Critical Accounting Estimate Disclosures and the Predictive Value of Earnings

2017 ◽  
Vol 31 (4) ◽  
pp. 1-12 ◽  
Author(s):  
Matthew Glendening
Keyword(s):  
Measurement Uncertainty ◽  
Predictive Value ◽  
Cash Flows ◽  
Securities And Exchange Commission ◽  
Negatively Associated ◽  
Accounting Measurement ◽  
Accounting Estimates ◽  
Future Cash Flows ◽  
Disclosure Practice ◽  
Jel Classifications

SYNOPSIS In the early 2000s, the Securities and Exchange Commission (SEC) called on firms to provide new Management's Discussion and Analysis (MD&A) disclosures about their critical accounting estimates (CAEs). The quantitative sensitivity disclosures outline reasonably likely changes in firms' highly uncertain accounting estimates and allow firms to communicate with users about accounting measurement uncertainty. Using a sample of S&P 500 firms, I find that the predictive value of earnings with respect to future cash flows is negatively associated with the presence of a CAE disclosure. Consistent with the SEC's intended purpose of the new disclosure practice, this finding suggests that CAE disclosures convey instances of heightened accounting measurement uncertainty and potentially aid users in assessing the level of uncertainty in accounting estimates. JEL Classifications: M41.

Tangible Long-Lived Asset Impairments and Future Operating Cash Flows under U.S. GAAP and IFRS

2017 ◽  
Vol 93 (1) ◽  
pp. 187-211 ◽  
Author(s):  
Elizabeth A. Gordon ◽  
Hsiao-Tang Hsu
Keyword(s):  
Predictive Value ◽  
Cash Flows ◽  
Negative Association ◽  
Data Availability ◽  
Economic Factors ◽  
Negatively Associated ◽  
Operating Cash Flows ◽  
Reporting Incentives ◽  
Asset Impairments ◽  
Jel Classifications

ABSTRACT This paper investigates the predictive value of tangible long-lived asset impairments for changes in future operating cash flows under U.S. GAAP and IFRS. We find that impairments reported under IFRS are negatively associated with changes in future operating cash flows, whereas those under U.S. GAAP, on average, are not. We investigate whether differences in the predictive value are attributable to differences in recognition or measurement, providing evidence suggesting that impairment recognition under U.S. GAAP is delayed. Evidence also suggests that the value-in-use measurement attribute, allowed under IFRS, does not induce under-impairing as IFRS and U.S. GAAP impairments are similarly related to future impairments. The main result of a negative association under IFRS, but not U.S. GAAP, holds after considering future impairments to control for measurement differences, macro-economic factors, and firm reporting incentives. Further, impairment losses under IFRS are more predictive in high-enforcement countries. JEL Classifications: D78; F02; M16; M41; G38. Data Availability: Data used are available from sources identified in the paper.

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

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.

Do Stock-Based Compensation Deferred Tax Assets Provide Incremental Information about Future Tax Payments?

2015 ◽  
Vol 38 (1) ◽  
pp. 79-102 ◽  
Author(s):  
Derek Johnston ◽  
Lisa Kutcher
Keyword(s):  
Stock Options ◽  
Cash Flows ◽  
Employee Stock Options ◽  
Negatively Associated ◽  
Deferred Tax Assets ◽  
Incremental Information ◽  
Restricted Stock ◽  
Tax Payments ◽  
Deferred Tax ◽  
Jel Classifications

ABSTRACT We explore whether an accounting treatment similar to that required under IFRS improves the ability of the stock-based compensation component of deferred tax assets to predict future tax payments, relative to U.S. GAAP. Using hand-collected data for S&P 500 firms, we estimate the deferred tax assets related to employee stock options (ESOs) and restricted stock units (RSUs). We find that the RSU deferred tax asset is negatively related to future cash tax payments, while we fail to find that the ESO deferred tax asset is. However, after reducing the ESO and RSU deferred tax assets by their corresponding estimated impairments, we find that both variables are negatively associated with future tax payments. Additional analysis provides evidence that supports the conjecture that using a revaluation approach to account for stock-based compensation deferred tax assets may be more useful in predicting future tax cash flows, relative to current U.S. GAAP. JEL Classifications: H25; M41.

Comparing the Value Relevance, Predictive Value, and Persistence of Other Comprehensive Income and Special Items

2011 ◽  
Vol 86 (6) ◽  
pp. 2047-2073 ◽  
Author(s):  
Denise A. Jones ◽  
Kimberly J. Smith
Keyword(s):  
Predictive Value ◽  
Value Relevance ◽  
Cash Flows ◽  
Data Availability ◽  
Net Income ◽  
Special Items ◽  
Comprehensive Income ◽  
Other Comprehensive Income ◽  
Gains And Losses ◽  
Future Cash Flows

ABSTRACT Gains and losses reported as other comprehensive income (OCI) and as special items (SI) are often viewed as similar in nature: transitory items with little ability to predict future cash flows and minimal implications for company value. However, current accounting standards require SI gains and losses to be recognized in net income, while OCI gains and losses are deferred until realized. This study empirically compares OCI and SI gains and losses using a model that jointly estimates value relevance, predictive value, and persistence. Results show that both SI and OCI gains and losses are value-relevant, but SI gains and losses exhibit zero persistence (i.e., are transitory), while OCI gains and losses exhibit negative persistence (i.e., partially reverse over time). Further, we find that SI gains and losses have strong predictive value for forecasting both future net income and future cash flows, while OCI gains and losses have weaker predictive value. Data Availability: All data are publicly available from sources indicated in the text.

Regulator-Cited Cooperation Credit and Firm Value: Evidence from Enforcement Actions

2018 ◽  
Vol 94 (4) ◽  
pp. 275-302 ◽  
Author(s):  
Rebecca Files ◽  
Gerald S. Martin ◽  
Stephanie J. Rasmussen
Keyword(s):  
Firm Value ◽  
Securities And Exchange Commission ◽  
Department Of Justice ◽  
Negatively Associated ◽  
Private Action ◽  
Firm Cooperation ◽  
Remedial Actions ◽  
Insight Into ◽  
Jel Classifications

ABSTRACT Regulators claim to reward firm cooperation in the enforcement process. However, critics question which actions constitute firm cooperation and contend that cooperation leads to “harsh” and “unfair” outcomes. Examining 1,162 enforcement actions for financial misrepresentation initiated by the Securities and Exchange Commission and Department of Justice, we find that regulator-cited cooperation credit is best explained by remedial actions and self-reported law violations. Cooperation credit is negatively associated with firm monetary penalties assessed by regulators. Our estimates suggest that firms with cooperation credit realize an average penalty reduction of $23.8 million (49 percent). We also estimate that average reputation-related losses are $756 million (70 percent) lower for firms with cooperation credit. We find no association between cooperation credit and related private action outcomes. Our results provide important insight into what constitutes meaningful cooperation with regulators, and suggest that the benefits can be substantial for firms deemed to be cooperative. JEL Classifications: G38; K22; K42; M41.

Discretionary Risk Disclosures

2003 ◽  
Vol 78 (2) ◽  
pp. 449-469 ◽  
Author(s):  
Bjorn N. Jorgensen ◽  
Michael T. Kirschenheiter
Keyword(s):  
Stock Returns ◽  
Risk Premium ◽  
Voluntary Disclosure ◽  
Cash Flows ◽  
Share Price ◽  
Risk Disclosure ◽  
Share Prices ◽  
Ex Post ◽  
Partial Disclosure ◽  
Future Cash Flows

We model managers' equilibrium strategies for voluntarily disclosing information about their firm's risk. We consider a multifirm setting in which the variance of each firm's future cash flow is uncertain. A manager can disclose, at a cost, this variance before offering the firm for sale in a competitive stock market with risk-averse investors. In our partial disclosure equilibrium, managers voluntarily disclose if their firm has a low variance of future cash flows, but withhold the information if their firm has highly variable future cash flows. We establish how the manager's discretionary risk disclosure affects the firm's share price, expected stock returns, and beta, within the framework of the Capital Asset Pricing Model. We show that whereas one manager's discretionary disclosure of his firm's risk does not affect other firms' share prices, it does affect the other firms' betas. Also, we demonstrate that a disclosing firm has lower risk premium and beta ex post than a nondisclosing firm. Finally, we show that ex ante, the expected risk premium and expected beta of each firm are higher under a mandatory risk disclosure regime than in the partial disclosure equilibrium that arises under a voluntary disclosure regime.

On earnings and cash flows as predictors of future cash flows

2021 ◽  
Author(s):  
Ray Ball ◽  
Valeri V. Nikolaev
Keyword(s):  
Cash Flows ◽  
Future Cash Flows

FINANCIAL DERIVATIVES - INTEREST RATE SWAP

2004 ◽  
Vol 10 (3-4) ◽  
pp. 161-168
Author(s):  
Zoran Ivanović ◽  
Elvis Mujačević
Keyword(s):  
Cash Flows ◽  
Basic Form ◽  
Over The Counter ◽  
Interest Rate Swap ◽  
Market Participants ◽  
Forward Contract ◽  
Financial Derivative ◽  
Future Cash Flows ◽  
Interest Payments ◽  
Rate Swap

Swap as a portfolio of forward contract is a financial derivative traded on the over-the-counter market. In its basic form, swap is based on the exchange of future cash flows between two market participants in accordance with the agreed terms. The cash flows that are exchanged are the interest payments and in some circumstances even the notional amount, and transactions are carried out in a period of two to thirty years. Swaps first appeared in 80's, and have evolved from back-to-back loans.

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