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The
Quality of Accruals and Earnings: The Role of Accrual Estimation
Errors
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Patricia M Dechow and Ilia D Dichev
The
major benefit of accruals is to reduce timing and mismatch
problems in the underlying cash flows. However, accruals
accomplish this benefit at the cost of making assumptions
and estimates about future cash flows, which implies that
accruals include errors of estimation or noise. Since estimation
noise reduces the beneficial role of accruals, this study
suggests that the quality of accruals and earnings is decreasing
in the magnitude of estimation noise in accruals. More specifically,
we develop a simple model of working capital accruals where
accruals correct the timing problems, in cash flows, at
the cost of including errors in estimation. Based on the
model, we derive an empirical measure of accrual quality
as the residual from firm-specific regressions of changes
in working capital on the past, present, and future operating
cash flow realizations. The study concludes with two empirical
applications that illustrate the usefulness of our measure
of accrual quality. First, we explore the relation of accrual
quality to economic fundamentals. We find that accrual quality
is negatively related to the magnitude of total accruals,
length of the operating cycle, and the standard deviation
of sales, cash flows, and earnings, while it is positively
related to firm size. Second, we show a strong positive
relation between accrual quality and earnings persistence.
©
Patricia M Dechow and Ilia D Dichev. www. umich.edu. Reprinted
with permission.
Control:
Worth Paying for but Worth Recording?
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Michael Davis
A
controlling interest in another business entity embodies
valuable rights not available to a noncontrolling interest.
Payment for these rights, known as a control premium, is
a well-established concept in the mergers and acquisitions
arena. The control premium has received scant attention,
however, in financial accounting, even though it may represent
a significant portion of purchased goodwill. As the Financial
Accounting Standards Board (FASB) has recently issued new
rules for goodwill and other identifiable intangibles, this
paper examines the theory surrounding control premiums and
the feasibility of separate identification and valuation.
However, due to numerous measurement difficulties, including
determination of how many shares a control premium needs
to be paid and the reliability of the prevailing pre-bid
share price as a reference point used to estimate control
premiums, it is unlikely that control premiums can be valued
with any degree of accuracy.
©
Graziadio Business Report. Reprinted with permission.
The
Relationship between Accounting and Taxation
- Simon James
Although
accounting principles and practices normally form the basis
for tax assessment, there are reasons why there should sometimes
be variations between the figures used for commercial accounting
and those used for tax assessment. These reasons include
the different purposes of accounting and taxation, difficulties
in applying relevant economic concepts and the administrative
effectiveness required of a tax system. The recent Secan
case
has renewed interest in these issues and this paper also examines
recent developments in the UK and internationally. It concludes
that the relationship between accounting and taxation is an
evolving one but there seems to have been a clear movement
towards greater reliance on commercial accounts for the purposes
of taxation. It is, therefore, suggested that the relevant
areas of tax law are reviewed to ensure that they continue
to meet the requirements of an effective tax system.
©
IUP. All Rights Reserved.
Corporate
Conflicts of Interest
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Joel S Demski
This
paper surveys conflicts of interest in corporate governance,
with emphasis on auditors, boards of directors, analysts
and investment bankers, regulators, management, attorneys
and investors. Enron provides a host of examples as well.
The author stresses the multifaceted nature of these conflicts,
and the fact that most research looks at some conflicts
such as auditor independence, absent the larger setting
and potential interactions among various players. He further
speculates herding behavior to be an important explanatory
device in understanding periodic failures.
©
Journal of Economic Perspectives (JEP), Spring 2003.
Reprinted with permission.
The
Relevance and Applicability of IAS in Madagascar: The Perception
of Accounting Practitioners
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Pran
Boolaky
This
article reports the result of a survey carried out on the
importance and applicability of International Accounting
Standards (IAS, now known as International Financial Reporting
Standards, IFRS) Madagascar. This article uses IFRS to cover
the use of international standards both before and after
the reform of the International Accounting Standards Committee
in 2001. The results of the survey show that IFRS are both
totally applicable and also very important to Madagascar.
An important challenge before the accounting bodies and
professionals of Madagascar is addressing 20 issues not
dealt with, in the present accounting plan and incorporating
the same in the revised accounting plan.
©
IUP. All Rights Reserved.
Research Summary
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