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1 – 10 of 83Su-Jane Hsieh and Yuli Su
The purpose of this paper is to investigate whether financial analyst coverage affects the dissemination of disclosed operating lease information into cash flow predictions and…
Abstract
Purpose
The purpose of this paper is to investigate whether financial analyst coverage affects the dissemination of disclosed operating lease information into cash flow predictions and stock prices.
Design/methodology/approach
The difference in lease expense between capital/finance lease and operating lease reporting is estimated based on the approach in Hsieh and Su (2015). This difference is referred to as the earnings impact from operating lease capitalization and is only available from footnotes. The authors then include the level of financial analyst following in a cash flow model to study its impact on the cash flow predictive value of the earnings impact. Similarly, the level of financial analyst following is inserted in an earnings-return model to assess the effect of analyst coverage on the association between contemporaneous stock returns and earnings impact.
Findings
The authors find that the cash flow predictive value of the earnings impact shifts to the interaction between analyst coverage and the earnings impact, suggesting that the decision-usefulness of the earnings impact is conditioned on the level of analyst following. Nevertheless, the authors find that the earnings impact continues to have explanatory value for the contemporaneous stock returns, while the interaction between analyst coverage and the earnings impact does not. This finding suggests that the earnings impact is already fully reflected in stock prices regardless of analyst following.
Research limitations/implications
Since the estimation of the earnings impact from reporting operating leases as capital leases is based on the method developed by Imhoff et al. (1991), the results and inferences are thus constrained by the validity of the method.
Practical implications
The authors find that financial analyst activities accelerate the incorporation of the earnings impact from operating lease capitalization in cash flow predictions, but it does not promote the impounding of the earnings impact into stock prices. This finding suggests that financial analysts' influence on the dissemination of the earnings impact hinges on the type of economic activity, and failing to consider the financial analyst following in studying the cash flow predictive value of the earnings impact would obscure the findings.
Originality/value
The authors extend the findings of prior research that financial analysts' activities promote the incorporation of firm-specific information into stock prices by investigating the impact of financial analysts on the dissemination of disclosed operating lease information.
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The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have given relief to lessees in response to the coronavirus (COVID-19…
Abstract
Purpose
The International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) have given relief to lessees in response to the coronavirus (COVID-19) pandemic. However, it is not clear why any relief from the requirements in International Financial Reporting Standards (IFRS) or the Accounting Standards Codification (ASC) should be necessary. The purpose of this paper is to highlight weaknesses in how the IASB and FASB developed their leases Standards, and why those Standards are not robust enough to cope with a shock to the economic system.
Design/methodology/approach
The COVID-19 relief suspends some features of the leasing requirements rather than changing them. What if other economic or regulatory events cause the same circumstances to arise?
Findings
Have COVID-19 exposed weaknesses in the leasing standards that should have been avoided when they were developed or is COVID-19 the problem?
Originality/value
Analysis of actual board discussions and staff papers is unusual and provides insights into the standard-setting process.
Sean M. Andre and Joy L. Embree
The typical accounting curriculum focuses on technical knowledge, which makes it challenging to devote time toward developing other important skills, such as examining how…
Abstract
The typical accounting curriculum focuses on technical knowledge, which makes it challenging to devote time toward developing other important skills, such as examining how accounting rules may impact a company’s financial statements. Recently, the accounting rules for lease transactions changed significantly, and this chapter provides an overview of an assignment used in an intermediate accounting course to engage students in a real-world application. Students had the opportunity to apply accounting rules to a publicly traded company, measure the significance of changes to generally accepted accounting principles, read financial disclosures, reinforce concepts of present value and ratio analysis, and engage in critical thinking. This type of assignment does not have to be limited to leases, and instructors could discuss any accounting rule by following a similar model, whether the rule itself is current or proposed. This would offer students context beyond textbook learning.
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Natalie Tatiana Churyk, Alan Reinstein and Lance Smith
This exercise exposes students to complex lease transactions, requiring research in the FASB Accounting Standards Codification, archived standards, and future standards (exposure…
Abstract
Purpose
This exercise exposes students to complex lease transactions, requiring research in the FASB Accounting Standards Codification, archived standards, and future standards (exposure drafts (ED)).
Design/methodology/approach
Case study/exercise/assignment.
Findings
Students analyze how a retail establishment examines lease transactions to ensure its practices are in line with its mission. Students gain experience researching archived, current, and future standards. Student feedback suggests that students feel the exercise is valuable because it reinforces what they learned in earlier courses and it requires them to understand all aspects related to capital and operating leases. Furthermore, direct assessment data based on grading rubrics indicates that most students meet instructor expectations and indirect assessment data based on student perceptions indicates students are meeting the exercise learning outcomes.
Originality/value
This learning exercise fosters critical thinking skills; emulating professional practice issues and enhancing written and communication skills. It reinforces graduate students’ undergraduate learning related to leases.
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Natalie Tatiana Churyk, Martin Ndicu and Thomas C. Pearson
Creating a mindset for research, including the development of professional research skills and critical thinking, is of the utmost importance in preparing students for the…
Abstract
Creating a mindset for research, including the development of professional research skills and critical thinking, is of the utmost importance in preparing students for the business world. To help faculty with this mindset, we discuss novel approaches for incorporating professional research and interactions into the undergraduate classroom, although the recommendations can apply to the entire curriculum. We describe three scenarios where our recommendations might apply – research/financial, tax, and accounting information system courses. Using a professional accounting research course and a financial course as examples, we start out broadly discussing a practitioner-coauthored professional case study approach that is applicable to any course, at any level. We then present a capstone undergraduate tax research course followed by an introduction of a specific project in an accounting information systems course. We include suggested syllabi, projects, and assessment rubrics throughout the discussion.
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Noriyuki Tsunogaya, Satoshi Sugahara and Parmod Chand
The purpose of this paper is to examine the effects of a principles-based accounting standard with guidance (principles-with-guidance approach), stringency (conservativeness) of…
Abstract
Purpose
The purpose of this paper is to examine the effects of a principles-based accounting standard with guidance (principles-with-guidance approach), stringency (conservativeness) of numerical thresholds, and incentives (high or low debt-equity ratio environment) on the judgments of Japanese auditors in a lease accounting setting.
Design/methodology/approach
To reflect Japanese auditors’ judgmental features, this study adopts a quasi-experiment that uses both manipulation for different environments (i.e. stable or critical financial condition) and perceptions about the importance of “principles” and “guidance” in different types of lease accounting standards (i.e. substantially all, approximately 90 and 88 percent).
Findings
“Principle” (substantially all) has a positive effect, while “guidance” (approximately 90 percent) has a negative effect on encouraging Japanese auditors to capitalize lease transactions. “More stringent guidance” (approximately 88 percent) has a positive effect only when clients are in critical financial conditions. Other findings indicate that judgments of Japanese auditors are strongly influenced by their colleagues’ perceived judgments.
Originality/value
This is the first quasi-experiment to examine Japanese auditors’ professional judgments using a lease accounting setting. To find out whether Japanese auditors interpret and apply International Financial Reporting Standards (IFRS) in the similar manner as their counterparts in other countries will be important when Japanese policymakers make their final decision regarding the adoption of IFRS. The discussion and findings also contribute to the International Accounting Standards Board (IASB) with regard to enhancing global convergence of financial reporting.
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Ahmed Ebrahim and Tarek Abdelfattah
This study aims to critically analyze the fundamentals of the current major Islamic Finance (IF) instruments and contracts in light of both the foundations of IF and the concept…
Abstract
Purpose
This study aims to critically analyze the fundamentals of the current major Islamic Finance (IF) instruments and contracts in light of both the foundations of IF and the concept of substance over form in the accounting conceptual framework. Such analysis is believed to be necessarily for the IF institutions to provide better and more genuine service to their customers.
Design/methodology/approach
To achieve the study purpose, the methodology is based on theoretical analysis and analytical review of the major IF contracts.
Findings
The IF industry needs to focus on the economic substance of the products offered to their clients. In developing and promoting their products, IF institutions need to focus on the ultimate and substantial goals of Islamic Sharia rather than re-packaging existing conventional products under different arrangements and formats to make them appear as Sharia-compliant to their clients. Both religious scholars and IF professionals need to engage in much deeper analysis and understanding of the substantial design of IF instruments and the concept of usury in modern economy.
Research limitations/implications
This paper does not intend to develop a comprehensive framework for the design of IF instruments to meet the economic substance and ultimate goals of IF principles or measure such economic substance. However, that is definitely a subject for further research.
Originality/value
By applying concepts like substance over form from other business fields such as the accounting theoretical framework to the IF instruments and contracts, we should gain better understanding and practical implications of these instruments and figure out ways to improve their design to be more consistent with and better serve the ultimate goals of the Islamic Sharia.
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Daniel J. Phaneuf and Roger H. von Haefen
In this chapter, we describe how random utility maximization (RUM) discrete choice models are used to estimate the demand for commodity attributes in quality-differentiated goods…
Abstract
In this chapter, we describe how random utility maximization (RUM) discrete choice models are used to estimate the demand for commodity attributes in quality-differentiated goods. After presenting a conceptual overview, we focus specifically on the conditional logit model. We examine technical issues related to specification, interpretation, estimation, and policy use. We also discuss identification strategies for estimating the role of price and non-price attributes in preferences when product attributes are incompletely observed. We illustrate these concepts via a stylized application to new car purchases, in which our objective is to measure preferences for fuel economy.
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Natalie Tatiana Churyk, Alan Reinstein and Gerald Harold Lander
This paper aims to examine the status and implications of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) forthcoming…
Abstract
Purpose
This paper aims to examine the status and implications of the Financial Accounting Standards Board (FASB) and International Accounting Standards Board’s (IASB) forthcoming standard on leases. The proposal arose from concern that many lease obligations are unrecorded on the balance sheet and that current accounting for lease transactions does not represent fully the economics of many lease transactions.
Design/methodology/approach
On September 20, 2012 and September 25, 2012, the Boards decided to account for some lease contracts using an approach similar to their proposed 2010 leases exposure draft (interest and depreciation) and to account for some leases using an approach that results in a straight-line lease expense. On May 13, 2013, the Boards decided to continue to account for some lease contracts on a straight-line basis, and others on an amortization basis separate from interest expense. Identification of the type of lease requires a two-step process at lease commencement, and all leases are recorded identically at inception. The subsequent measurement gives rise to differences. Some concerns are that an increase in assets and liabilities may result in debt covenant breaches that will require renegotiation and adjustment.
Findings
While understanding that many financial users, preparers and auditors favor retaining the current and long-standing leasing standards, the FASB and IASB should recognize many unexpected consequences of its new proposals, including the changing of many long-held financial ratios and the resultant violations of many bank loan covenants.
Research limitations/implications
The only limitation is that this manuscript is not based on primary empirical data. There are no implications for the study’s purpose is an update of a proposed FASB/IASB standard, an analysis of the empirical impact studies that have been done, a questionning of whether a new standard is really needed or that the current standard is not being implemented properly, and guidance for the implementation at transition and on-going for the proposed standard. This study gives a reader a compact update, implications, ramifications and guidance for preparation of a new standard if it is passed.
Practical implications
The new rules will alter many key financial metrics that investors use to determine company valuations and credit agencies use to determine credit worthiness. Some items will improve, such as gross margin, cash flow from operations and earnings before interest and taxes. Reported interest coverage and return on assets will be lower under the new rules. Industries that make extensive use of operating leases such as transportation, banking, telecommunications, retail and real estate will be most affected.
Social implications
In the best case scenario, the new standard would destroy approximately 190,000 US jobs. US gross domestic product (GDP) would be reduced by $27.5 billion annually. In the best case, the household earnings would be reduced by $7.8 billion annually. In the worst case, this decrease is $135.2 billion a year. The apparent liabilities of US publicly traded companies would increase by $1.5-$2 trillion, the equivalent gross state product of 20 states. Approximately $1.1 trillion of this would be attributable to balance sheet recognition of real estate operating leases, while the remainder would come from recognizing equipment and other leases as liabilities.
Originality/value
The value of this research is the unique analysis of the proposed lease standard, and in looking at why the previous models did not work or did they? Is it the current requirements that are wrong or their implemenation? The reader is given a detailed overview of the proposed standard, its economic and social impacts, an update of the proposed standard, what companies must do now to get ready for the transition and on-going requirements, and a discussion of the tremendous opposition to any proposed changes in the current lease requirements from what they are.
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