scholarly journals Equity Classification Of Convertible Debt?: Tax And Cash Flows Considerations

2011 ◽  
Vol 11 (4) ◽  
pp. 64
Author(s):  
Douglas K. Schneider ◽  
Dan Schisler ◽  
Mark G. McCarthy ◽  
J. Larry Hagler
Keyword(s):  
Cash Flows ◽  
Financial Accounting ◽  
Financial Instruments ◽  
Financial Accounting Standards Board ◽  
Convertible Debt ◽  
Accounting Standard ◽  
Policy Makers ◽  
Hybrid Securities ◽  
Tax Deduction ◽  
Interest Expense

The issue of debt versus equity classification for hybrid securities has been a source of continuing controversy for tax policy-makers and financial accounting standard setters. A large number of corporations have issued hybrid financial instruments which possess the characteristics of both debt and equity. One of the most common examples of hybrid financial instruments is convertible debt. Issuers of convertible debt were motivated by a desire to raise capital that would be attractive to the capital markets while at the same time exploit tax or reporting rules. For instance, the issuer of convertible debt is allowed a tax deduction for interest expense even though the convertible debt instrument may later be converted to equity, thus avoiding repayment of principal at maturity. The Internal Revenue Service (IRS) allows the issuer a tax deduction for interest expense, while requiring the holder to recognize taxable interest income. However, the IRS and the Financial Accounting Standards Board (FASB) have considered treating convertible debt according to its underlying economic substance and ultimate outcome as opposed to treating it strictly as debt. If the IRS, the FASB, or both were to move towards an economic substance approach with respect to convertible debt, what implications would this have on the issuers and holders of convertible debt? This article speculates on changes in tax and reporting rules for convertible debt and analyzes the potential impact of such changes on the treatment of distributions from convertible debt. Our analysis shows that if convertible debt were treated as equity and its distributions no longer eligible for interest expense deductions, issuers would experience a decrease in cash flow from operations due to the presumed increase in tax liability. Conversely, holders of convertible debt may be eligible for the dividends-received deduction.

An empirical analysis of an alternative model of Financial Accounting Standard no. 128

2018 ◽  
Vol 31 (4) ◽  
pp. 498-508 ◽  
Author(s):  
John E. McEnroe ◽  
Mark Sullivan
Keyword(s):  
Accounting Standards ◽  
Equity Capital ◽  
Financial Accounting ◽  
Average Increase ◽  
Financial Accounting Standards Board ◽  
Convertible Debt ◽  
Accounting Standard ◽  
Content Type ◽  
Accounting Principles ◽  
Median Increase

Purpose This paper aims to investigate the empirical effects of an inconsistency in the calculation of the diluted earnings per share (EPS) number which originated in Accounting Principles Board Opinion No. 15 (APB 15) and continues in Statement of Financial Accounting Standard No. 128 (SFAS 128), EPS. The discrepancy involves the treatment of dilutive warrants and options versus other dilutive convertible securities and is explained in the section of this paper where the authors describe the proposed alternative EPS model. In a sample of 55 publicly traded companies in which they applied their model, it was found that the average increase in diluted EPS to be 5.7 per cent and the median increase to be 3.8 per cent. The authors believe that SFAS 128 should be considered, along with other factors, to be revised to direct that diluted EPS be computed in accordance with their model. Design/methodology/approach The authors selected a sample of companies from the Compustat Annual Database that had either Convertible Debt or Convertible Stock or both with a year-end between July 1, 2011 and July 1, 2012 which was the most recent data available at the time of the initial study. They then used the model assuming a “repurchase” of common shares as if the “treasury stock method” which applies to options and warrants also applied to these conversions. They then reduced the number of shares initially used to compute diluted EPS by the number of assumed repurchased shares. Using the revised number of shares, the authors recomputed diluted EPS as a percentage of the originally reported diluted EPS. Findings For the 55 companies in the sample, the average increase in diluted EPS using the “treasury stock method” was 5.7 per cent. The median increase was 3.8 per cent. The largest increase was 26.6 per cent and the smallest was 0 per cent. Research limitations/implications This is a one-year study of the sampled firms. A multi-year sample is recommended for further research. Also, the sample might be applied to foreign entities under the jurisdiction of IAS 33. Practical implications According to the Financial Accounting Standards Board (FASB) the price-earnings ratio of an equity is perhaps the most frequently cited statistic in the business of equity investments. As the denominator in the price-earnings ration is the “diluted” EPS figure calculated under generally accepted accounting principles (GAAP) under Statement of Financial Accounting No. 128 (SFAS 128), the results have very significant implications for the recommended study and revision of the diluted EPS statistic. Social implications If the current diluted EPS reported numbers result in lower stock prices than would otherwise be the case under the authors’ model, then it seems likely that these companies with large amounts of debt would have a higher cost of equity capital than would otherwise be the case. The overall result would be a different allocation of equity capital than would be the case if convertible debt and convertible equity were treated the same way as options and warrants. As we are unaware of a rationale for the disparate treatment, it is believed that this a is a misallocation caused by a statement of the Financial Accounting Standards Board (FASB) that seems flawed and recommend that it be considered to be revised. Originality/value A review of the literature found no other study addressing this issue.

THE EVOLUTION OF THE RELATIONSHIP BETWEEN THE US FINANCIAL ACCOUNTING STANDARDS BOARD AND THE INTERNATIONAL ACCOUNTING STANDARD SETTERS: 1973–2008

2012 ◽  
Vol 39 (1) ◽  
pp. 1-51 ◽  
Author(s):  
Robert J. Kirsch
Keyword(s):  
Accounting Standards ◽  
Financial Accounting ◽  
Working Relationships ◽  
International Accounting ◽  
International Accounting Standards ◽  
Financial Accounting Standards Board ◽  
Accounting Standard ◽  
Staff Members ◽  
The Us ◽  
The Relationship

ABSTRACT Utilizing archival materials as well as personal interviews and correspondence with personnel of the Financial Accounting Standards Board (FASB) and International Accounting Standards Committee/Board (IASC/B), including former Board chairmen and staff members, this paper examines the development of the working relationships between the FASB and the IASC/B from their earliest interactions in 1973 through the transformation of the IASC into the IASB and the Convergence Program rooted in the 2002 Norwalk Agreement up to 2008.

Impairment reversals: unbiased reporting or earnings management

2018 ◽  
Vol 26 (2) ◽  
pp. 245-271 ◽  
Author(s):  
Tongyu Cao ◽  
Hasnah Shaari ◽  
Ray Donnelly
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Reporting Standard ◽  
Accounting Standard ◽  
Content Type ◽  
Study Support ◽  
A Company

Purpose This paper aims to provide evidence that will inform the convergence debate regarding accounting standards. The authors assess the ability of impairment reversals allowed under International Accounting Standard 36 but disallowed by the Financial Accounting Standards Board to provide useful information about a company. Design/methodology/approach The authors use a sample of 182 Malaysian firms that reversed impairment charges and a matched sample of firms which chose not to reverse their impairments. Further analysis examines if reversing an impairment charge is associated with motivations for and evidence of earnings management. Findings The authors find no evidence that the reversal of an impairment charge marks a company out as managing contemporaneous earnings. However, they document evidence that firms with high levels of abnormal accruals and weak corporate governance avoid earnings decline by reversing previously recognized impairments. In addition, companies that have engaged in big baths as evidenced by high accumulated impairment balances and prior changes in top management, use impairment reversals to avoid earnings declines. Research limitations/implications The results of this study support both the informative and opportunistic hypotheses of impairment reversal reporting using Financial Reporting Standard 136. Practical implications The results also demonstrate how companies that use impairment reversals opportunistically can be identified. Originality/value The results support IASB’s approach to the reversal of impairments. They also provide novel evidence as to how companies exploit a cookie-jar reserve created by a prior big bath opportunistically.

Instructional Case: General Host: Accounting for a Bond Refunding

1999 ◽  
Vol 14 (3) ◽  
pp. 451-464 ◽  
Author(s):  
Mary Beth Mohrman
Keyword(s):  
Earnings Management ◽  
Stock Prices ◽  
Cash Flows ◽  
Economic Consequences ◽  
Financial Accounting ◽  
Business Press ◽  
Paper Money ◽  
Book Values ◽  
The Relationship ◽  
Interest Expense

This assignment, which involves accounting for a simple bond refunding, achieves several objectives. First, it reinforces basic concepts in bond accounting, such as cash flows, book values, interest expense and gains/losses from early extinguishment. Second, it leads students to critically analyze an article from the popular business press. Third, it illustrates many important issues in financial accounting, such as earnings management, the relationship between earnings and stock prices, and economic consequences. Students are asked to read “Paper Money” from Forbes' “Numbers Game” column. The article describes General Host's bond exchange offer and questions the recognition of a gain in such circumstances. The case assignment requires students to carefully analyze the bond exchange and to question many of the authors' assumptions about the economic impacts of the exchange offer. I have used this case successfully in undergraduate intermediate accounting classes and in an introductory financial accounting course for M.B.A. students.

Going Concern Designations and GAAP versus Non-GAAP Earnings Metrics

2012 ◽  
Vol 28 (1) ◽  
pp. 77-92 ◽  
Author(s):  
James L. Bierstaker ◽  
Thomas F. Monahan ◽  
Michael F. Peters
Keyword(s):  
Stock Price ◽  
Potential Role ◽  
Cash Flows ◽  
Financial Accounting ◽  
Master's Level ◽  
Financial Accounting Standards Board ◽  
Generally Accepted Accounting Principles ◽  
Going Concern ◽  
Public Company ◽  
Auditor Reporting

ABSTRACT: Many students have not spent much time studying or contemplating the importance of non-GAAP (Generally Accepted Accounting Principles) earnings to the “Street.” Based on the facts of an actual company and utilizing the financial information drawn from this company's 10-K and Earnings Release, this case introduces students to the strengths and weaknesses of GAAP and non-GAAP earnings measures, and why the Street might be more interested in cash and recurring earnings in attempting to predict movements in stock price. It also provides the instructor with an opportunity to discuss the dangers of allowing firms to emphasize earnings in their press releases that are not defined by an external authoritative body (such as the Financial Accounting Standards Board [FASB]), and how this can hurt the consistency and reliability of reporting. This is an important discussion, since regulators have recently formally proposed to include non-GAAP measures in their overhaul of the auditor reporting model (Public Company Accounting Oversight Board [PCAOB] 2011). The case also familiarizes students with current auditing guidelines dealing with the going concern decision and the potential role that non-GAAP earnings can play in this decision. Thus, the three primary learning objectives are to teach students: (1) to apply going concern audit standards, (2) about the potential role of non-GAAP earnings in this decision—especially as a predictor of future cash flows, and (3) other issues associated with non-GAAP earnings. This topic is important, as auditors are frequently auditing companies that release non-GAAP earnings and/or have going concern issues. This case can be used in Intermediate and Auditing classes, as well as master's-level courses.

What Are the Essential Features of a Liability?

2010 ◽  
Vol 24 (4) ◽  
pp. 623-633 ◽  
Author(s):  
Dennis Murray
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Cash Flows ◽  
Economic Benefits ◽  
Primary Objective ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Time Dimension ◽  
The Past ◽  
Definition Of

SYNOPSIS: The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) are in the process of jointly re-examining their conceptual frameworks. The re-examination includes assessing the definition of a liability. The Boards’ existing liability definitions include three criteria: (1) a present obligation; (2) a past transaction or event; and (3) a probable future sacrifice of economic benefits. The Boards have recently proposed that a liability be defined as “a present obligation for which the entity is the obligor” (FASB 2008c, 2). The proposed definition mentions only one time dimension (the present). References to the past and future are omitted. This paper argues that these omissions are undesirable. Omitting a reference to the past removes the link between the definition and the tradition of historically based financial statements. More importantly, however, the failure to reference future sacrifices of economic benefits divorces the definition from the primary objective of financial reporting: to provide information about the “amount, timing and uncertainty of an entity’s future cash flows” (FASB 2008a, para. OB6). This paper offers an alternative definition that emphasizes the past and future rather than the present.

scholarly journals The FASBs Concepts Statement On Cash Flows And Present Value

2011 ◽  
Vol 19 (4) ◽  
Author(s):  
Stanley Martens ◽  
Thomas Berry
Keyword(s):  
Cash Flow ◽  
Accounting Standards ◽  
Fair Value ◽  
Cash Flows ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Present Value ◽  
Numerical Examples ◽  
Flow Information

In February 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements.  In this document the FASB asserts without proof that a present value computation along its lines will provide a good estimate of the fair value of an asset or liability.  Using numerical examples provided by the FASB, we attempt to construct arguments in support of the FASB’s claim.  We find that such arguments require strong and not at all obvious assumptions about players in hypothetical markets.

scholarly journals Operating Cash Flows, Cash Recovery Rates And Internal Rates Of Return

2010 ◽  
Vol 8 (8) ◽  
Author(s):  
Christine Andrews ◽  
Joseph C. Rue ◽  
Ara Volkan
Keyword(s):  
Financial Reporting ◽  
Stock Price ◽  
Market Price ◽  
Cash Flows ◽  
Financial Accounting ◽  
Sufficient Information ◽  
Financial Accounting Standards Board ◽  
Historical Cost ◽  
Value Stocks ◽  
Future Cash Flows

<p class="MsoNormal" style="text-align: justify; line-height: normal; margin: 0in 0.5in 0pt; mso-pagination: none;"><span style="font-family: &quot;Times New Roman&quot;,&quot;serif&quot;; color: black; font-size: 10pt; mso-themecolor: text1;">Investors depend on financial reporting to assess the amounts and timing of future cash flows. Unfortunately, the historical cost basis may not provide sufficient information to judge future cash flows. The Financial Accounting Standards Board argues that the market price of common stock incorporates the market estimate of discounted future cash flows. This paper illustrates the calculation of operating cash flow on a per share (CFPS) basis and measures a firm&rsquo;s internal rate of return by dividing the CFPS by the beginning of the year stock price reported by the Dow Jones Industrials. Although this measure may be affected by other market events, we believe it has potential information content and may provide investors with a tool to value stocks.</span></p>

The Accounting Standard-Setting Due Process, Corporate Consensus, and FASB Responsiveness: Employers' Accounting for Pensions

1995 ◽  
Vol 10 (3) ◽  
pp. 555-564 ◽  
Author(s):  
Georgia R. Saemann
Keyword(s):  
Conceptual Framework ◽  
Due Process ◽  
Accounting Standards ◽  
Standard Setting ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Accounting Standard ◽  
Accounting Standard Setting

The Financial Accounting Standards Board (FASB) uses a due process to ascertain the views of its constituents and to build consensus while setting standards based on a sound conceptual framework. This study examines the responsiveness of the FASB and its success in building consensus among corporations in the due process on Employers' Accounting for Pensions. The findings indicate that the FASB is influenced by the number of opposing comments filed by its corporate constituents. Further, there is evidence that consensus was built throughout the due process for the highly controversial standard.

scholarly journals Accounting For OPEBs: Does Better Accounting Serve The Public Interest?

2011 ◽  
Vol 11 (3) ◽  
pp. 1 ◽  
Author(s):  
Timothy A. Pearson ◽  
Scott I. Jerris ◽  
Richard Brooks
Keyword(s):  
Health Care ◽  
Social Consequences ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Accounting Standard ◽  
Public Companies ◽  
The Public ◽  
Setting Process ◽  
Sfas 106 ◽  
Accounting Standard Setting

In 1992, the Financial Accounting Standards Board (FASB) issues Employers Accounting for Postretirement Benefits Other Than Pensions (SFAS 106). SFAS 106 requires public companies to account for postretirement benefits other than pensions (e.g., health care) on an accrual basis. While SFAS 106 is good accounting, it provides corporations with an excellent excuse to amend or terminate health care coverage for retirees. This paper discusses the economic and social consequences of SFAS 106 as well as the politics of the accounting standard setting process.

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