On the ‘Disclosure Initiative – Principles of Disclosure’: The EAA Financial Reporting Standards Committee’s View

This paper summarises the contents of a comment letter produced by a working group of 12 academics in response to the International Accounting Standards Board (IASB) Discussion Paper on principles of disclosure. The comment letter was submitted by the Financial Reporting Standards Committee (FRSC) of the European Accounting Association (EAA). The work includes reviews of relevant academic literature of areas related to the various questions posed by the IASB in the Discussion Paper, including the ‘disclosure problem’ and the objective of the project, the suggested principles of effective communication, the roles of the primary financial statements and notes, the location of information and the use of performance measures. The paper also discusses the disclosure of accounting policies, the objectives of centralised disclosure, and the New Zealand Accounting Standards Board staff’s approach to disclosure

Can we expect institutional investors to improve corporate governance?

The purpose of this paper is to investigate the way institutional investors use information for equity-investment purposes, and to discuss the implications that this may have for the role of these investors as owners of public companies. On the basis of an empirical study, the paper reports that institutional investors tend to use very little of the available information regarding listed companies, and to simplify their forming of expectations. They managed this by setting a priori limitations on the investment alternatives, by relying on highly trusted external advisors, and by overemphasising the quarterly updating of the spreadsheet model. It is argued in the paper that if institutional investors are assigned a leading role in corporate governance, their heavy dependence on external advisors and their over-emphasis on quarterly financial information, may have negative implications for the management of listed companies.Institutional investors Financial information Corporate governance Financial reports Investment analysis Equities Non-public information

Earnings manipulation: cost of capital versus tax. A commentary

The paper by Eilifsen, Knivsfla and Saettem, in this issue of the journal, provides some interesting research results in the field of accounting and taxation. Contrary to most European research in this area, Eilifsen, Knivsfl� and Saettem apply a theoretical, deductive, model-based approach in the positive accounting tradition, and reach the somewhat provocative conclusion that linking taxable income to accounting income reduces managers' incentives to manipulate (overstate) earnings. Their theoretical results, supporting a view of the link between taxable income and accounting income as an automatic safeguard against overstatements of earnings, is a meritorious contribution to the current debate. For example, their results should be of interest for legislators and other authorities who consider a change to less dependence between accounting and taxation. However, from my perspective, the paper by Eilifsen, Knivsfl� and Saettem also gives rise to some criticism related to (i) the use of a model-based approach, and (ii) the applicability of the earnings manipulation approach.

Accounting Conservatism under IFRS, Accounting in

Abstract One of the main reasons for the International Accounting Standards Board (IASB) to adopt the balance sheet approach seems to have been to get away from all the inconsistent applications of the conservatism principle that are so common under conventional accounting, leading to the creation of hidden reserves and excessive provisions. The current paper investigates how the conservatism principle is applied under IFRS, by examining three cases concerning loss carryforwards, development costs and construction contracts, related to three different standards (IAS 12, IAS 38 and IAS 11, respectively). An analytical distinction is made between consistent conservatism (consistent understatement of net assets) and temporary conservatism (changes in accounting estimates that temporarily understates net assets via the creation of hidden reserves which later may be reversed). The analysis shows that the lower emphasis of consistent conservatism under IFRS will be replaced by a greater emphasis on temporary conservatism. The numerical and empirical examples illustrate that the creation of temporary hidden reserves in order to smooth income are not just practices of past conventional accounting, but are practices built into IFRS. The paper also examines some management control implications of accounting conservatism under IFRS, by comparing one company that uses the same standards both externally and internally (capitalisation of development costs if certain criteria are fulfilled) with two companies that internally use a consistently conservative principle with regard to development costs (immediate expensing). The temporary application of the conservatism principle in the company capitalising development costs led to counterintuitive effects on performance measurement that had negative implications for the control and motivation of managers

Does Pro Forma Reporting Bias Analyst Forecasts?

Standard setters put much effort into the development of 'better' financial reporting standards, that is, standards that more accurately capture the economic substance of business activities. However, the more sophisticated accounting treatments caused by new standards, and the growing complexity of business activities as such, has made financial reports more difficult to understand. In response to this situation, some companies use pro forma reporting, which means that certain complex items required by financial reporting standards are excluded. This study adopts a user perspective and investigates how pro forma reporting affects analysts' judgments in an experimental setting. On the basis of psychological theory, our hypothesis suggests that analysts' judgments will be affected by differences in the way company performance is presented. Our results show that analysts who received both pro forma and Generally Accepted Accounting Principles (GAAP) information made significantly higher earnings per share (EPS) forecasts than those who received GAAP information only. It is argued that positive framing and higher levels of anchor explain this result, which suggests in turn that analysts' EPS forecasts can be manipulated by alternative ways of presenting company performance. Some possible implications of this finding for standard setters are discussed.

The Impact of an IFRS for SMEs-Based Standard on Financial Reporting Properties and Cost of Debt Financing: Evidence from Swedish Private Firms

In 2014, all larger Swedish private firms were required, at short notice, to adopt a new reporting standard (K3) based on IFRS for SMEs (2009 version). Using this shock to the reporting environment, we study the effects of the new reporting standard on groups' financial reporting properties and cost of debt financing. We find that, following the introduction of K3, private groups exhibit reporting changes consistent with improved accounting quality; their financial statement comparability increases; and their cost of debt declines. Our results suggest that the cost-of-debt decline is related to changes in accounting numbers that are imputed to lending models. Our findings add to the literature on factors shaping private firms' financial reporting and inform the ongoing discussion on accounting regulation for private firms.Forskningsfinansiär: Handelsbanken Research Foundations</p

The persistence of international accounting differences as measured on transition to IFRS

The international accounting classification literature emphasises the importance of understanding how institutional factors shape accounting regulations and practices. With the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union and Australia in 2005, our empirical study examines whether three international accounting classification systems relating to equity financing, law and culture still had merit as measured on transition to IFRS and explore whether they are effective in grouping accounting systems. Using IFRS as the yardstick, we find statistically significant differences in the measurement of shareholders’ equity as between strong (Class A) versus weak (Class B) equity financing systems, common law versus code law systems and cultural systems based on ‘Anglo’, ‘Nordic’ and ‘More Developed Latin’ cultural groups. With regard to the measurement of net income, however, we find statistically significant differences only in respect of strong (Class A) versus weak (Class B) equity financing systems. Our findings demonstrate that traditional international accounting system differences still persisted at the time of IFRS adoption even after long periods of harmonisation and growing international accounting convergence

A Bayesian decision support tool for efficient dose individualization of warfarin in adults and children

Warfarin is the most widely prescribed anticoagulant for prevention and treatment of thromboembolic events. Although highly effective, the use of warfarin is limited by a narrow therapeutic range combined with a more than ten-fold difference in the dose required for adequate anticoagulation in adults. For each patient, an optimal dose that leads to a favourable balance between the wanted antithrombotic effect and the risk of bleeding, measured as the prothrombin time International Normalised Ratio (INR), must be found. A model capable of describing the time-course of the INR response to warfarin therapy can be used to aid dose selection, both before starting therapy (a priori dose prediction) and after therapy has been initiated (a posteriori dose revision). In this paper we describe the transfer of a population PKPD-model for warfarin developed in NONMEM to a platform independent decision support tool written in Java. The tool proved capable of solving a system of differential equations representing the pharmacokinetics and pharmacodynamics of warfarin, with a performance comparable to NONMEM. To estimate an a priori dose the user provides information on body weight, age, CYP2C9 and VKORC1 genotype, baseline and target INR. With addition of information about previous doses and INR observations, the tool will use a Bayesian forecasting method to suggest an a posteriori dose, i.e. the dose with the highest probability to result in the desired INR. Results are displayed as the predicted dose per day and per week, and graphically as the predicted INR curve. The tool can also be used to predict INR following any given dose regimen, e.g. a loading-dose regimen. We believe it will provide a clinically useful tool for initiating and maintaining warfarin therapy in the clinic. It will ensure consistent dose adjustment practices between prescribers, and provide more efficient individualization of warfarin dosing in both children and adults