Gaps in the IFRS Conceptual Framework

Abstract

The stated purpose of the IFRS Conceptual Framework is to assist the IASB to develop Standards that are based on consistent concepts, and also to assist preparers to develop consistent accounting policies when Standards either do not apply or allow a choice of accounting policy. Yet, the Framework actually does surprisingly little to help the IASB (or preparers) determine which assets, liabilities, income and expenses should be recognised, and how they should be measured. The Framework’s focus on assets and liabilities implies that the accounting can, and should, be determined from the balance sheet. Yet, many current financial reporting requirements focus initially on the income statement, and so they are not so much derived from the Framework as instead in need of being reconciled back to it. At its heart, the problem here is that, while the Framework states that accrual accounting provides a better basis for assessing past and future performance than cash-based information, it does not explain why. To do so would require a conceptualisation of how entities’ business models are employed to create value, and of the strengths and limitations of accounting data in enhancing investors’ understanding of that value-creation. The lack of explanation of the purpose and informational objectives of accruals, how they relate to business models and how they cause the income statement and the balance sheet to interact are gaps in the Framework. Filling those gaps would provide a more robust, and natural, way for the IASB to develop recognition and measurement requirements in its Standards.     

The consequences to analyst involvement in the IPO process: Evidence surrounding the JOBS Act

The JOBS Act allows certain analysts to be more involved in the IPO process, but does not relax restrictions on analyst compensation structure. We find that these analysts initiate coverage that is more optimistically biased, less accurate, and generates smaller stock market reactions. Investors purchasing shares following these initiations lose over 3% of their investment by the firm's subsequent earnings release. By contrast, issuers, analysts, and investment banks appear to benefit from this increased bias, as optimism is more positively associated with proxies for firm visibility and investment banking revenues when analysts are involved in the IPO process.     

<Emphasis Type="Bold">Measuring the market response to going concern modifications: the importance of disclosure timing</Emphasis>

Auditor going concern modifications (GCMs) are intended to provide market participants with information related to financial distress, and prior research suggests that the disclosure of a GCM elicits a substantial negative market reaction from investors. In this study, we investigate the market reaction to GCMs in a contemporary disclosure regime and consider whether the observed market reaction is confounded by other material disclosures. We find that the majority of GCMs are issued concurrently with earnings announcements (EAs) and that EAs in the year of new GCMs elicit large negative cumulative abnormal returns (CARs). We also find that CARs surrounding GCMs are significantly more negative when GCMs are disclosed with EAs versus following EAs. We then evaluate whether GCMs convey distress that is incremental to EA disclosures by measuring i) the market reaction to GCMs disclosed following EAs, and ii) whether EA CARs are substantially more negative for companies disclosing GCMs with EAs as opposed to after EAs. In both cases, we find that the incremental market response to GCMs is statistically weak and much smaller in economic magnitude than is suggested by prior research. Finally, we find that management disclosures in EAs, rather than the presence of a GCM, appear to convey information that investors use to anticipate bankruptcy. Taken together, these findings suggest that GCMs are confounded by other significant disclosures and that the informational benefits of GCM reporting are significantly smaller than previously thought.     

On the Earnings and Price Momentum Strategies: Evidence from European Real Estate Firms

We test the performance and interaction between earnings and price momentum for European real estate companies by first making use of decile portfolios sorted on the previous 3- to 12-month returns, standardized unexpected earnings and a combination of both. Then, the relation is tested on a risk-adjusted basis employing a 3-factor asset pricing model and Fama and Macbeth (1973) cross-sectional regression analyses. Our analyses reveal several critical findings: (1) both price and earnings momentum are effective for European firms, the effect being stronger for the UK than EU firms; (2) unlike U.S. REITs, price momentum seems to dominate drift for European firms; (3) there is weak evidence for positive interaction between drift and price momentum, contrary to the U.S. evidence; (4) the performance of momentum strategies depends on the state of the economy, while controlling for systematic factors; (5) idiosyncratic risk of real estate property firms may influence the returns on drift and momentum factors.     

Telecommunications policy and individuals with disabilities: Issues of accessibility and social inclusion in the policy and research agenda

Information and communications technologies have become an integral part of life in an information society, affecting employment, education and many other daily activities. For individuals with disabilities, equal access to telecommunications remains a concern, as many technologies that are developed do not allow for equal access. Law and policy have made significant progress in some nations, but sizeable barriers remain to the social inclusion of individuals with disabilities in telecommunications technologies and services. This paper examines the importance of equal access to telecommunications for individuals with disabilities in both the formulation and the implementation of policy. Analyzing issues of policy and implementation, this paper discusses policy questions and potential areas of research to better understand the relationship of telecommunications policy to access for persons with disabilities.     

ERPs as 'technologies-in-practice': social construction, materiality and the role of organisational factors

Enterprise Resource Planning systems (ERPs) often fail to deliver the organisational benefits anticipated. This paper uses Orlikowski's 'technology-in-practice' framework to analyse the impact of an ERP on branch managers in a large bank. While this framework provides important insights into the impact of ERPs, the case also highlights the significance of organisational factors in shaping how users enact technology at work.     

Discontinuous innovation and supply relationships: strategic dalliances

The authors address the need for supply relationships to generate, support, and respond to discontinuous innovation (DI), noting that established ways of working appear insufficient. The peculiarities of DI are explained and contrasted with well-known concepts within innovation. The need for customer firms to be both closely collaborative with suppliers while also exploring potential, unpredictable DI elsewhere is proposed, by means of strategic dalliances . A model is presented for understanding and exploring this emerging management challenge.     

A generalization of Panjer’s recursion and numerically stable risk aggregation

Portfolio credit risk models as well as models for operational risk can often be treated analogously to the collective risk model coming from insurance. Applying the classical Panjer recursion in the collective risk model can lead to numerical instabilities, for instance if the claim number distribution is extended negative binomial or extended logarithmic. We present a generalization of Panjer’s recursion that leads to numerically stable algorithms. The algorithm can be applied to the collective risk model, where the claim number follows, for example, a Poisson distribution mixed over a generalized tempered stable distribution with exponent in (0,1). De Pril’s recursion can be generalized in the same vein. We also present an analogue of our method for the collective model with a severity distribution having mixed support.     

Discussion of: “Flattening the organization: the effect of organizational reporting structure on budgeting effectiveness”

This paper is a discussion of Hannan et al. (Rev Account Stud, 2010), wherein subordinate-participants are endowed with private information, and superior-participants can potentially affect budget requests through their ability to reject them. Their findings are of interest to research on both the design of budgeting systems and span of control. I discuss the relevance of HRT to these literatures and comment on their implementation and experimental design. Also, I offer suggestions for future research, one of which is to explicitly introduce monitoring into experiments on span of control.