International Accounting

International Accounting

Standards, Regulations, and

Financial Reporting

Edited by

Greg N. Gregoriou and Mohamed Gaber

AMSTERDAM ● BOSTON ● HEIDELBERG ● LONDON ● NEW YORK ● OXFORD

PARIS ● SAN DIEGO ● SAN FRANCISCO ● SINGAPORE ● SYDNEY ● TOKYO

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Elsevier

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First edition 2006

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Contents

About the editors xiii

About the contributors xiv

1 Lobbying towards a global standard setter – do national

characteristics matter? An analysis of the comment

letters written to the IASB 1

Ann Jorissen, Nadine Lybaert, and Katrien Van de Poel

1.1 Introduction 3

1.2 Literature review and hypotheses development 5

1.2.1 Literature review 5

1.3 The development of hypotheses 10

1.4 The IASB and the standard-setting process 14

1.4.1 The transformation into a global standard setter 15

1.4.2 The mission of the IASB and its due process 15

1.4.3 The standard-setting process or due process 16

1.5 Research method 18

1.5.1 Data collection 18

1.5.2 Measurement of variables 20

1.6 Research results 23

1.6.1 The preparers lobby more often than the users 23

1.6.2 Large companies participate more often in the

lobbying process 25

1.6.3 Companies that suffer from a larger negative economic

impact of the standards will lobby more often 26

1.6.4 The position of the auditor in the lobbying process 28

1.6.5 The influence of country-level variables on the

lobbying behavior 30

1.7 Conclusion 32

References 33

Appendix A 36

Appendix B 39

2 A fair go for fair value 41

Janice Loftus

2.1 Introduction 43

2.2 Experimental fair value initiatives 44

2.3 Proposals and requirements for fair value for financial

instruments 46

2.4 IAS 39 and the mixed measurement model 49

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2.5 Conclusion 53

References 54

3 The behavior modification impact of International

Accounting Standards on decision-making and risk

management 57

Stanley C.W. Salvary

3.1 Introduction 59

3.2 The capital market and the commodity market 62

3.3 The role and the psychological effect of the capital market 66

3.4 Simplifying assumptions versus necessary conditions for

measurement 71

3.5 Economic reality, decision-making, and operating dynamics 75

3.6 Risk management and performance measurement 77

3.7 Structural and operating differences of companies 82

3.8 Sanity in market pricing and sensibility in

financial reporting 86

3.9 The investment decision, capital budgeting, and

recoverable cost 89

3.10 Discussion and conclusion 90

References 92

4 Fair value – the basis of International Financial

Reporting Standards: a conceptual contradiction

of the relevant measurement attribute in

financial accounting 97

Stanley C.W. Salvary

4.1 Introduction 99

4.2 Money, a credit economy, and the cash-flow process 102

4.3 Profit measurement and management’s

performance assessment 104

4.4 Neutrality, stewardship, and financial reporting 107

4.5 The lower of cost and market rule, fair valuation, and

realization 109

4.6 The IASB’s association of fair market value with the

cash-flow process 114

4.7 The Frameworks’ measurement bases and the mixed

attribute model 116

4.8 Investments, measurement rules, and market simulation 118

4.8.1 Lower of cost and market valuation 120

4.8.2 Realizable value 120

4.9 Summary, discussion, and conclusion 121

References 123

Contents

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5 Fair value accounting under IAS/IFRS: concepts,

reasons, criticisms 127

Jochen Zimmermann and Jörg Richard Werner

5.1 Introduction 129

5.2 Fair value accounting and the IFRS: basic properties and

scope of application 130

5.2.1 Definition of fair values 130

5.2.2 Treatment of holding gains and losses 130

5.2.3 FVA and capital maintenance 131

5.2.4 FVA and IAS/IFRS: scope of application 133

5.3 Justifications for the use of fair values in

financial reporting 139

5.3.1 Value relevance and standard setting 139

5.3.2 Revaluations as signals 141

5.3.3 Fair value accounting, contracting, and incentives 144

5.4 Conclusion 146

References 148

6 Does Delaware incorporation add value?

An accounting-based analysis 151

Feng Chen, Kenton K. Yee, and Yong Keun Yoo

6.1 Introduction 153

6.2 Development of hypotheses 154

6.3 Sample selection 156

6.4 Empirical results 160

6.4.1 Descriptive statistics 160

6.4.2 Is there a Delaware value premium? 162

6.5 Conclusion 165

References 166

7 Empirical evidence on the relation between

revaluations of fixed assets and the future

performance of firms in Brazil 169

Alexsandro Broedel Lopes

7.1 Introduction 171

7.2 Revaluation of fixed assets in Brazilian GAAP and

related literature 174

7.2.1 Brazilian GAAP for revaluation 174

7.2.2 Previous research 178

7.3 Models and results 180

7.3.1 Descriptive statistics 180

7.3.2 Research design and results 180

Contents

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7.4 Conclusions and implications for future research 185

Acknowledgments 187

References 187

8 Hedge funds and the stale pricing issue 189

Greg N. Gregoriou, William Kelting, and Mohamed Gaber

8.1 Introduction 191

8.2 Background information 194

8.3 Recent developments 195

8.4 Checklist of questions 196

8.5 Conclusion 197

References 197

9 Adopting and implementing International Financial

Reporting Standards in transition economies 199

Robert W. McGee

9.1 Introduction 201

9.2 Adopting and implementing IFRS 202

9.3 Translation problems 205

9.4 Teaching the new rules to practitioners 209

9.5 Reforming university curriculums 209

9.6 Credible accounting certification 218

9.7 Conclusion 220

Acknowledgments 221

References 221

10 International convergence: the Australian journey 225

Janice Loftus

10.1 Introduction 227

10.2 Models of international harmonization or convergence of

accounting 228

10.3 Models of accounting regulation 230

10.4 Australian standard setting 1970–1983 230

10.5 International harmonization of accounting 1970–1983 232

10.6 Australian standard setting 1984–1988 235

10.7 International harmonization of accounting 1984–1988 238

10.8 Australian standard setting 1988–1990 240

10.9 International harmonization of accounting 1988–1990 242

10.10 Australian standard setting 1991–1999 243

10.11 International harmonization of accounting 1991–1999 247

10.12 Australian standard setting 2000 onwards 252

10.13 International harmonization of accounting 2000 onwards 254

Contents

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10.14 The beginning of a new journey or the end of the road? 258

Acknowledgments 261

References 261

11 Determinants of bias in management earnings

forecasts: empirical evidence from Japan 267

Koji Ota

11.1 Introduction 269

11.2 Background on Japanese management forecasts 270

11.3 Data 272

11.3.1 Sample selection 272

11.3.2 Management forecast error 272

11.4 Determinants of bias in management earnings forecasts 273

11.4.1 Univariate analysis 273

11.4.2 Multivariate analysis 286

11.5 Market awareness of bias in management earnings

forecasts 288

11.6 Conclusion 290

Acknowledgments 292

References 293

12 Expected earnings growth when there is a

growth option 295

Kenton K. Yee

12.1 Introduction 297

12.2 Perpetual growth option: model setup 299

12.3 Accounting policies and earnings–value relations 303

12.4 Long-run earnings growth with a growth option 307

12.5 Conclusion 312

References 315

Appendix 317

13 The true cost of employee share options: the recent

debate and potential costs for a case study firm 325

Colette Grey, Derry Cotter, and Edel Barnes

13.1 Introduction 327

13.2 Literature review 329

13.2.1 ESO value and accounting income 329

13.2.2 Recognition date 331

13.2.3 Measuring fair values 332

13.3 Case study: ESAT Telecom Group 333

13.4 Results 338

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13.5 Discussion 340

13.6 Conclusion 343

Acknowledgments 345

References 345

14 Impairment of fixed assets: perceived implementation

problems associated with International Accounting

Standard No. 36 347

Mohamed E. Ibrahim

14.1 Introduction 349

14.1.1 Indications of impairment 352

14.1.2 The impairment test 353

14.1.3 Accounting for impairment 353

14.2 Previous studies 354

14.3 Methods 359

14.3.1 Sample 359

14.4 Results 361

14.4.1 Sample profile 361

14.4.2 Implementation problems 362

14.5 Conclusion 364

References 365

15 The rise and impact of hybrid securities in

Australian listed corporations 367

Tyrone M. Carlin and Nigel Finch

15.1 Introduction 369

15.2 The Australian hybrids market 370

15.3 Measuring the impact of hybrids 375

15.4 Results 376

15.5 Conclusion 383

References 385

16 Empirical evidence on the use, size, concentration,

and cost of executive options schemes in Australia 387

Tyrone M. Carlin and Guy Ford

16.1 Introduction 389

16.2 How prevalent are executive options plans in Australia? 390

16.3 Size, activity, and concentration of the observed

options schemes 392

16.4 Estimated cost of executive options schemes 396

16.5 Conclusion 398

References 399

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17 The introduction of fair value in Italy: economic and

financial reporting issues 401

Giovanni Melis, Andrea Melis, and Alessandro Pili

17.1 Introduction 403

17.2 The adoption of the International Financial Reporting

Standards in Italy 404

17.3 Accounting for the fair value changes: a comparative

analysis of IFRS, US GAAP, and Italian GAAP 406

17.3.1 Intangibles and fixed assets 406

17.3.2 Investment properties 415

17.3.3 Assets and liabilities in foreign currency 415

17.3.4 Actuarial gains and losses on defined

benefit plans 418

17.3.5 Financial assets and liabilities 419

17.3.6 Biological assets 424

17.4 The entity’s capital maintenance 425

17.4.1 Example 1 (investment property) 426

17.4.2 Example 2 (financial liability) 430

17.5 Accrual basis vs prudence: a comparative analysis of IFRS,

Italian, and US GAAP 433

17.6 The underlying reasons for the importance of the prudence

principle in Italy 438

17.6.1 Ownership, capital, and control structures

of Italian nonfinancial listed companies 439

17.6.2 Generally accepted concept of the corporate

entity: IASB vs Italy 440

17.6.3 Cultural issues concerning prudence and

risk avoidance 441

17.7 The adoption of the comprehensive income statement

in Italy 443

17.7.1 Example 1 (investment property) 445

17.7.2 Example 2 (financial liability) 445

17.8 Conclusion 450

Acknowledgments 451

References 454

18 Factors affecting accounting development in the

harmonization process with the international

framework: the case of Estonia 457

Toomas Haldma

18.1 Introduction 459

18.2 Literature review 460

18.3 Factors influencing accounting reform in Estonia 462

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18.4 Stages of the integration of the Estonian accounting

system into the international framework 463

18.5 Findings and discussion 470

18.5.1 The political system 470

18.5.2 The legal system 472

18.5.3 The taxation system 474

18.5.4 Finance and capital markets 475

18.5.5 The accounting profession 476

18.6 Conclusion 479

Acknowledgement 480

References 480

19 An elegant comparison of the tax advantages of mutual

funds, IRAs, and Roth IRAs – what hath Roth wrought? 483

Colin Read

19.1 Introduction 485

19.2 A model of lifetime consumption and savings under

various tax regimes 485

19.3 The analysis of Roth retirement savings 487

19.4 Comparison to mutual funds under an infinite time horizon 488

19.5 Conclusion and public policy ramifications 489

20 A meta-national perspective on accounting and

auditing in nonprofit organizations: the literature

interpreted in a principal–agent framework 491

Marc Jegers

20.1 Introduction 493

20.2 Containing the external stakeholders–management

agency costs 494

20.2.1 The role of accounting: reducing information

asymmetry between board and management 494

20.2.2 A special case: religious organizations 495

20.2.3 Accounting knowledge 495

20.2.4 Donors and the organization 496

20.2.5 Accounting regulation 497

20.2.6 Accounting choices 498

20.2.7 Compliance 499

20.2.8 Choices and compliance when calculating the

cost of nonprofit activities 500

20.3 The role of external audit 501

20.3.1 Reducing agency costs 501

20.3.2 Audit pricing 501

20.3.3 Containing the management–other staff agency

costs: internal control 502

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20.4 Conclusion 502

Acknowledgments 503

References 503

21 How about performance audits for public companies? 507

Haji Shafi Mohamad

21.1 Introduction 509

21.2 Extensions to the role of external auditing 509

21.3 The concept of performance auditing 510

21.4 The origins of auditing 512

21.5 Limitations and problems with implementing performance

audits 514

21.6 Auditor independence 515

21.7 Cost/Benefit 515

21.8 Establishing measurement criteria 516

21.9 Conclusion 518

References 520

22 Empirical evaluation of discretionary accruals models 523

Xavier Garza-Gómez

22.1 Introduction 525

22.2 Estimating discretionary accruals 527

22.2.1 Basic accrual models 528

22.2.2 Alternative accrual models 530

22.3 Important properties of total accruals 530

22.3.1 Accruals calculation 531

22.3.2 Sample and descriptive statistics 532

22.4 Evaluation of discretionary accruals models 536

22.4.1 Initial standard errors 537

22.4.2 Results of discretionary accrual models 540

22.5 Information content of discretionary and

nondiscretionary accruals 544

22.5.1 Sensitivity tests 545

22.6 Conclusion 546

References 547

23 What to teach? A comparison of professional and

paraprofessional accountants’ views on accounting

topic emphasis 549

Geoffrey Tickell and Kosmas X. Smyrnios

23.1 Introduction 551

23.2 Methodology 555

23.2.1 Participants 555

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23.2.2 Procedure 558

23.2.3 Data analyses 558

23.3 Results 558

23.3.1 Descriptive statistics 558

23.3.2 Principal components analyses 559

23.4 Conclusion 565

References 566

24 Australia’s accounting education in perspective 569

Geoffrey Tickell and Kosmas X. Smyrnios

24.1 Introduction 571

24.2 Higher education in Australia 571

24.3 Technical and Further Education (TAFE) 573

24.4 Increased cooperation between TAFEs and universities 575

24.5 Lifelong learning 577

24.6 Seamless education 578

24.7 The accounting profession and accounting education

in Australia 580

24.8 Accounting education in Australia 582

24.9 Accounting education in TAFE 583

24.10 Conclusion 583

References 584

Index 587

Contents

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About the Editors

Greg N. Gregoriou is Associate Professor of Finance and coordinator of faculty

research in the School of Business and Economics at the State University of New

York, College at Plattsburgh. He obtained his Ph.D. (Finance) from the University

of Quebec at Montreal and is hedge fund editor for the peer-reviewed scientific

journal Derivatives Use, Trading and Regulation published by Henry Stewart

Publications (UK). He has authored over 45 articles on hedge funds, and man￾aged futures in various US and UK peer-reviewed publications, including the

Journal of Portfolio Management, Journal of Derivatives Accounting, Journal of

Futures Markets, European Journal of Operational Research, Annals of

Operations Research, European Journal of Finance, and Journal of Asset

Management, etc. He has four books published by John Wiley & Sons. This is his

second book with Elsevier.

Mohamed Gaber is Associate Professor and Chair, Department of Accounting at

the State University of New York, College at Plattsburgh. He received his M.B.A.

and Ph.D. from Baruch College (CUNY). He has published in scientific journals

such as the Journal of Pensions and Derivatives Use, Trading and Regulation,

among others, and has written several book chapters.

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About the Contributors

Dr Edel Barnes is Senior Lecturer in Corporate Finance in the Department of

Accounting, Finance and Information Systems, University College Cork, and is

program director for the B.Sc. Finance Degree. She obtained her doctorate in

Financial Economics from the University of Manchester, her specific area of

study being securities markets and seasoned issuance. She also holds the

President’s Award for excellence in teaching.

Tyrone M. Carlin is Professor of Management at the Macquarie Graduate School

of Management (MGSM), Sydney, Australia. His current research interests lie in

interdisciplinary work in the areas of corporate governance and corporate finan￾cial reporting, as well as public sector financial management. He has published

articles in these areas in a range of international journals, including Management

Accounting Research, Financial Accountability and Management, Public

Management Review, Australian Accounting Review, Sydney Law Review,

University of New South Wales Law Review, and Australian Business Law

Review. He co-edits the Journal of Law and Financial Management.

Feng Chen is a Ph.D. Candidate in Accounting at Columbia Business School. He

expects to graduate in 2006. Mr Chen holds an M.A. in Economics from

Washington University in St Louis and an undergraduate economics degree from

Xiamen University in China. He studies accounting-based equity valuation, ana￾lysts forecasting, and international accounting. He has published in Accounting

and Business Research, and has several papers under review at premier account￾ing and finance journals. Recently, he has presented his research at major US and

international academic accounting conferences.

Derry Cotter is a chartered accountant and lectures in Accounting in the

Department of Accounting, Finance and Information Systems, UCC, where he is

program director for the B.Sc. Accounting degree. He also holds the President’s

Award for excellence in teaching.

Nigel Finch is a Lecturer in Management at the Macquarie Graduate School of

Management, specializing in the areas of managerial accounting and financial

management. His research interests are in the areas of accounting and manage￾rial decision-making, finance and investment management, financial services,

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