Framework: What they reveal about the “living law” of accounting

The International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB) recently published the final version of Chapter 1 of their joint Conceptual Framework for Financial Reporting (IASB/FASB, 2010). In this article, we focus on two of the key issues addressed in Chapter 1: stewardship and the definition of the primary user groups of financial statements. To address the discourses surrounding the evolution of Chapter 1, we introduce the concept of “living law” from sociological jurisprudence into accounting scholarship. We first trace the role of stewardship/accountability in the evolution—from antiquity to the present day—of the living law of accounting. We then explore the origin, nature, and implications—from a living law perspective—of the moral traditions associated with stewardship/accountability. Our analysis suggests that stewardship has been, and continues to be, embedded in the living law of accounting—notwithstanding the formal pronouncements of standard setters. We also examine the social accounting project from a living law perspective and we suggest that such an analysis provides new possibilities for addressing core social accounting concerns. We conclude by arguing that, particularly in light of the far reaching impact of the neoliberal agenda, there is an urgent need for scholars in both contemporary “social” and “mainstream” accounting to recognize and build upon their shared living law heritage rooted in the age-old traditions of stewardship/accountability.     

Application of the Fair-Value Concept: Evidence from Australian Legal Decisions

The concept of "fair value" is increasingly being incorporated into Australian and international accounting standards and pronouncements. The fair-value concept has also been established and developed in Australian legal cases, and an examination of pertinent court decisions is of interest to accountants. By examining and analysing relevant cases, the paper highlights some of the principles and difficulties involved in operationalising the fair-value concept for accounting and legal purposes, particularly in situations where the asset being valued is subject to imperfect or incomplete markets.     

An examination of the work of the Accounting Education Change Commission 1989–1992

This paper reviews the literature concerning the Accounting Education Change commission(AECC)

and the most recent attempts to create a climate of change within accounting education in the United States.The background leading up to the creation of the AECC is briefly stated, followed by a commentary on the activities and pronouncements issued by the AECC so far. The paper concludes with an evaluation of the performance of the AECC project to date, and consideration of the implications for accounting education in other english-speaking countries.     

Informal communications, nonformal communications and mentoring in public accounting firms

Control is important within public accounting firms for a variety of reasons. Yet professional pronouncements are limited in providing guidance to auditors in the form of formally stated rules and requirements. The purpose of this article is to examine the non-formalized, non-rule oriented approaches employed in large public accounting firms to effect control. More specifically, it is directed towards understanding the possible roles of informal and nonformal communications and mentoring in managing public accounting firms.Based upon evidence gathered using a naturalistic, qualitative research methodology, it is concluded that: (1) informal communications exist in public accounting firms, play a limited role in informing organizational members of the politics and power within the organization, and are of some benefit to lower level individuals; and (2) nonformal communications and mentoring are involved with the performance of audit tasks, socialization of the individual firm, and instruction as to politics and power within the organization, and benefit the protege, mentor and firm, though at some cost. Implications of the study are also explored.     

Distributable Profit in Britain Since 1980: A Critical Appraisal

This paper critically evaluates the 1980 introduction into British company law of a new European-based definition of distributable profit. The concept is defined in terms of cumulative realized profits but the law left to the British accounting profession the task of specifying what constituted realized profits. A review of British professional accounting exposure drafts and standards since 1980 reveals omissions, inconsistencies and ambiguities in the treatment of realized profits by the minority of those pronouncements that discussed the term. Consequently, since 1980, distributable profit has remained a flawed concept.     

The usefulness of current-cost measures of debt in assessing systematic risk: extending the provisions of SFAS no. 33

Current-cost disclosure requirements of SFAS No. 33, Financial Reporting and Changing Prices (Financial Accounting Standards Board [FASB] 1979), as amended by a recent exposure draft, Financial Reporting and Changing Prices: Current Cost Information (FASB 1984), focus on the asset side of the balance sheet. Both pronouncements exclude liabilities and preferred stock from their requirements for current-cost disclosure. Evidence presented here suggests that the usefulness of current-cost disclosures in assessing systematic risk is enhanced significantly by expanding these disclosure requirements to include liabilities and preferred stock. Decision usefulness is emphasized by accounting regulators as an important financial reporting objective. Considering the results presented here, the addition of current-cost measures of liabilities and preferred stock to the disclosure requirements of the exposure draft appears to be consistent with that objective. Further, the costs involved are anticipated to be minimal. The implication is that society can benefit from these additional disclosures through a more effective allocation of resources at minimal incremental cost.     

CURRENT COST DEPRECIATION: A PROGRAMMING PERSPECTIVE

Professional accounting bodies in the United Kingdom, the United States and Canada are requiring disclosure of current cost of capital equipment and related depreciation. In this paper the ability of a normative programming model of the firm to produce depreciation allocations in accordance with economic depreciation is examined, and the model's depreciation allocations are compared with current professional pronouncements. It is found that if the firm can costlessly adjust capacity period-by-period, current cost depreciation is on strong theoretical grounds. Otherwise depreciation should be based on value-use.     

Stock price reaction and value relevance of recognition versus disclosure: the case of stock-based compensation

This study examines the equity price reaction to the pronouncements related to accounting for stock-based compensation and assesses the value relevance of recognition versus disclosure in financial reporting. We document that firms exhibit significant abnormal returns around the issuance of the Exposure Drafts proposing to require recognition of stock-based compensation costs, and also around the event reversing that decision to require disclosure only (while encouraging recognition). We also document that the abnormal returns are most pronounced for high-tech, high-growth, and start-up firms. Our results are consistent with the contracting theory, and show that disclosure is not a substitute for recognition.