Comparing US-GAAP and Iran-GAAP operating cash flows to predict future cash flows

Purpose – The main objective of this paper is to compare the ability of US-generally accepted accounting principles (GAAP) operating cash flows versus Iran-GAAP operating cash flows in predicting future cash flows. Design/methodology/approach – The sample comprises 240 firms (1,200 firm-years) during the period from 2004 to 2008 for which operating cash flows and other variables are available. Cross-sectional and panel data regression models are used in testing the hypotheses. Findings – This study finds that operating cash flows based on Iran-GAAP are no more effective in predicting future cash flows than those based on USA-GAAP, and the predictive ability of the model is improved by adding the earnings accrual components to the operating cash flows. Originality/value – The study suggests that the Iranian accounting standard setting committee recommends that the statement of cash flows be prepared based on the three-category model instead of the five-category model in an attempt to converge with the International Financial Reporting Standards. Consistent with Financial Accounting Standards Board and financial analyst recommendations, the results reveal that earnings are a better predictor than cash flows from operations.

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Do Big 4 auditors improve the ability of goodwill to forecast future cash flows?

Corporate Ownership and Control ◽

10.22495/cocv13i3c1p2 ◽

2016 ◽

Vol 13 (3) ◽

pp. 164-172 ◽

Cited By ~ 1

Author(s):

Ahmad Al-Hiyari ◽

Rohaida Abdul Latif ◽

Noor Afza Amran

Keyword(s):

Financial Reporting ◽

Predictive Ability ◽

Cash Flows ◽

Reporting Standard ◽

Accounting Firms ◽

Big 4 ◽

Business Combination ◽

Accounting Rules ◽

Future Cash Flows ◽

Professional Judgement

The accounting rules prescribed in Malaysian Financial Reporting Standard (MFRS) 3, Business combination, and (MFRS) 136, Impairment of Assets, give managers considerable reporting discretion in allocating goodwill and estimating its actual value. Agency theory predicts that managers may use the accounting discretion granted by the new rules to pursue their own interests at the expense of shareholders. Hence, auditors are required to exercise professional judgement when investigating hard-to-verify management assumptions and valuations. We exploit this issue by examining whether predictive ability of goodwill improved in the presence of Big 4 auditors. We provide evidence that goodwill has a significant predictive ability for second and third-year ahead cash flows which exists only in the firms audited by the large international reputable accounting firms. This suggests that Big 4 auditors play an important role in ensuring appropriate implementation of the present accounting for goodwill.

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Predictive ability of accruals before and after IFRS in the Brazilian stock market

Revista Contabilidade & Finanças ◽

10.1590/1808-057x201806300 ◽

2018 ◽

Vol 29 (78) ◽

pp. 375-389

Author(s):

Terence Machado Boina ◽

Marcelo Alvaro da Silva Macedo

Keyword(s):

Stock Market ◽

Financial Reporting ◽

Predictive Ability ◽

Discretionary Accruals ◽

Cash Flows ◽

Accounting Quality ◽

Convenience Sample ◽

Accounting Choices ◽

Before And After ◽

Future Cash Flows

ABSTRACT This study aimed to analyze and assess the predictive ability of discretionary accruals (DAs) and non-discretionary accruals (NDAs) for forecasting future cash flows before and after the convergence with International Financial Reporting Standards (IFRS) in Brazil. The study is warranted due to the scarcity of research in Brazil on the subject and is relevant because it aims to shed light on whether the changes occurring due to convergence with IFRS in Brazil have improved accounting quality. The accounting choices of managers and accountants in the Brazilian stock market, enabled by IFRS, contribute to an apparent improvement in accounting quality in terms of reliability, the faithful representation of entities’ equity and financial positions, and in particular, the predictive ability for forecasting future cash flows. The population was composed of publicly traded companies listed on the Bovespa and São Paulo Stock, Commodities, and Futures Exchange (BM&FBovespa) in 2004 to 2007 and 2010 to 2015. The non-probability convenience sample is composed of 715 enterprises, once companies from the “finance and insurance” and “funds” sectors and even those considered as “holding” were excluded. The data were pooled by year, as they contain different companies over the time series (unbalanced panel data). The DAs and NDAs produced prior to full convergence with IFRS are negative and statistically significant for predicting future cash flows in the Brazilian stock market, which indicated opportunistic/contractual earnings management. One of the possible explanations for this would be the influence of government tax authorities on Brazilian accounting norms, which could induce managers to manipulate accounting results with the aim of reducing earnings in order to pay fewer taxes, for example. The DAs and NDAs produced after IFRS are positive and statistically significant for predicting future cash flows in the Brazilian stock market, signaling the motivation of discretionary accounting choices under the informational aspect. Current DAs and NDAs add informational power compared to current aggregate accruals. It has also been observed that the current DAs and NDAs originating after IFRS in Brazil, compared to current aggregate accruals, have an informational gain in relation to those produced before.

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Does the fundamental indexation portfolio perform better? An Indian investigation

Accounting Research Journal ◽

10.1108/arj-06-2020-0156 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Santosh Kumar ◽

Ranjit Tiwari

Keyword(s):

Capital Market ◽

Stock Exchange ◽

Cash Flows ◽

Cross Sectional ◽

Content Type ◽

Operating Cash Flows ◽

Asset Pricing Models ◽

Portfolio Managers ◽

Fama And French ◽

Market Premium

Purpose This study aims to compare the fundamental indexation (FI) portfolio vis-à-vis the cap-weighted index (CWI). It also explored the return-generating attributes of the FI portfolios. Design/methodology/approach This study extracted relevant data from the Centre for Monitoring Indian Economy’s Prowess database from March 1996 to March 2017 from a sample of National Stock Exchange (NSE) 500 companies. The FI portfolios were constructed with First_50 and Next_50 stocks using the latest and five years of trailing average aggregations. Further, the regression technique was used to identify the return-generating attributes of FI portfolios. Findings It was found that the FI portfolios based on First_50 and Next_50 stocks outperformed the CWI (i.e. NSE_First_50 and NSE_Next_50) in the Indian capital market, and between the two, the FI portfolios based on Next_50 stocks were superior to the FI portfolios based on First_50 stocks. The cross-sectional superiority of FI portfolios is obvious if they are sorted according to four fundamentals, namely, total income, sales, operating cash flows and profit before depreciation interest tax and amortisation. The return-generating process of FI portfolios is well-explained by market premium followed by value premium and investment premium. Practical implications This study may enable portfolio managers and investors to measure FI portfolios’ superiority in the Indian capital market and identify the return-generating attributes of FI portfolios so that the loadings can be switched amongst different priced factors for higher yield. Further, this study extends the FI literature, providing evidence from one of the world’s fastest-growing economies. Originality/value To the best of the knowledge, this is amongst the first few studies to explore the performance of FI portfolios vis-à-vis CWIs in India, and to use Fama and French (2015) asset pricing models to understand the return-generating attributes of FI portfolios. It is also novel in the sense that it considers the FI portfolios for a longer duration, predating 1997 and coinciding with the inception of CWIs, namely, NSE_First_50 (inception: 1995) and NSE_Next_50 (inception: 1996), reducing the apprehensions of data-snooping biases.

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The Comparative Predictive Abilities Of Accrual Earnings And Cash Flows In Periods Of Economic Turbulence: The Case Of The IT Bubble

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v26i1.279 ◽

2010 ◽

Vol 26 (1) ◽

Cited By ~ 6

Author(s):

Marilyn A. Waldron ◽

Charles E. Jordan

Keyword(s):

Financial Reporting ◽

Predictive Ability ◽

Cash Flows ◽

Primary Objective ◽

Decision Makers ◽

Net Income ◽

Font Size ◽

Time Period ◽

Economic Boom ◽

Future Cash Flows

As set forth in SFAC No. 1, a primary objective of financial reporting is to provide information useful to decision makers. Predicting future cash flows represents a major goal of investors and creditors, and accrual and cash flow accounting information present two alternative factors useful in such predictions. The current research investigates the comparative abilities of accrual basis net income and historical cash flows from operations as predictors of future cash flows during both the economic boom leading up to the IT Bubble and the period of economic duress following the burst of that Bubble. Generally, results indicate that historical cash flows outperform accrual net income in predicting future cash flows during these periods of economic turbulence.  Additionally, the evidence reveals great variability in the predictive ability of accrual earnings during the time period studied, suggesting that accrual accounting estimates lose some of their precision during periods of extreme economic fluctuation.

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An Analysis Of The Comparative Predictive Abilities Of Operating Cash Flows, Earnings, And Sales

Journal of Applied Business Research (JABR) ◽

10.19030/jabr.v23i3.1390 ◽

2011 ◽

Vol 23 (3) ◽

Cited By ~ 4

Author(s):

Charles E. Jordan ◽

Marilyn A. Waldron ◽

Stanley J. Clark

Keyword(s):

Predictive Power ◽

Explanatory Power ◽

Predictive Ability ◽

Cash Flows ◽

Share Price ◽

Font Size ◽

Operating Cash Flows ◽

Aggregate Earnings ◽

Future Cash Flows ◽

Better Than

Prior studies (e.g., Greenburg et al., 1986; Murdoch and Krause, 1989) provide evidence that earnings outperforms historical cash flows in predicting future cash flows. Later research (e.g., Barth et al., 2001) demonstrates that the major accrual components of earnings each possess significant explanatory power in predicting future cash flows and that they augment, rather than replace, the predictive ability of aggregate earnings.  The current study furthers this work by examining the predictive power of another major component of earnings, i.e., sales.  Using share price as the dependent variable and as a proxy for future cash flows, this study compares the predictive abilities of changes in operating cash flows, earnings, and sales.  Similar to the findings in prior research, earnings predicts better than operating cash flows.  More importantly, however, sales predicts with greater accuracy than either operating cash flows or earnings.

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The Predictive Ability of Quarterly Financial Statements

International Journal of Financial Studies ◽

10.3390/ijfs9030050 ◽

2021 ◽

Vol 9 (3) ◽

pp. 50

Author(s):

Hui Zhou ◽

Worapree Ole Maneesoonthorn ◽

Xiangjin Bruce Chen

Keyword(s):

Financial Reporting ◽

Predictive Ability ◽

Financial Statements ◽

Cash Flows ◽

Policy Implications ◽

Quarterly Data ◽

Time Series Modelling ◽

Modelling Techniques ◽

Future Cash Flows

A fundamental role of financial reporting is to provide information useful in forecasting future cash flows. Applying up-to-date time series modelling techniques, this study provides direct evidence on the usefulness of quarterly data in predicting future operating cash flows. Moreover, we show that the predictive gain from using quarterly data is larger for asset-heavy industries and industries with higher levels of earnings smoothness. This study contributes to the accounting literature by examining the usefulness of quarterly financial statements in predicting the realization of future cash flows. Our results help fill the gap in knowledge on quarterly financial statements and provide new insights on why the frequency of financial reporting matters. In addition, our findings have important policy implications for the ongoing debate over interim reporting requirements in multiple jurisdictions around the world.

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The relative predictive ability of earnings and cash flows

Management Research Review ◽

10.1108/mrr-06-2013-0156 ◽

2015 ◽

Vol 38 (4) ◽

pp. 367-380

Author(s):

Varun Dawar

Keyword(s):

Prediction Models ◽

Explanatory Power ◽

Predictive Ability ◽

Cash Flows ◽

Financial Accounting ◽

Accounting Standard ◽

Content Type ◽

Aggregate Earnings ◽

Future Cash Flows

Purpose – The purpose of this paper is to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India. Design/methodology/approach – The study uses the list of CRISIL NSE Index (CNX) Nifty Shariah Index companies as its sample for a period of 10 years for conducting the analysis. The study utilizes the cash flow prediction models to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows. Findings – The study report that contrary to Financial Accounting Standard Board assertion, current cash flows have superior predictive ability of next period cash flows than current aggregate earnings in case of Shariah-compliant companies in India. The results further show that there are no gains from decomposing earnings into accruals and cash flows in predicting future cash flows. There is no increase in explanatory power (measured by adjusted R2) when aggregate earnings are disaggregated into accruals and cash flows to predict next period cash flows. Practical implications – The empirical findings of the study will enable the Shariah compliant investors to understand the role of current earnings (and its components) and cash flows in predicting next period cash flows in case of Shariah-compliant companies in India. Originality/value – To the best of author’s knowledge, this is the first study which examines the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India.

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Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

Accounting Horizons ◽

10.2308/acch-52262 ◽

2018 ◽

Vol 33 (1) ◽

pp. 39-59

Author(s):

Jimmy F. Downes ◽

Tony Kang ◽

Sohyung Kim ◽

Cheol Lee

Keyword(s):

Financial Reporting ◽

Cash Flows ◽

Data Availability ◽

The European Union ◽

Accounting Quality ◽

Financial Reporting Standards ◽

Ifrs Adoption ◽

Accounting Estimates ◽

Accounting Accruals ◽

Future Cash Flows

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.

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Predictive view of the value relevance of earnings in India

Journal of Financial Reporting and Accounting ◽

10.1108/jfra-08-2021-0219 ◽

2021 ◽

Vol ahead-of-print (ahead-of-print) ◽

Author(s):

Hajam Abid Bashir ◽

Manish Bansal ◽

Dilip Kumar

Keyword(s):

Capital Investment ◽

Stock Return ◽

Value Relevance ◽

Stock Exchange ◽

Predictive Ability ◽

Cash Flows ◽

Data Set ◽

Content Type ◽

Uniform Sample ◽

Reported Earnings

Purpose This study aims to examine the value relevance of earnings in terms of predicting the value variables such as cash flow, capital investment (CI), dividend and stock return under the Indian institutional settings. Design/methodology/approach The study used panel Granger causality tests to examine causality relationships among variables and panel data regression models to check the statistical associations between earnings and value variables. Findings Based on a data set of 7,280 Bombay Stock Exchange-listed firm-years spanning over ten years from March 2009 to March 2018, the results show higher sensitivity of earnings toward cash flows, CI, divided and stock return and vice-versa. Further, the findings deduced from the empirical results demonstrate that earnings are positively related to value variables. Overall, the results established that earnings are value-relevant and have predictive ability to forecast the value variables that facilitate investors in portfolio valuation. The results are consistent with the predictive view of the value relevance of earnings. Several robustness checks confirm these results. Originality/value This study brings new empirical evidence from a distinct capital market, India, and provides a new facet to the value relevance debate in terms of its prediction view. The study is among earlier attempts that jointly measure the ability of earnings in forecasting different value variables by taking a uniform sample of firms at the same period. Hence, the study provides a comprehensive view of the predictive ability of reported earnings.

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Financial statement effects of adopting IFRS: the Canadian experience

International Journal of Accounting and Information Management ◽

10.1108/ijaim-08-2017-0096 ◽

2018 ◽

Vol 26 (4) ◽

pp. 466-491 ◽

Cited By ~ 3

Author(s):

Eva K. Jermakowicz ◽

Chun-Da Chen ◽

Han Donker

Keyword(s):

Financial Reporting ◽

Stock Exchange ◽

Panel Data Analysis ◽

Financial Statement ◽

Net Income ◽

Cross Sectional ◽

Toronto Stock Exchange ◽

Content Type ◽

Publicly Traded Companies ◽

Interaction Terms

Purpose The purpose of this study is to examine the effects of adopting International Financial Reporting Standards (IFRS) on financial statements of the largest Canadian firms (S&P/TSX 60) listed on the Toronto Stock Exchange (TSX). Design/methodology/approach This study investigates the financial statement effects of 46 companies from the S&P/TSX 60 index which report under IFRS in 2011 and switched to IFRS from CGAAP. This study used panel data analysis, which can be considered as more powerful when conducting cross-sectional and in time analysis among companies. Because of weakness of Cramer statistic on R-square, the authors used interaction terms as suggested by Hope (2007). Findings Consistent with the authors’ perceptions, this study finds that significant effects of adopting IFRS are associated with industry practices. The empirical results show that the adoption of IFRS in Canada created more relevant financial reporting for book value of equity and net income in the post-adoption periods. Originality/value This study should be of interest to the US regulators considering IFRS adoption by US publicly traded companies as well as to regulators, standard setters and listed companies in all countries worldwide that are in transition to IFRS.

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