36 research outputs found
Disclosures and judgment in financial reporting – Essays on accounting quality under International Financial Reporting Standards
No full textAs capital markets become more integrated and globalized, standard setting in financial accounting faces multiple challenges. Financial accounting standards must adapt and change in ways that make them usable to firms in varying institutional and economic settings, and by extension, make the financial statements produced under those standards useful to capital market participants worldwide. A question that arises is how to ensure corporate transparency and faithfully represented financial reports, and whether principles-based – rather than rules-based – standards are superior in this context. Two areas of particular interest to standard setters are mandatory disclosures made within the scope of the standards, and judgments and estimates required by financial statement preparers when standards are predominantly principles-based.
This thesis investigates quality implications of features pertaining to three different accounting standards: IAS 1 Presentation of Financial Statements, IAS 19 Employee Benefits and IFRS 9 Financial Instruments. The underlying aim is to draw conclusions about effects on accounting usefulness of the various accounting methods and disclosure and recognition rules prescribed by these standards. The rationale for this type of research can be derived from the IASB's own requirements that a post-implementation review (PIR) be executed whenever significant financial reporting changes are introduced by a new or revised standard.
The studies carried out within the scope of this thesis show that in accounting for certain discretionary items related to employee benefits, there appears to be improvements in transparency as firms are required by the amended IAS 19 to move previously off-balance-sheet items onto the balance sheet, thus formally recognizing them rather than merely disclosing them in the supplementary notes. Further, evidence on disclosures made in accordance with IAS 1 points to comparability issues and to the disclosures being of varying quality, with accounting outcomes being contingent on the individual firm’s contextual factors. This indicates that the principles-based disclosure standards that are currently favored by standard setters do not work as well as expected. Meanwhile, as regards estimation of credit losses in banks, there is evidence to support the current move towards a more principles-based standard (IFRS 9), provided that there is enforcement of adequate quality
Disclosures and Judgment in Financial Reporting - Essays on accounting quality under International Financial Reporting Standards
No full textAs capital markets become more integrated and globalized, standard setting in financial accounting faces multiple challenges. Financial accounting standards must adapt and change in ways that make them usable to firms in varying institutional and economic settings, and by extension, make the financial state- ments produced under those standards useful to capital market participants worldwide. A question that arises is how to ensure corporate transparency and faithfully represented financial reports, and whether principles-based|rather than rules-based|standards are superior in this context. Two areas of particu- lar interest to standard setters are mandatory disclosures made within the scope of the standards, and judgments and estimates required by financial statement preparers when standards are predominantly principles-based. This thesis investigates quality implications of features pertaining to three dif- ferent accounting standards: IAS 1 Presentation of Financial Statements , IAS 19 Employee Benefits and IFRS 9 Financial Instruments . The underlying aim is to draw conclusions about effects on accounting usefulness of the various ac- counting methods and disclosure and recognition rules prescribed by these stan- dards. The rationale for this type of research can be derived from the IASB's own requirements that a post-implementation review (PIR) be executed when- ever significant financial reporting changes are introduced by a new or revised standard. The studies carried out within the scope of this thesis show that in accounting for certain discretionary items related to employee benefits, there appears to be improvements in transparency as firms are required by the amended IAS 19 to move previously off-balance-sheet items onto the balance sheet, thus for- mally recognizing them rather than merely disclosing them in the supplementary notes. Further, evidence on disclosures made in accordance with IAS 1 points to comparability issues and to the disclosures being of varying quality, with ac- counting outcomes being contingent on the individual firm's contextual factors. This indicates that the principles-based disclosure standards that are currently favored by standard setters do not work as well as expected. Meanwhile, as regards estimation of credit losses in banks, there is evidence to support the current move towards a more principles-based standard (IFRS 9), provided that there is enforcement of adequate quality
Semi-Voluntary Disclosures under IFRS
No full textpaper from studies that look at voluntary disclosures (see e.g. Botosan and Plumlee, 2002; Luo et al., 2006; Francis et al., 2008; Jiang et al., 2010), and creates opportunities for heterogeneity in firm behavior, which, if systematic, indicates failure by management to apply their judgment in an appropriate manner. A simple content analysis of 2,437 annual reports was carried out for firms listed on European stock exchanges between 2005 and 2009. A binary scale was used to indicate firm disclosure for different accounting areas, after which a disclosure score was assigned each firm. After controlling for factors presumed correlated with the underlying amounts the firms are required to discuss (such as firm size, industry, and complexity of operations) any variations in disclosure level should presumably be random. However, it is proposed that there is significant leeway for management discretion in complying with said disclosure requirements, and that firms with a high level of disclosure differ systematically from firms with a low level of disclosure. More specifically, the part of the paper that explores disclosure behavior among non-disclosing versus disclosing firms shows that significant differences exist along three dimensions. First, the presence of IAS 1 disclosures is positively associated with stronger enforcement, supporting studies that show that high-quality standards are not sufficient in themselves for the achievement of high-quality accounts. Second, true IFRS adoption is suggested to be a gradual phenomenon rather than a one-time event, as non-disclosures are significantly more frequent in 2005 than in 2009, and a steady decrease of non-disclosure can be observed. Finally, a negative association between disclosure and the percentage of closely held shares suggest that firms that have higher ownership concentration have less incentives to be transparent and thus adhere more loosely to the prescriptions in IAS 1. Based on these findings, it is claimed that due to the room for judgment left by IFRS to preparers of financial reports, disclosure quality under the international standards remains a controversial issue. The fact that there are differences in disclosure levels supports the prediction that the desired positive effect of IFRS adoption is neither immediate nor obvious
Judgment and Uncertainty in the Financial Reporting Process: The Impact on Reporting Quality and Information Risk
No full textWith the wide-reaching introduction and promulgation of the International Financial Reporting Standards (IFRS), the potential implications of so-called “principles-based” accounting standards have been highlighted repeatedly in recent literature. One immediate concern is whether the increased role of professional judgment in the financial reporting process, brought on by these principles-based standards, helps improve the quality of reports and lowers information risk through increased transparency and greater focus on the substance of economic events and states, or whether in fact the reverse is true. By referring to the disclosure of accounting judgments and estimates in the supplementary notes to company financial reports, it is believed possible to make inferences about the level of judgment needed for particular accounting areas. Thence, by tracing these to the income statement and drawing on the return models developed within the field of market-based accounting research, uncertainty is modeled and the explanatory power of earnings on (raw) returns with respect to the relevant earnings components (as distinguished by the associated level of judgment for each component) is investigated
From Disclosure to Recognition: The Case of ``Corridor'' Accounting Under IAS 19 Employee Benefits
No full textThis paper provides evidence on market reactions to the amendments of IAS 19 Employee Benets that aect the accounting for actuarial gains and losses. A contribution is made to the literature which examines the distinction between dis- closure and recognition (on the face of the nancial statements) of accounting items. Positive investor reactions, as measured by cumulative abnormal returns, are found at early IAS 19 events (the release of the exposure draft and the announcement of the nal standard) that inform investors of the (probability of) upcoming changes. Such ndings support the view that investors perceive recognized actuarial gains and losses as having higher reliability, and that the standard change is a signal of future reductions in investor uncertainty. Highly-leveraged rms with actuarial losses experience a more positive investor reaction, consistent with these rms being considered more prone to have low-quality disclosures. Upon recognizing in the 2013 quarterly report actuarial losses that were previously merely disclosed, rms experi- ence negative abnormal returns. Furthermore, while an actual negative restatement amount leads to positive abnormal returns, this eect is likely due to a positive de- ferred tax \surprise". The above is consistent with the view that disclosed items are more complex and less complete compared to formally disclosed amounts, and that presentation format of actuarial gains and losses thus has valuation implications
To manage or reserve accruals? Evidence from abalanced-budget requirement reform
No full textIn 2013, an accounting reform permitted Swedish municipalities to voluntarily adopt a system withaccrual reserves that was designed to increase flexibility in meeting budget requirements anddecrease regulatory incentives to engage in earnings management. However, since a system withaccrual reserves imposes potentially undesirable transparency from the perspective of politicians,it is unclear whether the (regulatory) benefits of adopting accrual reserves are perceived to exceedthe (political) costs. The authors found that municipalities with higher levels of earningsmanagement were less likely to adopt a system of accrual reserves, and they attribute this topolitical incentives to avoid transparency
Goodwill or “No-will”: Hubris in the tone at the top
No full textIn this study, we examine the effect of hubris in the “tone at the top” on goodwill accounting, specifically the proportion of the purchase price allocated to goodwill following a business combination, and subsequent decisions to write down goodwill. Using a sample of CEO letters to shareholders from firms listed on the Stockholm Stock Exchange, we carry out textual analysis of CEO letters to identify hubristic language markers. Regression analyses show that hubristic tone is positively and significantly associated with the purchase price allocation to goodwill. Furthermore, we predict that hubristic managers are more likely to overestimate future cash inflows related to goodwill and are less likely to perceive the need for a potential write-down. Consistent with this prediction, we find that hubristic tone in the CEO letters is associated with less timely goodwill write-downs. This study contributes to the literature on goodwill accounting, the role of CEO attributes on corporate decision making, and to research on CEO-speak, by providing evidence that a hubristic tone at the top can explain strategic choices by management and accounting outcomes
Principles-Based Mandatory Disclosures
No full textIn recent years the amount and format of mandated disclosures have been discussed. For example, in a draft discussion paper, EFRAG suggests that disclosures should be more principles-based. In this study, we empirically test disclosures that are currently principles-based, being disclosures on judgment and uncertainties in the preparation of nancial statements, in accordance with IAS 1 Presentation of nancial statements
