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Article
Publication date: 17 April 2019

Ana Isabel Lopes and Laura Reis

This paper aims to examine pricing differences regarding contingencies presented in statements of financial position or notes, which are considered an area for creative accounting.

Abstract

Purpose

This paper aims to examine pricing differences regarding contingencies presented in statements of financial position or notes, which are considered an area for creative accounting.

Design/methodology/approach

The authors have chosen two countries with different cultural environments to test the exploratory study. The sample includes companies using the International Accounting Standard (IAS) 37, which requires recognition of provisions while contingent liabilities are only disclosed, implying different impacts from underlying judgement related with contingencies. The authors apply a regression model based on the Ohlson equity-valuation framework.

Findings

The most important conclusion is that market participants in both countries follow different patterns when incorporating information about provisions and contingent liabilities. More precisely, the results suggest that provisions are value-relevant, but incrementally less negative in Portugal. Contingent liabilities seem to have no value relevance. However, an exception exists for Portuguese companies having a risk committee board, in which case a significant market valuation of contingent liabilities is found and discounted in share prices. The existence of a risk committee corroborates the value relevance of this board, which is positively valued by market participants in both national cultures.

Practical implications

The findings may make a contribution to the IASB research project on the IAS 37 and possible amendments to it (suspended until the revisions to the conceptual framework are finalized) and to the IASB prioritization of communication effectiveness of financial statements to all users.

Originality/value

Value relevance of contingencies differentiating countries from two different national cultures and firms with a risk committee on the board of directors.

Details

Meditari Accountancy Research, vol. 27 no. 2
Type: Research Article
ISSN: 2049-372X

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Book part
Publication date: 5 October 2020

Deirdre M. Collier and Hannah Rozen

This case exposes students to contingent liabilities, a complex topic they must grapple with in practice, via introduction of the problem of accounting for vacation pay…

Abstract

This case exposes students to contingent liabilities, a complex topic they must grapple with in practice, via introduction of the problem of accounting for vacation pay earned but untaken. The case has been tested with both undergraduates and graduates. It is appropriate for students in an intermediate accounting course and can be completed either individually or in small groups. Grappling with issues related to contingent liabilities makes students appreciate the difficulties these present. The case allows students to consider the impact of a policy change on budgeting, firm financials, financial ratios, and the potential reaction from investors and employees. This case forces students to critically think about a little discussed business problem – contingent liabilities. Understanding the variability of a contingent liability and the firm’s handling of it constitutes the primary educational value of the case. Critical thinking and application skills are enhanced by considering the impact of both the existing contingent liability and steps necessary to eliminate it. Firms switching to unlimited vacation policies have been widely discussed in the press of late (Chen, 2020; Fontana, 2017; Henley, 2018; Jackson, 2018).

Details

Advances in Accounting Education: Teaching and Curriculum Innovations
Type: Book
ISBN: 978-1-83867-236-2

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Book part
Publication date: 8 August 2006

Allan Graham and John J. Maher

We examine the relationship that exists among bond ratings, bond yields, and various estimates of a firm's contingent environmental remediation liability using a sample of…

Abstract

We examine the relationship that exists among bond ratings, bond yields, and various estimates of a firm's contingent environmental remediation liability using a sample of new bond issues. Our results indicate that the largest external EPA-based estimates of the firm's environmental obligations are significantly associated with a firm's bond rating, providing relevant incremental information beyond that supplied by the environmental accruals presented in the financial statements. Furthermore, while the accrued environmental liability is shown to have a direct association with the bond yield, the external EPA-based estimates provide an indirect relationship with the bond yield through their influence on the bond rating. These results contribute to the extant literature by empirically clarifying the role of various environmental liability estimates in establishing a firm's bond rating and further indicating their connection with the pricing of corporate debt.

Details

Environmental Accounting
Type: Book
ISBN: 978-0-76231-366-2

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Book part
Publication date: 9 November 2009

Michael T. Gapen

This paper uses contingent claims analysis to evaluate the implicit government guarantee to Fannie Mae and Freddie Mac prior to their placement into conservatorship. The…

Abstract

This paper uses contingent claims analysis to evaluate the implicit government guarantee to Fannie Mae and Freddie Mac prior to their placement into conservatorship. The main findings of the paper indicate that the expected value of the guarantee was in line with the size of capital injections under the Treasury Preferred Stock Purchase Agreement and that the market expected the government to cover nearly all expected losses on senior debt. However, simulations reveal that the eventual total cost to recapitalize the GSEs may be significantly higher than provided for under the original terms of the conservatorship.

Details

Credit, Currency, or Derivatives: Instruments of Global Financial Stability Or crisis?
Type: Book
ISBN: 978-1-84950-601-4

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Article
Publication date: 20 February 2017

Thomas Schneider, Giovanna Michelon and Michael Maier

The purpose of this paper is to encourage accounting regulators to address diversity in practice in the reporting of environmental liabilities. When Canada changed to…

Abstract

Purpose

The purpose of this paper is to encourage accounting regulators to address diversity in practice in the reporting of environmental liabilities. When Canada changed to International Financial Reporting Standards (IFRS) in 2011, Canadian regulators asked the IFRS Interpretations Committee to interpret whether the discount rate to value environmental liabilities should be a risk-free discount rate. Old Canadian GAAP, and current US GAAP, allow for a higher discount rate, resulting in commensurately lower liabilities. International regulators refused to address this issue expecting no diversity in practice in Canada.

Design/methodology/approach

The focus is on a sample of Canadian oil and gas and mining firms. These domestic industries play a major role internationally and have significant environmental liabilities. The method is empirical archival, tracking firm characteristics and discount rate choice on transition to IFRS.

Findings

There is significant diversity in practice. About one-third of the sample firms choose a higher discount rate, avoiding a major increase in environmental liabilities on transition to IFRS. The evidence suggests that these firms have relatively larger environmental liabilities and that the discount rate decision is a strategic choice.

Research limitations/implications

The sample is based on one country and may only be reflecting local anomalies that have no broader implications.

Practical implications

Diversity in practice in accounting for environmental liabilities is not acceptable. Accounting regulators should act to create consistent and comparable reporting practice.

Social implications

Firms and managers facing larger environmental liabilities can choose to minimize environmental liabilities under IFRS, while it is the general public and society at large that bear the ultimate risk.

Originality/value

The paper pushes forward the debate on whether recognized environmental liabilities should reflect the interests of equity investors, or if other investors and stakeholders should be taken into account.

Details

Accounting, Auditing & Accountability Journal, vol. 30 no. 2
Type: Research Article
ISSN: 0951-3574

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Article
Publication date: 1 January 2005

Herman A. Theeke

This paper seeks to present the positions and conclusions of scholars to support a proposition that the asset approach to human resource accounting has failed.

Abstract

Purpose

This paper seeks to present the positions and conclusions of scholars to support a proposition that the asset approach to human resource accounting has failed.

Design/methodology/approach

Reviews the history of human asset accounting.

Findings

The paper offers an alternative “liability approach” to account for and report human resources.

Originality/value

The paper provides an argument and rationale to demonstrate that a liability paradigm would be compatible with normal accounting and reporting procedures.

Details

Journal of Human Resource Costing & Accounting, vol. 9 no. 1
Type: Research Article
ISSN: 1401-338X

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Article
Publication date: 3 September 2018

Saumya Ranjan Dash and Mehul Raithatha

The purpose of this study is to investigate the impact of disputed tax litigation risk on firm performance and stock return behavior using a sample of Indian listed firms.

Abstract

Purpose

The purpose of this study is to investigate the impact of disputed tax litigation risk on firm performance and stock return behavior using a sample of Indian listed firms.

Design/methodology/approach

The authors use disputed tax liability, reported as a contingent liability by the listed firms, as a proxy for the disputed tax litigation risk. To examine the impact of disputed tax litigation risk on firm performance (measured by accounting and market-based measures), the empirical approach used in this study focusses on the panel estimation technique. A portfolio-based approach using alternative asset pricing models examines the cross-sectional return variation because of the influence of disputed tax litigation risk.

Findings

The results of this study show a negative relationship between firm performance measures and disputed tax litigation risk. Cross-sectional test results reveal that higher disputed tax litigation risk is associated with higher expected returns.

Research limitations/implications

This study focusses on disputed tax reported under the heading of contingent liability as a proxy for litigation risk. The study will help investors and portfolio managers to consider disputed tax litigation risk as an important parameter in the evaluation of firm performance. This study will also help regulators to get feedback on tax related policies and improve the dispute resolution process.

Originality/value

This study adds to the existing literature on the relationship between litigation risk and firm performance. In the context of emerging market, this study is the first-of-its-kind study, which focusses on disputed tax as a litigation risk proxy and examines its possible impact on firm performance and stock return behavior.

Details

Accounting Research Journal, vol. 31 no. 3
Type: Research Article
ISSN: 1030-9616

Keywords

Abstract

Details

Public-Private Partnerships, Capital Infrastructure Project Investments and Infrastructure Finance
Type: Book
ISBN: 978-1-83909-654-9

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Article
Publication date: 16 October 2007

Graeme Wines, Ron Dagwell and Carolyn Windsor

This paper aims to critically examine the change in accounting treatment for goodwill pursuant to international financial reporting standards (IFRSs) by reference to the…

Abstract

Purpose

This paper aims to critically examine the change in accounting treatment for goodwill pursuant to international financial reporting standards (IFRSs) by reference to the Australian reporting regime.

Design/methodology/approach

The paper discusses and compares the former Australian and the new IFRS treatments for goodwill. This comparison focuses on the advantages and potential complexities of the new method, with the aim of identifying the issues and challenges that preparers, independent auditors and those involved in corporate governance face in complying with the new requirements.

Findings

The paper highlights that the identification and valuation of cash‐generating units and goodwill require numerous assumptions to be made in estimating fair value, value in use and recoverable amount. Considerable ambiguity and subjectivity are inherent in the IFRS requirements.

Research limitations/implications

Findings suggest that future research should examine how financial report preparers and corporate governance mechanisms are dealing with the complex change required by the new goodwill accounting treatment and how the many critical issues involved in auditing the resulting figures are being addressed.

Practical implications

The research has practical implications for financial report preparers in identifying the issues that must be addressed in complying with the international goodwill accounting treatment. In turn, the paper highlights conceptual issues of relevance to auditors in their role of providing assurance on the resulting accounting numbers. It also has implications for others involved in corporate governance, such as audit committee members, in emphasising the areas in which they should be providing oversight of the accounting judgments. These issues are of relevance in any reporting regime based on IFRSs.

Originality/value

While much has been written about the mechanics of the new goodwill accounting requirements, there has been a lack of critical research highlighting the many problems and ambiguities that will arise in the application of those rules.

Details

Managerial Auditing Journal, vol. 22 no. 9
Type: Research Article
ISSN: 0268-6902

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Article
Publication date: 6 November 2009

Christopher L. Culp and Kevin J. O'Donnell

Property and casualty (“P&C”) insurance companies rely on “risk capital” to absorb large losses that unexpectedly deplete claims‐paying resources and reduce underwriting…

Abstract

Purpose

Property and casualty (“P&C”) insurance companies rely on “risk capital” to absorb large losses that unexpectedly deplete claims‐paying resources and reduce underwriting capacity. The purpose of this paper is to review the similarities and differences between two different types of risk capital raised by insurers to cover losses arising from natural catastrophes: internal risk capital provided by investors in insurance company debt and equity; and external risk capital provided by third parties. The paper also explores the distinctions between four types of external catastrophe risk capital: reinsurance, industry loss warranties, catastrophe derivatives, and insurance‐linked securities. Finally, how the credit crisis has impacted alternative sources of catastrophe risk capital in different ways is considered.

Design/methodology/approach

The discussion is based on the conceptual framework for analyzing risk capital developed by Merton and Perold.

Findings

In 2008, the P&C insurance industry was adversely affected by significant natural catastrophe‐related losses, floundering investments, and limited access to capital markets, all of which put upward pressure on catastrophe reinsurance premiums. But the influx of new risk capital that generally accompanies hardening markets has been slower than usual to occur in the wake of the credit crisis. Meanwhile, disparities between the relative costs and benefits of alternative sources of catastrophe risk capital are even more pronounced than usual.

Originality/value

Although many insurance companies focus on how much reinsurance to buy, this paper emphasizes that a more important question is how much risk capital to acquire from external parties (and in what form) vis‐à‐vis investors in the insurance company's own securities.

Details

The Journal of Risk Finance, vol. 10 no. 5
Type: Research Article
ISSN: 1526-5943

Keywords

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