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Article
Publication date: 21 March 2008

Gerald H. Lander and Kathleen A. Auger

The paper's aim is to research and discuss the issue of the lack of transparency in financial reporting and how companies take advantage of accounting rules in ways that…

Abstract

Purpose

The paper's aim is to research and discuss the issue of the lack of transparency in financial reporting and how companies take advantage of accounting rules in ways that inhibit transparency.

Design/methodology/approach

A literature review was carried out to see what had been written and discussed. Various legal cases were studied as well as Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) studies of the impact of offbalancesheet arrangements allowed by the FASB and SEC.

Findings

There are many ways that companies accomplish offbalancesheet financing by taking advantage of rules‐based accounting. If there is not a rule to prevent an entity from handling a particular transaction a certain way, then it is difficult for the auditor to stop it from happening.

Research limitations/implications

The paper is of descriptive nature. There are many policy implications from the results of the paper for all regulatory agencies. The economic substance of transactions needs to be communicated.

Practical implications

Financial managers and financial consultants need to refocus the structuring of financial transactions so that they comply with generally accepted accounting principles and that the economic substance of financial transactions is communicated. More accountability and ethical awareness needs to be instilled in the individuals who deceitfully structure financial transactions. Regulatory bodies need to ensure more transparency by closing loopholes and better enforcement of accounting standards. Boards of directors, especially the audit committees, need to be sure that a company is communicating the true economic reality of the financial transactions and financial position of the business entity. Offbalancesheet financing is one of the most significant ways, among others, that the user of financial statements can be misled. It is time for regulatory bodies to eliminate overly rules‐based standards, clearly state the economic objective of each standard, and require firms to disclose the economic motivations for the accounting practices they adopt.

Originality/value

The value of the paper is that it studies the problems of the lack of transparency in financial reporting. It then suggests that if what is currently being done, (i.e. rules‐based accounting), is not working, then a new approach, principles‐based accounting needs to be implemented by the regulatory agencies. This paper provides an overview of the lack of financial statement transparency.

Details

Journal of Accounting & Organizational Change, vol. 4 no. 1
Type: Research Article
ISSN: 1832-5912

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Article
Publication date: 1 July 2001

Andrew Holt and Timothy Eccles

This paper is concerned with accounting for leasehold property. While property professionals are familiar with commercial and technical aspects of leases, recent proposals…

Abstract

This paper is concerned with accounting for leasehold property. While property professionals are familiar with commercial and technical aspects of leases, recent proposals offer serious implications beyond the notional historical reporting of an entity’s financial position. Current proposals issued by the ASB will markedly impact upon the financial position reported by businesses holding leasehold properties, with consequent effects upon their reported profitability and their ability to raise finance. This paper examines the current position, whereby leases are regarded as either a finance or an operating lease. It then examines the conceptual framework in which accountants view the existing lease reporting provisions, examining the unease the current provisions cause. Finally, it discusses the most recent proposals and offers a commentary upon responses to them. It concludes with a warning to the owners and users of leasehold property to be ready for change ‐ or to make their voices known.

Details

Journal of Corporate Real Estate, vol. 3 no. 3
Type: Research Article
ISSN: 1463-001X

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Article
Publication date: 1 July 2003

John Dewey and Joseph Yiu

Every day, landlords and tenants are confronted with the dilemma of financing tenant improvements. Both parties see financing tenant improvements as a necessity. The…

Abstract

Every day, landlords and tenants are confronted with the dilemma of financing tenant improvements. Both parties see financing tenant improvements as a necessity. The landlord sees his tenant improvement investment as a necessity to consummate leasing transactions, while the tenant sees its tenant improvement investment as a necessity to build out vacant space. But at the end of the day, the investment dilutes the balance sheet for both parties since tenant improvements are non‐earning depreciating assets with no residual value. This paper introduces a new financing methodology for tenant improvements that take both the landlord and tenant out of the business of financing these non‐earning assets.

Details

Journal of Corporate Real Estate, vol. 5 no. 3
Type: Research Article
ISSN: 1463-001X

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Article
Publication date: 1 August 2003

David Heald

In Private Finance Initiative (PFI) projects, value for money (VFM) tests and accounting treatment are distinct but related issues. VFM analysis should be concerned with…

Abstract

In Private Finance Initiative (PFI) projects, value for money (VFM) tests and accounting treatment are distinct but related issues. VFM analysis should be concerned with total risk, not just with the sharing of risk, which dominates the accounting treatment decision. A framework is developed for logical thinking about what is meant by “best VFM” in the context of PFI projects. This involves consideration of the full set of alternatives, not an artificially diminished subset. The credibility of analytical techniques can be tarnished if they are misused to legitimate a predetermined decision. A reduction in construction risk may be a powerful source of VFM gains under PFI, but, under UK accounting regulation, this should not influence the accounting treatment decision. New complications about how VFM should be interpreted arise directly from the process of public sector fragmentation: affordability to the client is not necessarily the same as VFM for the public sector as a whole. Only public auditors, such as the National Audit Office, can gain access to PFI documentation on the conditions necessary for a comprehensive assessment of both accounting treatment and VFM. However, such studies require the kind of theoretical underpinning provided in this article, as otherwise the findings are likely to be ambiguous and hence vulnerable to rebuttal. In particular, VFM judgements must make explicit the basis of comparison on which they rest.

Details

Accounting, Auditing & Accountability Journal, vol. 16 no. 3
Type: Research Article
ISSN: 0951-3574

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Article
Publication date: 1 October 2000

Simon Wainwright

For many corporate occupiers, commercial property constitutes one of their largest operational assets. With a desire to improve shareholder value and efficiency and to…

Abstract

For many corporate occupiers, commercial property constitutes one of their largest operational assets. With a desire to improve shareholder value and efficiency and to refocus on core business, the continued necessity to retain such assets on the balance sheet is now under challenge. Changes in accountancy practice and a desire to maintain flexibility are, however making the choices ever more complicated. This paper examines the current options available for corporate users seeking to extract value from their property assets.

Details

Journal of Corporate Real Estate, vol. 2 no. 4
Type: Research Article
ISSN: 1463-001X

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Article
Publication date: 15 January 2020

Marcus Brooks, Stephanie Hairston and Charles Harter

The purpose of this paper is to examine the influence of manager ability on a firm’s choice of lease classification and the decision to capitalize vs lease firm-specific assets.

Abstract

Purpose

The purpose of this paper is to examine the influence of manager ability on a firm’s choice of lease classification and the decision to capitalize vs lease firm-specific assets.

Design/methodology/approach

The authors use regression analysis to examine the association between manager ability, lease classification and asset specificity.

Findings

Using 31,110 firm-year observations from 1998 to 2013, the authors find a significant positive relationship between manager ability and the decision to classify leases as operating. The authors also find that high-ability managers are more likely to capitalize, rather than lease, specialized firm-specific assets.

Research limitations/implications

The results imply that manager ability influences the choice of lease classification, which provides some support for the recent changes to lease accounting in Accounting Standard Update (ASU) 2016-02. The authors also show that asset specificity may serve as a mitigating factor in high-ability managers’ preference for operating leases, which implies that high-ability managers’ concerns with operational efficiency outweigh the benefits of off-balance sheet financing in their purchasing decisions if the asset in question is firm-specific.

Practical implications

The findings may be useful to boards of directors, investors and accounting academics concerned with the role that managerial ability plays in operational decision making and financial reporting.

Originality/value

The results imply that high-ability managers prefer off-balance sheet financing, which is unlikely to limit their access to external capital, but that this relationship is mitigated if the firm requires highly specialized assets.

Details

Journal of Applied Accounting Research, vol. 21 no. 1
Type: Research Article
ISSN: 0967-5426

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Article
Publication date: 1 March 1990

Michael Chartres

Explains Off Balance Sheet Finance (OBSF). Discusses its use andmisuse. Concludes that whilst OBSF is not intrinsically good or bad, itcan be useful, can be abused and…

Abstract

Explains Off Balance Sheet Finance (OBSF). Discusses its use and misuse. Concludes that whilst OBSF is not intrinsically good or bad, it can be useful, can be abused and must be regulated.

Details

Journal of Property Finance, vol. 1 no. 1
Type: Research Article
ISSN: 0958-868X

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Article
Publication date: 1 December 2002

Jane Broadbent and Richard Laughlin

The Private Finance Initiative (PFI) is designed to introduce new resources into the national infrastructure. It introduces the idea that the public sector can provide…

Abstract

The Private Finance Initiative (PFI) is designed to introduce new resources into the national infrastructure. It introduces the idea that the public sector can provide services by purchasing them from the private sector rather than by direct provision. There have been considerable disagreements about how to account for these transactions. Key in this has been differences of view as to whether PFI transactions involve purchase of assets and thus whether the transaction should appear on the balancesheets of the public sector. This seemingly technical question has generated considerable debate and disagreements between the UK government and the Accounting Standards Board (ASB). Closer investigation into this disagreement demonstrates a range of alternative views and tensions. Describes and analyses these different views and the inter‐ and intra‐relationships and tensions between these parties using an interests‐based, political framework for this contextual analysis. Demonstrates how accounting standard setting, in cases such as accounting for PFI, if only analysed at the technical level, misses a range of social dynamics that are central to understanding the role of accounting in the development of society.

Details

Accounting, Auditing & Accountability Journal, vol. 15 no. 5
Type: Research Article
ISSN: 0951-3574

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Article
Publication date: 1 January 1989

L. B Steven

Academic discussion of leasing has sought to provide possible explanations for its widespread use. Generally, taxation is regarded as the dominant factor in the decision…

Abstract

Academic discussion of leasing has sought to provide possible explanations for its widespread use. Generally, taxation is regarded as the dominant factor in the decision to lease. Myers, Diil & Bautista, prominent in the area of lease evaluation, came to the conclusion that the tax benefit of leasing seemed to be

Details

Managerial Finance, vol. 15 no. 1/2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 October 2004

Jack G. Kaikati

Synthetic leases, used by some retailers to finance rapid expansion, could be ticking time bombs that might blow up anytime in the USA. This paper has three objectives…

Abstract

Synthetic leases, used by some retailers to finance rapid expansion, could be ticking time bombs that might blow up anytime in the USA. This paper has three objectives. First, it provides an overview of the financing technique in the USA by tracing its origin and pin‐pointing its advantages and drawbacks. It shows that the drawbacks tend to outweigh the benefits. Second, it discusses how some retailers were red‐flagged for using it and how they responded to such undesirable exposure. The third objective is to highlight the more stringent accounting regulations recently imposed by the Financial Accounting Standards Board (FASB) on synthetic leases in the USA.

Details

International Journal of Retail & Distribution Management, vol. 32 no. 10
Type: Research Article
ISSN: 0959-0552

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