Minimum tax legislation and its effect on corporate financial reporting: A comparative analysis between US and India: a discussion

In this study, the authors investigate imposing a minimum alternative tax (MAT) on Indian corporations during the 1996–1997 budget years. The authors have two objectives: to assess the new legislation's impact on tax revenue, and to determine how corporations responded to its imposition because of its explicit link to financial reporting. They first assess whether, on average, firms with low estimated tax rates before the imposition paid higher taxes after imposition and find, overall, that corporations paid, in total, a greater amount of their income in taxes. They also find that the largest firms in their sample experienced a smaller increase in their effective tax rates than smaller firms did. Next, they assess whether MAT-affected firms altered their financial statement reporting to reduce exposure to the MAT. Specifically, they assess whether a greater portion of MAT-affected firms changed their financial statement depreciation policies than non-MAT-affected firms. They report that, for their sample, a significant number of MAT-affected firms increased their depreciation rate after MAT imposition. The proportion of non-MAT-affected firms changing depreciation rates after imposition was not significant. They also partition MAT- and non-MAT-affected firms on increasing or decreasing book profit and find that MAT-affected firms made proportionally more changes. The authors conclude that the MAT appeared to have increased horizontal equity among taxpayers in India, but its tax revenue enhancement potential is limited by its scope, limited applicability, and avoidance behavior by affected corporations. My comments are directed at what I perceive to be motivational and methodological issues in the paper and the conclusions we can draw from the current representation.     

‘Deprival value’ vs. ‘fair value’ measurement for contract liabilities: how to resolve the ‘revenue recognition’ conundrum?

Revenue recognition and measurement principles can conflict with liability recognition and measurement principles. We explore here under different market conditions when the two measurement approaches coincide and when they conflict. We show that where entities expect to earn ‘super profits’ (residual income) the conceptual conflict is exacerbated by the adoption of ‘fair value’ (FV) as the measurement basis for assets and liabilities rather than the more theoretically grounded approach of ‘deprival value/relief value’ (DV/RV) which better reflects the impact of, and rational management response to, varying market conditions. However, while the problems of balance sheet liability and revenue recognition, and the related problems of income statement presentation, can be resolved by the application of DV/RV reasoning, this is not sufficient fully to resolve issues of the appropriate timing of profit recognition. Performance measurement issues still need to be addressed directly. The standard setters' current projects on ‘revenue recognition’, ‘insurance contracts’ and ‘measurement’ therefore need broadening to consider the pervasive issue of accounting for internally generated intangibles.     

Progression and revenue effects of income tax reform

Usually, only initial revenue effects of personal income tax reforms are considered. However, a tax reform characterized by base broadening in exchange for rate reduction can reduce the income elasticity of tax revenue. In that case, the increase in revenue after income growth will be relatively smaller: the tax reform has a negative effect on revenue in the second period. Using the microtax model of the Central Planning Bureau we simulated the effects of the Dutch Oort reform 1990 on revenue elasticities and, consequently, on tax revenue. The income tax revenue elasticity declined by 17 percent which caused an additional revenue loss of 0.6 percent in 1990, rising to 3.8 percent in 1993.     

Accounting complexity, misreporting, and the consequences of misreporting

I examine whether accounting complexity in the area of revenue recognition increases the probability of restating reported revenue. I measure revenue recognition complexity using the number of words and recognition methods from the revenue recognition disclosure in the 10-K and a factor score based on the number of words and methods. Tests reveal that revenue recognition complexity increases the probability of revenue restatements, and these restatements are the result of both intentional and unintentional misreporting. Furthermore, complexity moderates the consequences of restatement—lower incidence of AAERs, less negative restatement announcement returns, and lower subsequent CEO turnover—suggesting that stakeholders of the firm consider accounting complexity when responding to misreporting.     

Strategic revenue recognition to achieve earnings benchmarks

I examine whether managers use discretion in revenue recognition to avoid three earnings benchmarks. I find that managers use discretion in both accrued revenue (i.e., accounts receivable) and deferred revenue (i.e., advances from customers) to avoid negative earnings surprises, but find little evidence that discretion is used to avoid losses or earnings decreases. For a common sample of firms with both deferred revenue and accounts receivable, I find evidence that managers do not prefer to exercise discretion in either account. However, further tests show that managers preferred to use discretion in deferred revenue before the Sarbanes–Oxley Act of 2002 went into effect, consistent with them choosing to manage an account with the lowest real costs to the firm (i.e., future cash consequences). My results suggest that the revenue recognition joint project undertaken by the FASB and IASB to reduce managerial estimation in revenue recognition may have the unintended consequence of leading to greater real costs imposed on shareholders as firms are likely to use even greater discretion in accounts receivable.     

On the Definitions of Income and Revenue in IFRS

In a previous issue of this journal, Richard Barker addressed some problems with the IFRS definitions of income and profit. I apply his conclusions to the definition of ‘revenue’ that he did not cover. I point out other difficulties with the definition: the implication that some sales to customers are not revenue, the implication that receipts to settle accounts receivable (or to sell receivables to a bank) are revenue, and the out-dated term ‘ordinary activities’. Most of the problems with the definition of revenue remain in the IASB's exposure drafts of 2010 and 2011. I also suggest that, despite IASB statements, fair value gains on assets should not be considered to be revenue, and nor should the financial receipts of non-financial companies. This leads to the suggestion that a replacement for IAS 18 should deal with the wider topic of ‘income’, and then define ‘revenue’ more narrowly than at present as the gross increase in equity resulting from inflows from customers for certain types of performance under contracts.     

湖南省税收收入与经济增长的相关分析

运用协整检验和误差修正模型,以湖南省1970～2004 年的数据为样本,对湖南省税收收入与经济增长相关性进行的实证分析表明:湖南省经济增长与税收增长基本协调,但是,在湖南省税收收入高增长的同时,也存在税收收入的弹性相对偏低的问题.这一方面说明税务部门征收管理工作的进步,另一方面也说明非税收入的规模过大,挤占了税收增长的空间.为此,应继续加强征收管理;优化收入结构,强化非税收入管理;优化产业布局,大力发展制造业和服务业.     

Legal Certainty,European-ness and Realpolitik

The stimulus for this paper is an article published in 2005 by Wüstemann and Kierzek together with a critical comment thereon by Nobes in 2006. The original paper discusses the IFRS proposals, and the philosophy they represent, concerning revenue recognition. Nobes, in terms which this author broadly supports, criticises their revenue recognition proposals in some detail, together, again rightly, with some of their assumptions. This paper, rather than reopening these specific issues, considers the explicit statement, for example, p. 71, and elsewhere, that there is a ‘requirement of legal certainty in the European Union’, a statement which is given neither logical justification nor supporting references. IAS, EU requirements and GoB as a national concept are all argued to be flexible, judgemental and, necessarily and permanently, devoid of ‘legal certainty’. Implications of this analysis for regulation, harmonisation and for educational programmes in today's global environment are considered.     

Can Banks in Emerging Economies Benefit from Revenue Diversification?

This paper investigates the effect of revenue diversification on bank performance and risk. Using a panel dataset of 226 listed banks across 11 emerging economies and a new methodological approach, System Generalized Method of Moments estimators (System GMM), the results in this paper provide empirical evidence of the impact of the observed shift towards non-interest income generating activities on insolvency risk and bank performance. The core finding is that diversification across and within both interest and non-interest income generating activities decrease insolvency risk and enhance profitability. The results also show that these benefits are largest for banks with moderate risk exposures. By extension, these results have significant strategic implications for bank managers, regulators and supervisors who share a common interest in boosting bank performance and stability.     

分项收入不平等效应与收入结构的优化

从分项收入角度考察城乡收入不平等,不仅能判断产生收入不平等的原因,还能判断什么分项收入有利于增加收入总量;不仅能量化收入不平等效应,还能根据收入不平等效应来优化收入结构。研究发现,分项收入具有性质不同、大小不等的收入不平等效应,其中工资性收入扩大收入不平等的效应最强、转移性收入次之、财产性收入最小;经营性收入是唯一具有缩小收入不平等效应的分项收入。据此,我们认为,城乡居民收入结构优化的方向应该是,稳定维持工资性收入、适当调整转移性收入、适度控制财产性收入并努力增加经营性收入。     

Revenue Recognition under IFRS Revisited: Conceptual Models,Current Proposals and Practical Consequences

Since 2002, the FASB and the IASB have been undertaking a joint project on the revision and convergence of US GAAP and IFRS revenue recognition. Even though the outcome of the project is still open, the project's course as well as trends in recently published IFRS and other current IASB projects suggest that existing earnings-based and realisation-based IFRS revenue recognition criteria are likely to be replaced by a radically new approach. This paper demonstrates the inconsistencies in current IFRS revenue recognition that have triggered the project and then presents and discusses three conceptually different revenue recognition models that are internationally debated at present. The paper concludes that a major revision of existing IFRS revenue recognition as proposed by the FASB and the IASB is not required. It is argued that the perceived deficiencies should rather be solved on the basis of current transaction-based IFRS revenue criteria.     

Does Private Country-by-Country Reporting Deter Tax Avoidance and Income Shifting? Evidence from BEPS Action Item 13

To combat tax avoidance by multinational corporations, the Organisation for Economic Co-operation and Development introduced country-by-country reporting (CbCr), requiring firms to provide tax authorities with a geographic breakdown of their profitability and activities. Treating the introduction of CbCr in the European Union as a shock to private disclosure requirements, this study examines the effect on corporate tax outcomes. Exploiting the €750 million revenue threshold for disclosure and employing regression-discontinuity and difference-in-differences designs, I document a 1–2 percentage point increase in consolidated GAAP effective tax rates among affected firms. I also find evidence consistent with a decline in tax-motivated income shifting, starting in 2018. These results suggest that, although private geographic disclosures can deter corporate tax avoidance, so far, the regulations have had a limited effect on tax-motivated income shifting. My findings have policy implications for the global implementation of private CbCr and extend the debate on public versus private disclosure of tax information.     

Resource rents; when to spend and how to save

Countries with substantial revenues from renewable resources face a complex range of revenue management issues. What is the optimal time profile of consumption from the revenue, and how much should be saved? Should saving be invested in foreign funds or in the domestic economy? How does government policy influence the private sector, where sustainable growth in the domestic economy must ultimately be generated? This paper develops the issues in a simple two-period model, and argues that analysis must go well beyond the simple permanent income approach sometimes recommended.     

物业税改革对地区间税收分配差距的影响

本文通过对地区间税收分配差距指标的分析,认为开征物业税很可能会扩大我国地区间税收分配差距。在当前物业税改革过程中,需要充分重视该问题的研究。建议将土地出让金制度和财政转移支付制度改革,作为物业税改革总体规划的重要配套措施,统筹设计相关制度,以有效防止地区间税收分配差距的不合理扩大,促进地区间经济协调、平衡发展。     

Empirical assessment of the competitive conduct of Nigerian banks in a post-consolidation era

This paper is an empirical assessment of the level of competition in the Nigerian banking industry following the consolidation exercise, using a bank-level panel data, for the period 2005–2014. Empirical evidence from the Panzar and Rosse (1987) H-statistic reveals that market power in the Nigerian banking industry is consistent with monopolistic competition, which implies that firms are independent in their decision-making and conduct. This study innovates by incorporating non-interest income accounts in the assessment of revenue, and findings suggest that bank competitiveness decreases as revenue tends toward an inclusion of non-interest income or fee-based services.     

Taxes,Theft, and Firm Performance

This paper examines the interaction between income diversion and firm performance. Using unique Russian banking transaction data, I identify 42,483 spacemen, fly‐by‐night firms created specifically for income diversion. Next, I build a direct measure of income diversion for 45,429 companies and show that it is negatively related to firm performance. I identify the main reason for the observed effect as managerial diversion rather than tax evasion per se. I further show that stricter tax enforcement can improve firm performance: a one standard deviation increase in tax enforcement corresponds to an increase in the annual revenue growth rate of 2.6%.     

The value relevance of dirty surplus accounting flows in The Netherlands

Recently the Dutch financial reporting standard setters have taken steps to make dirty surplus accounting flows more visible to parties outside firms, either by eliminating their possibilities or by requiring comprehensive income-type statements. These steps are presumably based on the idea that dirty surplus accounting flows are relevant to investors and hence have to be visible to them.Whether dirty surplus accounting flows are indeed relevant in firm valuation is an empirical issue. This paper, therefore, explores both the incremental and relative value relevance of dirty surplus accounting flows for the Dutch listed firms in the period 1988–1997, when their existence was relatively unhindered.We find consistent evidence that both reported income and clean surplus income are relevant in explaining stock returns, though reported income seems a more relevant measure of returns in the period considered.The results suggest that aggregated dirty surplus flows are not associated with stock returns with accumulation intervals up to 10 years; however, asset revaluations and currency-translation differences are at times incrementally relevant to returns.     

Discretion in revenue recognition timing and comparability: Evidence from the implementation of SOP 97-2

An objective of financial reporting regulation is to encourage the production of decision-useful information. This paper examines the association between the level of discretion allowed in accounting standards and comparability, a key characteristic of decision-useful reporting. To study this link, I investigate changes in comparability around regulation SOP 97-2, which decreased discretion in the timing of revenue recognition on software-related transactions. Using a difference-in-differences research design, I find a positive association between discretion and comparability for affected firms, relative to control firms. This result is attenuated for firms with low reporting quality prior to the rule change and those that experienced a larger direct impact on their revenue recognition practices. This paper furthers understanding of the linkage between reporting discretion and the decision-usefulness of accounting outputs. Additionally, the results highlight the complex interactions between various financial reporting attributes.     

Selling-price estimates in revenue recognition and the usefulness of financial statements

Revenue is one of the largest and most value-relevant items in firms’ financial statements. Based on the “realizable” and the “earned” criteria of SFAC No. 5 (FASB in Concepts statement no. 5. Recognition and measurement in financial statements of business enterprises, 1984), revenues should reflect both selling price and timing of delivery. Of those two aspects, selling-price estimates are required for revenue recognition when standalone selling prices for products and services are not available. In this study, I examine the effects of selling-price estimates in revenue recognition on the contracting and informational roles of financial statements. Particularly, I examine the setting of SOP 97-2 (AICPA in Software revenue recognition. Statement of Position (SOP) 97-2, AICPA, New York, 1997) that removed software firms’ flexibility to recognize revenues using selling-price estimates. I find that SOP 97-2 implementation did not improve the contracting role of earnings. However its implementation partly shifted the informational role of financial statements from income-statement to balance-sheet components.     

Discussion of “biases in multi-year management financial forecasts: Evidence from private venture-backed U.S. companies”

Armstrong, Dávila, Foster, and Hand (“ADFH”) use a proprietary venture capital database of revenue and profit projections submitted by young firms seeking financing to attempt to address a number of questions related to forecasts by managers of early stage, venture-backed, private entrepreneurial firms. The proprietary dataset together with the creative use of a “historically-grounded conditional projections” methodology are the most interesting features of ADFH’s study. However, these same aspects give rise to empirical design constraints that the study does not fully overcome. In addition, there are numerous leaps of logic required to arrive at some of ADFH’s conclusions and there are alternative explanations for ADFH’s findings that have not been entirely refuted. This leaves the reader with some doubt as to whether all of ADFH’s conclusions are fully substantiated. Nevertheless, the evidence presented makes an interesting contribution to our understanding of the forecasting behavior of young, private, rapidly growing, VCbacked firms, and provides some natural economic and methodological leads into further studies of these issues.