Earnings Management and Derivative Hedging with Fair Valuation: Evidence from the Effects of FAS 133

2014 ◽  
Vol 90 (4) ◽  
pp. 1437-1467 ◽  
Author(s):  
Jongmoo Jay Choi ◽  
Connie X. Mao ◽  
Arun D. Upadhyay
Keyword(s):  
Earnings Management ◽  
Income Smoothing ◽  
Financial Accounting ◽  
Accounting Standard ◽  
Earnings Volatility ◽  
Discretionary Accrual ◽  
Smoothing Methods ◽  
Hedge Accounting ◽  
Reported Earnings ◽  
Fair Valuation

ABSTRACT Barton (2001) and Pincus and Rajgopal (2002) show that earnings management through discretionary accruals and derivative hedging are partial substitutes in smoothing earnings before 1999. In this study, we investigate whether Financial Accounting Standard (FAS) 133 regarding hedge accounting in 2000 has influenced the relative merit of the two earnings-smoothing methods. Based on a sample of S&P 500 nonfinancial firms during 1996–2006, we find that the substitution relation between derivative hedging and discretionary accrual is significantly attenuated after FAS 133 implementation. We also document a significant increase in earnings volatility associated with derivative hedging post-FAS 133. These results are robust to the use of various model and method specifications, as well as controlling for contemporaneous macroeconomic and regulatory shocks. Overall, our results suggest that a material change in an accounting rule regarding derivatives can influence the level and volatility of reported earnings, as well as the method of income smoothing. JEL Classifications: G32; M41; M48

Determinants and Consequences of Firms' Derivative Accounting Decisions

2020 ◽  
Vol 5 (1) ◽  
pp. 81-114 ◽  
Author(s):  
Spencer Pierce
Keyword(s):  
Financial Reporting ◽  
Accounting Standards ◽  
Fair Value ◽  
Financial Accounting ◽  
Firm Risk ◽  
Accounting Firms ◽  
Earnings Volatility ◽  
Hedge Accounting ◽  
Reported Earnings ◽  
Jel Classifications

ABSTRACTFinancial accounting standards require derivatives to be recognized at fair value with changes in value recognized immediately in earnings. However, if specified criteria are met, firms may use an alternative accounting treatment, hedge accounting, which is intended to better represent the underlying economics of firms' derivative use. Using FAS 161 disclosures, I examine determinants of hedge accounting use and the effects of hedge accounting on financial reporting and capital markets. I find variation in firms' hedge accounting use and provide evidence that compliance costs of applying hedge accounting affect firms' decision to use hedge accounting. Firms decrease their reported earnings volatility via derivatives that receive hedge accounting and could further decrease their earnings volatility if hedge accounting were applied to all their derivatives. Inconsistent with arguments given for using hedge accounting, I fail to find a decrease in investors' assessments of firm risk from using hedge accounting.JEL Classifications: M40; M41; G32.

Bank earnings management using commission and fee income

2019 ◽  
Vol 20 (2) ◽  
pp. 172-189 ◽  
Author(s):  
Peterson K. Ozili ◽  
Erick Outa
Keyword(s):  
Earnings Management ◽  
Financial Reporting ◽  
Investor Protection ◽  
Income Smoothing ◽  
Real Earnings Management ◽  
Accounting Standard ◽  
Content Type ◽  
Financial Firms ◽  
Reported Earnings ◽  
Accounting Standard Setting

Purpose The purpose of this paper is to investigate whether banks use commission and fee (CF) income to manage reported earnings as an income-increasing or income smoothing strategy. Design/methodology/approach The authors employ the regression methodology to detect real earnings management. Findings The authors find that banks use CF income for income smoothing purposes and this behaviour persists during recessionary periods and in environments with stronger investor protection. The implication of the findings is that bank non-interest income which achieves diversification gains to banks is also used to manipulate reported earnings. Research limitations/implications The findings show that real earnings management is prevalent among banks in Africa. Further research into earnings management should examine real earnings management among non-financial firms in developing regions. Practical implications From an accounting standard setting perspective, the evidence suggests the need for national/international standard setters to adopt strict revenue recognition rules that ensure that banks or firms report the actual fees they make, and to discourage banks from delaying (or deferring) the collection of fee income to manage or smooth reported earnings opportunistically. Originality/value This study contributes to the positive accounting theory (PAT) literature which examines the accounting and non-accounting decisions that influence managers’ choice of accounting methods in financial reporting. Extending the PAT, the authors show that certain conditions can incentivize managers to engage in earning management such as during recessions and weak institutional quality or weak investor protection.

Earnings management and goodwill impairment

2016 ◽  
Vol 17 (1) ◽  
pp. 120-147 ◽  
Author(s):  
Giuseppe Davide Caruso ◽  
Elisa Rita Ferrari ◽  
Vincenzo Pisano
Keyword(s):  
Earnings Management ◽  
Design Methodology ◽  
Income Smoothing ◽  
Financial Accounting ◽  
Current Debate ◽  
Managerial Behavior ◽  
Content Type ◽  
Listed Firms ◽  
Goodwill Impairment ◽  
Research Questions

Purpose – The purpose of this paper is to understand whether managerial behavior in impairing goodwill arising from M & As has changed after the adoption of IAS/IFRS, searching for evidences of earnings management (EM) practices. Thus, our goal is to provide a response to the following research questions. Are goodwill impairments used by listed firms’ managers to manipulate earnings? If so, what kind of EM practice is mostly used? Design/methodology/approach – In this paper the authors tested the following hypothesis: H1. In the year of the deal’s closure and in the following four years, the management detects impairment of goodwill in difformity with the previous Italian regulations and related accounting practices. Moreover, the authors tried to determine, for each considered firms, potential symptoms of typical DEM practices widely debated in the financial accounting literature (income smoothing, income minimization, income minimization, or big bath accounting). Findings – Our analysis does not prove evidence of certain EM practices, but it highlights very clearly that, after the adoption of IAS/IFRS, managers’ behavior has deeply changed. Moreover, the analysis shows that there is no univocal choice in favor of a specific EM practice and that every firm pursues its own “strategy.” Originality/value – Considering the importance of the topic from both the perspectives of managerial (with regard to M & As valuation processes) and financial accounting (with regard to intangibles valuation fulfilled by applying the impairment test instead of the amortization), this work aims to provide a multi-dimensional contribution to the current debate.

scholarly journals Valuing An Emerging International Technology Company

2011 ◽  
Vol 7 (1) ◽  
Author(s):  
John Zimmerman
Keyword(s):  
Balance Sheet ◽  
Cumulative Effect ◽  
Fair Value ◽  
Financial Accounting ◽  
Publicly Traded ◽  
Accounting Standard ◽  
Financial Valuation ◽  
Accounting Principle ◽  
Fair Valuation ◽  
Interim Period

The requirements of Financial Accounting Standard Board (FASB) 142 provide an excellent opportunity to examine various financial valuation methods used to determine a company’s value.  Under FASB 142, goodwill and intangible assets with indefinite useful lives are no longer amortized, but instead tested for impairment at least annually in accordance with the provisions. Any impairment loss has to be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in an organization’s first interim period. The impairment test requires an accurate and fair valuation of the asset in question.  This case is based upon the valuation dilemma faced by Integrated Silicon Solution (NASDAQ: ISSI), a publicly traded international technology company, in late 2008. ISSI had made several acquisitions and carried substantial goodwill. Since ISSI was publicly traded, a public market value was available but the financial crisis of 2008 caused the company to consider other methods, as is allowed under FASB 142. The case uses both the income and comparable market approaches to arrive at a fair value, and this value is used to determine if impairment for the goodwill the company carried on its balance sheet existed.

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.

scholarly journals Earnings Management and Audit Opinion

2016 ◽  
Vol 8 (4) ◽  
pp. 113
Author(s):  
Elaheh Moazedi ◽  
Ehsan Khansalar
Keyword(s):  
Earnings Management ◽  
Income Smoothing ◽  
Real Earnings Management ◽  
Control Variables ◽  
Main Hypothesis ◽  
Audit Opinion ◽  
Discretionary Accrual ◽  
Time Period ◽  
Logistic Regression Method ◽  
The Relationship

The subject of the present research is the study of the relationship between earnings management (accrual-based and real) and auditor’s opinion. Alongside putting the control variables into consideration, this this paper studies the relationship between earnings management (accrual-based and real) and auditors’ opinion. The purpose of this research is to examine the effect of income smoothing and manipulation on the opinion of independent auditors. This research includes two independent variables i.e. earnings management (based on discretionary accruals) and real earnings management, one dependent variable i.e. auditor’s opinion, along with control variables. In the first main hypothesis the relation between real earnings management and auditor’s opinion is examined; and the second hypothesis involves the association between discretionary accrual-based earnings management and auditor’s opinion. In this research some 117 firms in the time period 2008-2013 are empirically investigated and studied using logistic regression method. In conclusion, the second and third hypotheses are rejected; however examination of the first and fourth hypotheses confirms their significant association with auditor’s opinion.

Bank earnings management and income smoothing using commission and fee income

2017 ◽  
Vol 13 (4) ◽  
pp. 419-439 ◽  
Author(s):  
Peterson K. Ozili
Keyword(s):  
Earnings Management ◽  
Management Strategy ◽  
Income Smoothing ◽  
Policy Implications ◽  
Too Big To Fail ◽  
Content Type ◽  
Interest Income ◽  
Ex Post ◽  
European Banks ◽  
Reported Earnings

Purpose The purpose of this paper is to investigate whether European banks use commission and fee income (CF) to smooth reported earnings or to persistently increase reported earnings as an income-increasing earnings management strategy. Design/methodology/approach The author tests the income-smoothing hypothesis following the approach of Stubben (2010) and Ahmed et al. (1999). Findings The author finds that European banks use CF to smooth reported earnings and this behaviour is pronounced among non-too-big-to-fail (NTBTF) European banks compared to too-big-to-fail (TBTF) European banks. The author also finds a positive and significant correlation between interest income and non-interest income (CF) indicating increased systematic risk due to reduced diversification benefits. The author also finds that the CF of NTBTF banks is procyclical with fluctuating economic conditions but not for TBTF banks. Also, the author finds evidence for income-increasing earnings management in the post-crisis period, for larger European banks and when banks have higher ex post interest income, implying that the propensity to engage in income-increasing earnings management significantly depends on bank size and ex post interest margin considerations. The findings have policy implications. Originality/value The author examines alternative financial numbers that banks use to manage earnings. The author focusses on income smoothing via CF among European banks, a context that has not been explored in the literature.

scholarly journals APAKAH MANAJEMEN LABA TERMASUK KECURANGAN ? : ANALISIS LITERATUR

2018 ◽  
Vol 3 (1) ◽  
Author(s):  
Deddy Kurniawansyah
Keyword(s):  
Earnings Management ◽  
Important Implication ◽  
Research Method ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Remedial Action ◽  
Literature Study ◽  
Accounting Theory ◽  
Reported Earnings

Many maintain that earnings management is harmful. This literature study explains and describe the issue from the outside perspective of earnings management. This research method used qualitative with literature study. The results of this study are Earnings management is not a fraud. Fraud is an “act ofcriminal deception” or a “deceitfulbehavior which may be punished by law”. Earnings management is within legitimate constraints, implying that the deviation of reported earnings from underlying or economic earnings due to earnings management is legitimate or authorized by accounting standards and corporate laws.The results of this study contribute as add to the treasury of financial accounting literature, especially accounting theory. The results of this research have important implication for regulators and lawmakers. Regulators tend to regardearnings management as harmful and in the need ofimmediate remedial action. . 

scholarly journals APAKAH MANAJEMEN LABA TERMASUK KECURANGAN ? : ANALISIS LITERATUR

2018 ◽  
Vol 3 (1) ◽  
Author(s):  
Deddy Kurniawansyah
Keyword(s):  
Earnings Management ◽  
Important Implication ◽  
Research Method ◽  
Accounting Standards ◽  
Financial Accounting ◽  
Remedial Action ◽  
Literature Study ◽  
Accounting Theory ◽  
Reported Earnings

Many maintain that earnings management is harmful. This literature study explains and describe the issue from the outside perspective of earnings management. This research  method  used  qualitative  with  literature  study. The  results  of  this  study  are Earnings management is not a fraud. Fraud is an “act of criminal deception” or a “deceitful  behavior  which  may  be  punished  by  law”.  Earnings  management  is within legitimate constraints, implying that the deviation of reported earnings from underlying  or  economic  earnings  due  to  earnings  management  is  legitimate  or authorized by accounting standards  and corporate laws.  The results of this study contribute  as  add  to  the  treasury  of  financial  accounting  literature,  especially accounting  theory.  The  results  of  this  research  have  important  implication  for regulators  and  lawmakers.  Regulators  tend  to  regard  earnings  management  as harmful and in the need of immediate remedial action.

scholarly journals DIVERSIFIKASI USAHA DAN MANAJEMEN LABA DENGAN PENDEKATAN CONDITIONAL REVENUE MODEL

2017 ◽  
Vol 21 (2) ◽  
pp. 302
Author(s):  
Matthew Haryanto ◽  
Lina Lina
Keyword(s):  
Earnings Management ◽  
Large Scale ◽  
Stock Exchange ◽  
Positive Influence ◽  
Financial Accounting ◽  
Annual Reports ◽  
Accounting Standard ◽  
Financial Reports ◽  
Public Companies ◽  
Revenue Model

Generally, go public companies are belong to large-scale companies or even international ones. Mostly those companies have more than one business divisions, therefore the financial reports might be published in more than one segments. According to Financial Accounting Standard 5, the company financial reports can be distinguished between geographical segments and operating segments. This study aims to give the empirical evidence about the influence of the business diversification towards earnings management. The amount of the geography segments and the operating segments are used as proxy to represent the business diversification. The earnings management is measured by conditional revenue model. The data is collected from the company annual reports by accessing through Indonesia Stock Exchange website for period 2011-2013. The sampling method used is purposive sampling. Data analysis used multiple linear regressions. The result of the study shows that the geography segments have no influence on the earnings management, meanwhile the operating segments have positive influence on earnings management.

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