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Article
Publication date: 1 February 2003

Sharad Asthana and Birendra Mishra

This study investigates the incremental value‐relevance of non‐pension postretirement benefit obligations and expenses (disclosed by firms pursuant to SFAS 106). Our study is…

Abstract

This study investigates the incremental value‐relevance of non‐pension postretirement benefit obligations and expenses (disclosed by firms pursuant to SFAS 106). Our study is motivated by previously published evidences that investors value the SFAS 106 measure of postretirement benefit obligations. However, prior research does not address incremental value‐relevance of the SFAS 106. We address two related questions. First, “do the SFAS 106 measures of non‐pension postretirement benefit obligations and expenses provide incremental value relevance (after controlling for information available from non‐SFAS 106 sources).” Second, “under what circumstances are the SFAS106 measures more likely to provide incremental value relevance.” The key findings of this paper are: (i) on average, SFAS 106 measures of postretirement benefit obligations and expenses have no significant incremental value‐relevance after controlling for non‐SFAS 106 information; and (ii) labor intensity and the magnitude of postretirement benefit obligation increases the incremental value‐relevance of SFAS 106 measures.

Details

Review of Accounting and Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1475-7702

Article
Publication date: 1 February 2002

Sharad Asthana

This paper posits that the precision of accounting estimates should be an increasing function of experience due to learning effects. Using a sample of 747 observations for 305…

Abstract

This paper posits that the precision of accounting estimates should be an increasing function of experience due to learning effects. Using a sample of 747 observations for 305 firms for the period 1993–96 with complete data available on the COMPUSTAT, CRSP, and COMPACT DISCLOSURE databases, the paper conducts regression analyses to examine the precision of two estimates (discount rates and health care cost inflation rates) required under SFAS 106. Tests show that the estimation errors for the health care cost inflation estimates decrease with experience, but those for discounts rates do not. The results persist after controlling for the profile of participants of the health care plan, predisclosure uncertainty, and propensity to manipulate by managers. The results are consistent with “learning effect” for health care cost inflation rates that were being estimated for the first time, while no such effect is visible for discount rates that had been estimated in the past for pension plans. The paper also hypothesizes that the market rewards perceived precision of accounting estimates attributable to learning effect. Cross‐sectional tests confirm that the valuation coefficient of postretirement benefit obligations increases in absolute value as the estimation errors decline, suggesting that the market relies more on reported accounting estimates as their perceived precision improves. Thus, the extant research findings of weak or non‐existent value relevance of SEAS 106 liabilities may have been confined to the initial period after the adoption of SEAS 106 when the measurement errors were high. The documented evidence of improvement in precision provides support for FASB's claim that the reliability of accounting estimates, especially those required by complex standards such as SEAS 106, should improve with experience. The evidence of improvement in value‐relevance should also be reassuring for FASB, since one of the intended benefits of SEAS 106 was to provide value relevant information to the investors.

Details

Review of Accounting and Finance, vol. 1 no. 2
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 6 November 2007

C.S. Agnes Cheng, Su‐Jane Hsieh and Yewmun Yip

The purpose of this paper is to examine whether the choice of accounting treatment of transition obligation under SFAS 106 affects the value of firms, and also whether the quality…

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Abstract

Purpose

The purpose of this paper is to examine whether the choice of accounting treatment of transition obligation under SFAS 106 affects the value of firms, and also whether the quality of earnings is improved after the implementation of SFAS 106.

Design/methodology/approach

Different regression models were employed on a sample of 50 immediate recognition firms and 50 matched prospective recognition firms. Chow test is also used to investigate the quality of earnings before and after the implementation of SFAS 106.

Findings

In spite of the significant difference in impact on earnings from the choice of treatment of transition obligation, the accounting choice has no significant impact on the total value relevance of earnings and book value. When immediate recognition method is applied, investors ignore the one‐time charge of transition obligation, and rely more on book value in the valuation of a firm. However, when prospective recognition method is applied, both earnings and book value are value‐relevant in the adoption year and also in the subsequent year. In addition, the paper finds that the implementation of SFAS 106 improves the value relevance of earnings.

Research limitations/implications

Results are limited by the accuracy of the models used to measure value relevance of earnings and book value of equity.

Practical implications

Results may have implications for managers' choice of accounting treatment, and the evidence seems to support accrual basis over cash basis on earnings measurement.

Originality/value

The paper uses the value relevance approach to analyze the impact of SFAS 106 on the quality of earnings and book value of equity.

Details

Review of Accounting and Finance, vol. 6 no. 4
Type: Research Article
ISSN: 1475-7702

Keywords

Article
Publication date: 13 January 2012

Hui Di, Steven A. Hanke and Wei‐Chih Chiang

This paper aims to examine whether the substitution of employee stock options (ESOs) for debt occurs for firms with different tax status classifications throughout the conditional…

Abstract

Purpose

This paper aims to examine whether the substitution of employee stock options (ESOs) for debt occurs for firms with different tax status classifications throughout the conditional distribution of interest expense before and after the implementation of Statement of Financial Accounting Standard 123R (SFAS 123R).

Design/methodology/approach

This study uses Censored Quantile Regression (CQR) to assess whether the substitution effect is dependent on firms' position in the conditional distribution of interest expense. Our sample firms are categorized into two groups: one group (tax‐sensitive) that is sensitive to additional deductions due to a moderate income level and the other group (tax‐insatiable) that is not sensitive because of very high income level.

Findings

The substitution effect is not present for firms with below medium level of interest expense. Only tax‐sensitive firms substitute at medium levels of interest expense while both tax‐sensitive and tax‐insatiable firms substitute at high levels of interest expense. Tax‐insatiable firms with very high levels of interest expense also substitute; however, tax‐sensitive firms with very high levels of interest expense only substitute after SFAS 123R required firms to report ESO expense in financial statements. We attribute the substitution patterns revealed by the CQR analysis to a positive relationship between interest expense and cost of debt.

Originality/value

To the authors' knowledge, this is the first paper to analyze firms' tax status classification impact on the substitution of ESO expense for interest expense across different levels of interest expense. Our application of CQR should benefit researchers who are interested in examining explanatory variables' impact at various points in the conditional distribution of the dependent variable. This study also refines the conjecture that ESOs are substitutes for debt by demonstrating that such relationship is dependent on the level of interest expense and tax status. Furthermore, the finding of firms substituting ESOs for debt provides accounting standard setters a reason to begin requiring firms to re‐measure the value of ESOs after the grant date until the exercise date.

Details

Managerial Finance, vol. 38 no. 2
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 1 July 2014

Ahmed Ebrahim and Bruce Bradford

This paper aims to study a preemption proposition for the compliance costs associated with stock option expensing under SFAS 123(R) by examining whether early adopters used their…

Abstract

Purpose

This paper aims to study a preemption proposition for the compliance costs associated with stock option expensing under SFAS 123(R) by examining whether early adopters used their discretion over option pricing model inputs to mitigate the adoption effect.

Design/methodology/approach

The paper uses a matched sample approach of firms that voluntarily adopted stock option expensing during the 2002-2004 period and similar firms that waited until the mandatory expensing. The paper empirically examines some determinants of voluntary adoption, and the changes in option pricing model inputs during the period leading to mandatory expensing.

Findings

The paper reports evidence that voluntary adopters of stock option expensing during the 2002-2004 period have used the period leading to mandatory expensing to preempt its compliance cost effect. The authors exercised their discretion by decreasing estimates for stock price volatility and time-to-maturity to preempt or minimize the reduction in earnings before mandatory adoption date.

Originality/value

Results of this paper are useful to accounting regulators in understanding the reaction of financial statement preparers to deliberations, effective dates and voluntary early adoption terms of the accounting standards setting process.

Details

Journal of Financial Reporting and Accounting, vol. 12 no. 1
Type: Research Article
ISSN: 1985-2517

Keywords

Article
Publication date: 30 September 2008

Sharad Asthana

The purpose of this paper is to examine the determinants of US firms' postretirement benefits choices.

Abstract

Purpose

The purpose of this paper is to examine the determinants of US firms' postretirement benefits choices.

Design/methodology/approach

The paper uses empirical methodology (univariate and multivariate) to test the research hypotheses.

Findings

Industry norm, average employee age, financial structure, and firm size are significant factors in the determination of the proportion of compensation that is deferred. Industry norm, financial structure, and firm size are significant factors that determine the percentage of deferred compensation that is negotiated as defined benefits. Finally, industry norm, corporate tax rates, and cash flow help explain the percentage of defined benefits that are paid in the form of retiree health benefit plans.

Research limitations/implications

Data requirements might bias the sample towards larger sized firms. Data availability limits the number of observations in 2000 and 2001.

Practical implications

The trends in post‐retirement benefits reported in this paper are important for policy makers.

Originality/value

These findings have implications for the baby boomers. The trend to offer smaller proportion of compensation as deferred benefits reflects the increasing costs of deferral to the employers. This increases the employees' responsibilities to save on their own. This also would shift the retirees' dependence on the public pension system for their retirement income. The trend to favor defined‐contribution plans instead of defined‐benefit plans reflects the employers' attempts to diversify their risks of paying promised post‐retirement benefits by transferring the risk to the employee. On the other hand, the popularity of defined‐contribution pension plans also reflects the increased Government's incentives to encourage savings via 401‐k plans and employee's willingness to manage their own pension portfolios.

Details

Accounting Research Journal, vol. 21 no. 2
Type: Research Article
ISSN: 1030-9616

Keywords

Article
Publication date: 21 August 2020

Philippe Touron and Peter Daly

The paper analyzes four cases of IAS adoption (Aérospatiale in 1989; Usinor in 1991; Coflexip in 1993; and Péchiney in 1995) to better understand the instructional logics behind…

Abstract

Purpose

The paper analyzes four cases of IAS adoption (Aérospatiale in 1989; Usinor in 1991; Coflexip in 1993; and Péchiney in 1995) to better understand the instructional logics behind the use of alternative or additional standards by French companies in the early 1990s.

Design/methodology/approach

The study employs multiple case studies to explain how and why the heterogeneity of adoption (IAS versus US GAAP) is a response to institutional complexity.

Findings

This research shows that French companies adopted IAS as long as they were not required to use US GAAP by their financial backers. The results highlight how the companies combine logics to respond to the complexification of the field. The authors outline how endorsement of logics by outside carriers (auditors, financial analysts, stock exchange commissions) and framing of logics by managers evolve in time and space within this complexification process.

Research limitations/implications

This study contributes to the institutional complexity literature in that it focuses on distinct organizational responses to multiple institutional logics. More precisely, the choice of standards in primary consolidated accounts are viewed as an organizational response to compatible and conflicting demands from several levels: home countries, transnational areas and host countries with the aim of raising funds in the US.

Originality/value

This research makes a distinct link between institutional complexity and international accounting standards and US GAAP.

Details

Accounting, Auditing & Accountability Journal, vol. 33 no. 8
Type: Research Article
ISSN: 0951-3574

Keywords

Article
Publication date: 22 April 1995

Bruce A. Leauby, Y. Joseph Ugras and Mary Jeanne Welsh

The Statement of Financial Accounting Standards No.106, Employers’ Accounting for Postretirement Benefitsother than Pensions is a dramatic change in how companies measure the cost…

Abstract

The Statement of Financial Accounting Standards No.106, Employers’ Accounting for Postretirement Benefitsother than Pensions is a dramatic change in how companies measure the cost of providing other post retirement benefits (OPEBs). Companies must change from pay‐as‐you go (cash‐basis) to an accrual method of accounting that is similar to that used for defined benefit pension plans.Our review of early adopters shows that most firms (59 out of 64) elected to recognize the transition obligation immediately, there by reducing current earnings and showing all the bad news in the first year of adoption. From an Income Statement viewpoint, the accrued based OPEB cost under SFAS 106 is 1.63 times larger than the previous year cash basis method, increasing from an average of $13 million to $21 million. From a Balance Sheet perspective, the average recorded liability as a percent of equity exceeds 15 percent. Since companies will adopt this standard over a long transition period, it may be several years before valid comparisons and conclusions can be made about the total impact of SFAS 106.

Details

American Journal of Business, vol. 10 no. 1
Type: Research Article
ISSN: 1935-5181

Keywords

Article
Publication date: 9 June 2017

Alexander Merz

The fundamental change in accounting rules for equity-based compensation (EBC) instituted by SFAS 123, SFAS 123r, and IFRS 2 has allowed for new insights related to a variety of…

Abstract

The fundamental change in accounting rules for equity-based compensation (EBC) instituted by SFAS 123, SFAS 123r, and IFRS 2 has allowed for new insights related to a variety of research questions. This paper discusses the empirical evidence generated in the wake of the new regulation and categorizes it into two broad streams. The first stream encompasses research on the changed use of EBC and the incentives provided. The second stream addresses how firms account for EBC, including the underreporting phenomenon and how it was affected by the mandatory recognition of EBC expenses. I discuss where research delivers unanimous findings versus contradictory results. Using these insights, I make recommendations for further research opportunities in the area of EBC.

Details

Journal of Accounting Literature, vol. 38 no. 1
Type: Research Article
ISSN: 0737-4607

Keywords

Article
Publication date: 2 May 2017

Lei Han and Daniel F. Hsiao

The purpose of this study is to investigate the long-term performance of firms that early adopted Statement of Financial Accounting Standard 142 (SFAS 142).

Abstract

Purpose

The purpose of this study is to investigate the long-term performance of firms that early adopted Statement of Financial Accounting Standard 142 (SFAS 142).

Design/methodology/approach

In particular, the paper focuses on a relatively lengthy time frame after the standard became effective in 2002 and examines whether the firms which early adopted SFAS 142 exhibit different characteristics from their non-early adopting counterparts when comparing operating returns, stock returns and earnings quality over the same time period. Profit margin, return on assets and return on equity are used to measure operating returns; buy-and-hold return, Tobin’s Q and price-to-book ratio are used to measure stock returns; and abnormal accruals and accruals quality are used to measure earnings quality.

Findings

Based on a sample of 692 firm-year observations over five years between 2002 and 2006, the authors find that early adopters tend to exhibit lower operating performance (most noticeable when measuring profit margin and return on assets) and lower earnings quality following the early adoption of SFAS 142 than non-early adopters. However, little relation is found between post-adoption market returns and the choice to early adopt SFAS 142.

Research limitations/implications

This study helps fill the gap in accounting literature by investigating the long-term performance of firms post adoption of SFAS 142. The empirical results may provide greater understanding of the firms choosing to early adopt SFAS 142, and offer additional insight to guide standard setters on similar accounting issues in the future.

Originality/value

This study’s research questions attempt to identify potential differences in operating and stock performance and earnings quality by comparing early adopters and non-early adopters of SFAS 142 over a five-year period between 2002 and 2006, which extends the research beyond the relatively short window covered by prior research, and also takes into consideration Statement of Financial Accounting Standard 141 (SFAS 141)-R “Business Combination”, issued in 2007, to supersede SFAS 141 of 2001.

Details

International Journal of Accounting & Information Management, vol. 25 no. 2
Type: Research Article
ISSN: 1834-7649

Keywords

1 – 10 of 248