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Author: Changling Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 62
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Book Description
Since the late 1980s, the Financial Accounting Standards Board has implemented several new fair value accounting rules that have resulted in unrealized fair value gains or losses in net income. However, accrual-based earnings management models such as the Modified Jones Model (MJM) of Dechow, Sloan, and Sweeney (1995) and other accrual models in the literature do not consider the net income effects of fair value accounting. The fair value hierarchy of Statement of Financial Accounting Standard No. 157 implies that valuation of level 1 and level 2 instruments is subject to observable market inputs, whereas the valuation inputs of level 3 are unobservable. Therefore, with respect to earnings management, level 3 instruments are more likely to be manipulated relative to level 1 and level 2 instruments. In this paper, we adjust the MJM by adding level 1 and level 2 instruments as explanatory variables to nondiscretionary accruals; we classify net income effects of level 3 instruments as discretionary accruals in our Fair Value Adjusted Modified Jones Model (FVAMJM). We show that the FVAMJM is more powerful than the MJM in detecting earnings manipulation based on level 3 instruments and is equally good in detecting expense and revenue manipulations. In addition, the nondiscretionary accruals derived under FVAMJM have incremental explanatory power to firm market value beyond the accruals of the traditional MJM; the discretionary accruals derived under FVAMJM contribute to identifying companies meeting or beating earnings targets after controlling for MJM discretionary accruals.
Author: Changling Chen
Publisher:
ISBN:
Category :
Languages : en
Pages : 62
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Book Description
Since the late 1980s, the Financial Accounting Standards Board has implemented several new fair value accounting rules that have resulted in unrealized fair value gains or losses in net income. However, accrual-based earnings management models such as the Modified Jones Model (MJM) of Dechow, Sloan, and Sweeney (1995) and other accrual models in the literature do not consider the net income effects of fair value accounting. The fair value hierarchy of Statement of Financial Accounting Standard No. 157 implies that valuation of level 1 and level 2 instruments is subject to observable market inputs, whereas the valuation inputs of level 3 are unobservable. Therefore, with respect to earnings management, level 3 instruments are more likely to be manipulated relative to level 1 and level 2 instruments. In this paper, we adjust the MJM by adding level 1 and level 2 instruments as explanatory variables to nondiscretionary accruals; we classify net income effects of level 3 instruments as discretionary accruals in our Fair Value Adjusted Modified Jones Model (FVAMJM). We show that the FVAMJM is more powerful than the MJM in detecting earnings manipulation based on level 3 instruments and is equally good in detecting expense and revenue manipulations. In addition, the nondiscretionary accruals derived under FVAMJM have incremental explanatory power to firm market value beyond the accruals of the traditional MJM; the discretionary accruals derived under FVAMJM contribute to identifying companies meeting or beating earnings targets after controlling for MJM discretionary accruals.
Author: Elisa Menicucci
Publisher: Springer Nature
ISBN: 3030367983
Category : Business & Economics
Languages : en
Pages : 154
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Book Description
This book provides an overview of earnings quality (EQ) in the context of financial reporting and offers suggestions for defining and measuring it. Although EQ has received increasing attention from investors, creditors, regulators, and researchers in different areas, there are various definitions of it and different approaches for its measurement. The book describes the relationship between EQ and earnings management (EM) since they can be considered related challenges, especially in the context of international financial reporting standards (IAS/IFRSs). EM occurs when managers make discretionary accounting choices that are regarded as either an efficient communication of private information to improve the informativeness of a firm’s current and future performance, or a distorting disclosure to mislead the firm’s true performance. The intentional manipulation of earnings by managers, within the limits allowed by the accounting standards, may alter the usefulness of financial reporting and lead to lower quality of earnings. The use of fair value in financial reporting has created a current debate about the impact it might have on EQ. At times, the high subjectivity in estimating fair value can allow opportunities for the exercise of management judgments and intentional bias, which can reduce the quality of financial reporting. Management discretion can result in high EM and hence in a reduction of EQ. Particularly during difficult financial periods, managers engage in EM to mask the negative effects of the turmoil, and in such circumstances accruals and earnings smoothing are attempts to reduce abnormal variations of earnings in such circumstances. This book is a valuable resource for those interested in wider perspectives on EQ and it adds to the research studies on this topic in the context of financial reporting.
Author: Joshua Ronen
Publisher: Springer Science & Business Media
ISBN: 0387257713
Category : Business & Economics
Languages : en
Pages : 587
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Book Description
This book is a study of earnings management, aimed at scholars and professionals in accounting, finance, economics, and law. The authors address research questions including: Why are earnings so important that firms feel compelled to manipulate them? What set of circumstances will induce earnings management? How will the interaction among management, boards of directors, investors, employees, suppliers, customers and regulators affect earnings management? How to design empirical research addressing earnings management? What are the limitations and strengths of current empirical models?
Author: Shane Nicholls
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
The overall objective of this dissertation is to investigate the interface between both firm- and country-level corporate governance mechanisms and fair value accounting for a sample of international financial institutions in the post-financial crisis period. In order to meet this objective, I conduct two studies investigating different aspects of the fair value hierarchy and the role of corporate governance. The first study investigates the impact of firm- and country-level corporate governance mechanisms on the relevance and reliability of the estimates provided by the fair value hierarchy. This is examined for a sample of publicly listed banks from Canada and the European Union and extends the scant literature on the interface between corporate governance and fair value accounting. The results show that, contrary to prior research, investors do not consider level 3 fair value estimates to be reliable enough to be incorporated into firm value and thus, are not value relevant. Further testing, however, reveals that corporate governance mechanisms act in such a manner as to increase the perceived reliability of level 3 fair value estimates such that investors do consider them to be value relevant. Moreover, the results suggest that, in the context of value relevance decisions, firm- and country-level governance mechanisms act as substitutes for one another. The second study investigates the potential for the fair value hierarchy to act as an alternative vehicle for earnings management in banks, and the role that firm- and country-level corporate governance plays in impacting the relationship between two competing earnings management methods. Extant earnings management literature on financial institutions focuses on the use of the loan loss provision to manage earnings. However, the recent change in accounting standards towards fair value accounting has provided an alternative vehicle for earnings management, specifically through level 2 and level 3 fair value measurements. The results show that level 2 fair values do not appear to be a viable tool to manage earnings. However, after accounting for the effect of either firm- or country-level corporate governance, the results suggest that level 3 fair values can act as an alternative earnings management tool. Managers faced with high (low) governance report lower (higher) levels of discretionary loan loss provisions as the proportion of level 3 assets increases. Moreover, additional analyses provide preliminary results suggesting that, in the context of earnings management, firm- and country-level governance mechanisms act as complements for one another.
Author: Malek El Diri
Publisher: Springer
ISBN: 3319626868
Category : Business & Economics
Languages : en
Pages : 120
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Book Description
This book provides researchers and scholars with a comprehensive and up-to-date analysis of earnings management theory and literature. While it raises new questions for future research, the book can be also helpful to other parties who rely on financial reporting in making decisions like regulators, policy makers, shareholders, investors, and gatekeepers e.g., auditors and analysts. The book summarizes the existing literature and provides insight into new areas of research such as the differences between earnings management, fraud, earnings quality, impression management, and expectation management; the trade-off between earnings management activities; the special measures of earnings management; and the classification of earnings management motives based on a comprehensive theoretical framework.
Author: Vieira, Elisabete S.
Publisher: IGI Global
ISBN: 1799875989
Category : Business & Economics
Languages : en
Pages : 433
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Book Description
New trends are emerging regarding earnings management and corporate governance showing similarities and striking differences in the practices of different countries and economies. These new trends currently shape the field of modern corporate governance with crucial issues being looked at in governance law and practices, accounting systems, earnings quality and management, stakeholder involvement, and more. In order to advance these new avenues in corporate governance, research looks at accounting policies firms use in different opportunistic circumstances in order to manage earnings, the corporate governance practices in different countries, firm performance, and other dimensions of companies. The understanding of these topics is beneficial in understanding the current state of different types of firms and their practices in modern times. Comparative Research on Earnings Management, Corporate Governance, and Economic Value is focused on the investigation of key challenges and perspectives of corporate governance and earnings management and outlines possible scenarios of its development. The chapters explore this new avenue of research and cover theoretical, empirical, and experimental studies related to different themes in the global context of earnings management and corporate governance. This book is ideal for economists, businesses, managers, accountants, practitioners, stakeholders, researchers, academicians, and students who are interested in the current issues and advancements in corporate governance and earnings management.
Author: Melumad Nahum
Publisher: Now Publishers Inc
ISBN: 1601982127
Category : Business & Economics
Languages : en
Pages : 159
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Book Description
Line-Item Analysis of Earnings Quality provides a comprehensive summary and analysis of the specific earnings quality issues pertaining to key line item components of the financial statements. After providing an overview of earnings quality and earnings management, Line-Item Analysis of Earnings Quality analyzes key line items from the financial statements. For each key line item, the authors: review accounting principles; discuss implications for earnings quality; evaluate the susceptibility of the item to manipulation; describe analyses and red flags which may inform on the item's quality. Line-Item Analysis of Earnings Quality will prove useful in conducting fundamental and contextual analyses through its analysis and evaluations.
Author: Steven B. Lilien
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
The new accounting standard (FASB ASC 805) requires acquiring firms to estimate the fair value of net assets acquired and recognize the excess amount over purchase price as a bargain purchase gain, a component of current earnings. The flexibility in fair value measurement provides acquiring management with discretion to determine the amount of the bargain purchase gain, and thereby, inflate income. This paper investigates the association between bargain purchase gains booked by the acquirer and smoothing of acquirers' earning performance across time. We find that bargain purchase gains, and in particular, the level-3 fair value estimates of intangible assets acquired, have consistently been used to smooth earnings but that such smoothing activities are not associated with long-term market returns.
Author: James P. Catty
Publisher: John Wiley & Sons
ISBN: 1118185420
Category : Business & Economics
Languages : en
Pages : 256
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Book Description
An all-encompassing guide to the elements and basics of fair value With the important role fair value is playing in the creation of a converged set of global accounting standards, demand for products in this category is growing spectacularly. The elements and basics of fair value are covered, including risk, dealing with the SEC, and details on legal responsibility. In addition, sample financial statements are included, along with tables, recommended applicable techniques, and management checklists for those who are responsible for preparing and approving of financial statements. Written by the Chairman and co-CEO of the International Association of Consultants, Valuators and Analysts (IACVA) Includes sample financial statements of both U.S. and foreign companies Appropriate for anyone involved professionally with finance—managers, accountants, investors, bankers, instructors, and students—The Professional's Guide to Fair Value is a reliable reference on the ins and outs of fair value financial disclosure.
Author: Shaofeng Zheng
Publisher:
ISBN:
Category : Fair value
Languages : en
Pages : 113
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Book Description
My dissertation comprises of two essays: 1) The Effects of Fair Value Measurements (IFRS 13) on Operating Performance and Market Performance, and on Value Relevance of Firms across European Countries; 2) The Disclosure of Fair Value Pension Asset under SFAS No. 158, Pension Assumptions, and Earnings Manipulation. Fair value accounting has been gained a spotlight over years. My first essay focuses on Fair Value measurements (IFRS13), which provides a single source for all fair value measurements, and clarifies the definition of fair value and enhance the disclosures. I examine the effect of IFRS 13 fair value on operating performance, the market reaction to the key event of the announcement date of IFRS 13 adoption, and the effect on value relevance in the context of IFRS 13 adoption by a large sample of five countries in European Union: France, Germany, Italy, Spain, and United Kingdom from 2010 to 2014. Evidences from the analyses of the models revealed that the operating performance overally decreased after IFRS 13 adoption in France and Germany but increased in Italy, Spain and United Kingdom based on some ratios to evaluate the operating performance. Firms with higher ROA in pre-IFRS 13 might report more consecutive earnings after IFRS 13 adoption than firms with lower ROA in pre-IFRS 13. Market reaction was tested on the key event of IFRS 13 adoption: the announcement date of IFRS 13. The results of the event study indicate that the cumulative abnormal returns (CAR) are negatively associated with the release date of IFRS 13 adoption, suggesting that European markets' reaction has been somewhat negative to IFRS 13. The adjustment to earnings per share model suggests mixed evidence of a increase in value relevance. In summary, European market may perceive IFRS 13 as an important in financial reporting or a reduction in the formation asymmetry and these results have implications for investors, auditors, and educators. In September 2006, Statement of Financial Accounting Standard (SFAS) No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, required firms to disclose and recognize the full funded status of defined benefit pension plans in the balance sheet instead of only in the footnote. Comparing with recognition, there are limited researches about the effect of the disclosure of fair value pension assets on the expected rate of return (ERR). Therefore, my second essay examines the association between the disclosure of fair value pension plan assets under SFAS No. 158 and ERR. Empirical results support that firms with the Level-3 fair value of pension assets are more like to inflate ERR and are more like to meet ERR through the actual rate of return (ARR) of the Level-3 fair value of pension assets. In addition, I explore the relationship between the disclosure of fair value pension plan assets and earnings target through ERR management. The results document that firms with the Level-3 fair value pension asset more like to achieve earnings target when they marginally fall short of earnings expectations. Such disclosures could improve the efficient use of the information by market participants.
