Equity Accounting Research Articles

In Defence of Bad Science and Irrational Policies: an Alternative Account of the Precautionary Principle

In the first part of the paper, three objections to the precautionary principle are outlined: the principle requires some account of how to balance risks of significant harms; the principle focuses on action and ignores the costs of inaction; and the principle threatens epistemic anarchy. I argue that these objections may overlook two distinctive features of precautionary thought: a suspicion of the value of “full scientific certainty”; and a desire to distinguish environmental doings from allowings. In Section 2, I argue that any simple distinction between environmental doings and allowings is untenable. However, I argue that the appeal of such a distinction can be captured within a relational account of environmental equity. In Section 3 I show how the proposed account of environmental justice can generate a justification for distinctively “precautionary” policy-making.

Common Terror: Permissible Error in Financial Statements - Teradyne Case Study - Why a $24 Million Accounting Error Need not be Corrected

In 2002, the SEC, citing a need for transparency, promulgated new disclosure rules pertaining to corporate stock repurchase programs. As a result, companies since 2004 have been required to provide monthly reports on the volume and pricing of their stock buybacks. Under the new reporting protocol, Teradyne's monthly report for October 2007 erroneously excluded 1.738 million shares reacquired for $24.151 million at $13.90 apiece. The company decided no correction to the misstatement was necessary. The apparent lesson from the Teradyne case is: 1) Either a $24 million error is insignificant 2) Or the mandated 10Q/10K tables showing monthly corporate stock repurchases need not be accurate. In a world in which equity transactions such as stock repurchases, in conformance to 15th century tradition, are deemed never to cause a profit or loss, it makes sense both that $24 million be disregarded as insignificant and that corporate stock repurchase reports tolerate inaccuracy. But, if such reasoning seems out of joint, perhaps Teradyne should correct its error? More appropriately, accounting for equity transactions should be broadly revisited. In the market for corporate stock repurchases which, at its peak in 2007, exceeded a $700 billion annual rate, insult to common shareholders may be done a penny at a time (excessive fees, benefits to option holders, disregard of pricing, risk of insider trading) but, in the end, is tantamount to death by a thousand pinpricks and burial unnoticed in a pauper's grave. For instance, a recent study suggests losses to investors from U.S. corporate buybacks are now approaching $2 trillion (a benefit sellers reap at the expense of faithful investors). In the mayhem of financial ruin, the equanimity of accounting statements, in their total disregard of equity transaction losses, is a final indignity borne by shareholders. Common TERROR, a commentary on Teradyne's ethereal view on permissible error in financial statements, highlights that rules of equity accounting are overdue for overhaul. The solution is simple: Treat equity transactions the same as any other asset or liability with gains/losses included in the income statement. Tolerance for misstatement will vanish.

State and Context-Dependent Information Management and Wealth Accumulation: An Information Analysis of the Billionaires between Taiwan and China

From the Forbes Magazine survey of the world’s 538 richest, seventy seven (77) or about 14.4% were identified as born in Asia (Asia Week, June 28, 2001). In addition, the top 100 billionaires (in $NT) in Taiwan, 2001 and 2002 were surveyed by Taiwan Smart Monthly magazine ( Nov 11, 2002) and another top 100 billionaires in China (in U.S dollars) were reported by the Forbes magazine in 2004. This paper utilizes Liu ,Lin, Lee and Chou’s (1996) state and context dependent information management model specification (Joseph & John, 2006), and equity account dependent variables to study the underlying intercultural factors affecting the richest 77 Asian and the top 100 Taiwanese and Chinese entrepreneurs respectively by such attributes and characteristics as shown in the bamboo network (Weidenbaun & Hughes 1996), Liu and Grawford(1996) and Fedorowicz, Gogan and Ray,(2004). Using regression and categorical techniques, this paper shows that important intercultural information factors affecting the world’s richest Asian billionaires are age, marital status, Chinese cultural background and self-made accomplishment, economic and national business condition, education, training and total quality management, and the human development index, etc. While most billionaires in Taiwan came from the information technology (IT) industry, but due to different stage of IT development, many billionaires in China were found in real estate and manufacturing management.

The value relevance of disclosures of liabilities of equity‐accounted investees: UK evidence

This study examines the value relevance of mandated disclosures by UK firms of the investor‐firm share of liabilities of equity‐accounted associate and joint venture investees. It does so for the six years following the introduction of FRS 9: Associates and Joint Ventures, which forced a substantial increase in such disclosures by UK firms. Since the increased disclosure requirements were partly motivated by concern that single‐line equity accounting concealed the level of group gearing, and in light of previous US results, it is predicted that the mandated investee‐liability disclosures have a negative coefficient in a value‐relevance regression. The study also examines whether value‐relevance regression coefficients on investee‐liability disclosures are more negative for joint ventures than for associates and whether they are more negative in the presence of investor‐firm guarantees of investee‐firm obligations than in the absence of such guarantees. The study reports that the coefficient on all investee‐liability disclosures taken together has the predicted negative sign, and is significantly different from zero. It finds little evidence that the negative valuation impact of liability disclosures is stronger for joint venture investees overall than for associate investees overall, or stronger for guarantee cases overall than for non‐guarantee cases overall. There is, however, some evidence that the impact for joint venture guarantee cases is stronger than that for joint venture non‐guarantee cases and stronger than that for associate guarantee cases.

Accounting for Equity Transactions - Marking Equity to Market: 400 Years Overdue? Or, GAAP's Gap: Pacioli After the Dutch East India Company

It is time for accounting to recognize the existence of stock exchanges and stop treating the equity accounts of public corporations as if they belonged to 15th century private partnerships. When Pacioli's codification of the principles of accounting was published in 1494, stock exchanges did not exist. After the founding of the Dutch East India Company (VOC) in 1602, that changed. It is time for accounting to change, too. The VOC's growth to become the 17th century's largest commercial enterprise was advanced by financial innovations that fostered liquid trading in its shares, a development credited as the progenitor of today's public stock exchanges. In 1609, VOC shares became non-redeemable and lost directorship rights, so that, besides the possibility of future dividends (none had yet been paid), investors' sole focus became the ease of transferability and the possibility of capital gain. Though the VOC's charter limited its issuance of equity capital, the well recognized value of its stock served the VOC and its shareholders as collateral to secure loans on advantageous terms. The access to capital afforded by publicly traded, readily transferable, non redeemable shares confirmed the value of equity distinct from historical book value, and the British emulated and improved upon the invention later that century. Today, the equity market value of corporations routinely exceeds accounting book value by several fold. Some might postulate the spread is largely theoretically justified and partly market error. An alternative explanation is just the reverse: The market is mainly right but accounting wrong, and the spread, GAAP's gap, readily measured and monetized, reflects accounting's failure to adapt to the reality of public stock exchanges. Accounting should capitulate and treat equity like other assets and liabilities by marking it to market and recognizing profit and loss on equity transactions. Mark to market equity accounting eliminates GAAP's gap, loses nothing and gains much: Adjusted financial statements match today's but add lines that render a more complete picture of a firm's transactions and current standing.

Accelerated Stock Repurchase Programs: Underreported and Overpriced? Part II (Hewlett-Packard Addendum)

The current study adds consideration of a $1.7 billion accelerated stock repurchase (ASR) by Hewlett-Packard (HP) to a recent analysis of 2006-2007 ASRs by Applied Materials, Cypress Semiconductor, Linear Technology, and Xilinx. The HP addition to company case studies leaves fundamental findings on ASRs unchanged including: 1) Liability (ASRs are denied a 10b-18 safe harbor) 2) Disturbing, pre-deal, stock activity (prices rise 10% pre-deal) 3) Idiosyncratic, incomplete, and sometimes misleading disclosures 4) Inferior risk/reward relative to alternatives. Studied ASRs all share these drawbacks. That does not prevent some from being profitable. Profitability depends on post deal stock performance rather than liability exposure, governance quality, or disclosure transparency. Still, regardless of profitability, ASRs are found to provide lower returns compared to simpler and/or less risky alternatives. So, why have ASRs grown in popularity in recent years? Other than sympathetic accounting, no satisfactory explanation is found or hypothesized. HP's ASR reinforces the view that cosmetic accounting rather than economics attracts companies to ASRs. In published interviews, HP managers explain their goal: A deal to smoothly offset anticipated options dilution without incurring a reported profit, loss or fee. HP's ASR achieves that goal. Like other ASRs, HP's requires no income statement recognition. Absent any income accounting, HP's banker and counterparty, BNP Paribas, is free to report that HP probably saved over $100 million. However, we calculate, to the contrary, that the $1.7 billion transaction costs HP and its ongoing shareholders at least $115 million (6.7%) while exposing HP to unnecessary liability. Whether ASRs facilitate efficient execution of large buybacks with superior governance may be an open question. Arguably, equity accounting for options and buybacks should be revisited. But, as ASRs become a larger proportion of total buybacks, the need for better disclosure seems a modest, reasonable and necessary start.

Accelerated Stock Repurchase Programs: Underreported and Overpriced? Part I (AMAT, CY, LLTC and XLNX Case Studies)

A previous study failed to identify economic benefits to explain the 2006-2007 popularity of accelerated stock repurchase programs (ASRs) funded through issuance of convertible debt. The case study of a $600 million transaction by Cypress Semiconductor did find cosmetic advantages in terms of earnings presentation (expenses largely bypass the income statement to go directly to the equity account instead). The deal was profitable for Cypress, but other structures offered superior risk/reward, the ASR component appeared easily $15 million overpriced, and reporting was problematic. The current study looks at ASRs of four companies. In addition to the Cypress ASR, those of Applied Materials, Linear Technology, and Xilinx are considered. Execution, reporting, and performance of all four ASRs are troublesome. The initial ASR commitments are at prices 5-15% higher than the companies' stock prices in the week prior to execution. Insofar as the initial stock delivery is followed by any subsequent deliveries, pricing on subsequent deliveries is subject to idiosyncratic reporting that tends to obscure (no price given) or substantially understate (price averaged over multiple reporting periods) the actual price paid on transactions in any given period. All surveyed companies fail to disclose the negotiated premium or discount versus VWAP (volume weighted average price) for their ASRs, the exact timeframe for calculation of VWAP, and VWAP specifications (such as exclusion of trades by the company, bankers and investors involved in the ASR and related transactions). Companies that execute ASRs ought to disclose VWAP benchmark terms, uniformly report monthly stock transactions that reflect the actual price paid (if any) for shares when delivered, and, if appropriate, ascribe a portion of the total ASR outlay to a fee. While ASRs enjoy no 10b-18 safe harbor against charges of manipulation, they carry the usual 10b-18/10b5-1 governance freight plus the added baggage of misleading disclosures and disturbing, pre-deal, pricing patterns. Whether ASRs facilitate efficient execution of large buybacks with superior governance may be an open question, but the need for better disclosure seems reasonably conclusive.

Understanding Convertible Debt Funded Stock Buybacks - Cypress Semiconductor Case Study

In 2006-2007, convert funded stock buybacks are popular. Why? Consider Cypress Semiconductor's complex transaction. In March 2007, its stock at $18.89, Cypress sells $600 million of converts, enters a $571 million VWAP (volume weighted average price) stock buyback contract, buys calls and sells warrants. It retires 28.9 million shares. Good profits! Bad deal? Six months post deal with its stock up 51.9% to $28.70, Cypress stands to reap a $180 million benefit at maturity, a $1.18 (4.3%) stock price boon for ongoing shareholders. Still, when it enters the deal, Cypress: - Needs 11.0% stock price appreciation to break even - Is exposed to 100% of any shortfall in its stock price from breakeven - Receives 100% of any stock price increase up to 28.7% above breakeven - Receives just 13.0% of any further stock price advance Simpler, superior structures are available. At 0-5% added cost, a call spread matches upside but cuts risk 83% or more. Other structures give lower cost with equal (or better) upside. Its deal choice (full downside; limited upside) suggests Cypress at execution is sure its stock is going up. Are selling shareholders adequately informed? Is earnings management an attraction? Real economic advantage through tax arbitrage seems blocked, but equity accounting lets deal losses (if incurred) and most fees bypass the income statement. A baseline settlement at current spot has Cypress receive a $180.2 million benefit through in part (40%) cash receipts, in part (60%) a 2.4% share count reduction. The only definite monetary trace in reported income is $27.0 million of tax deductible expense over the deal's life; Cypress can elect to show phantom income, but real tax then cuts the total real economic benefit. Also, stock buyback execution prices are seriously understated, but companies should not value this feature: The complex, syndicated deal itself exacerbates 10b-18 governance concerns, and misleading trade confirmations just put other anomalies in stock volume and pricing in a bad light. This analysis is tentative insofar as it fails to identify economic or governance advantages to explain the popularity of convert funded buybacks. Earnings cosmetics is not satisfying given the deal's poor risk/reward. Is there an overlooked tax advantage? The deal's popularity with banking syndicates is easy to understand, but, for now, we wonder, could the transaction be popular with companies because it is popular?

Universal Design for Early Childhood Education: Ensuring Access and Equity for All

This article introduces the framework of Universal Design for Early Childhood Education (UDECE). The goal of the framework is to synthesize best practices within the field of early childhood education and special education, providing a template to support access and equity for all children. The UDECE framework includes examination of issues of access, the provision of high quality educational practices, and issues of accountability for success and equity. By placing the needs of all children at the core, UDECE extends philosophies embracing full inclusion into pathways through which this goal can be supported.

Model for performance based land area and water allocation within irrigation schemes

This paper focuses on irrigation schemes under rotational water supply in arid and semiarid regions. It presents a methodology for developing plans for optimum allocation of land area and water, considering performance measures such as productivity, equity and adequacy. These irrigation schemes are characterized by limited water supply and heterogeneity in soils, crops, climate and water distribution network, etc. The methodology proposed in this paper, therefore, uses a previously developed simulation–optimization model (Area and Water Allocation Model, AWAM) that considers the heterogeneity of the irrigation scheme in the allocation process, and modifies this to take account of equity and adequacy of supply to irrigated areas. The AWAM model has four phases to be executed separately for each set of irrigation interval over the irrigation season: 1. generation of irrigation strategies for each crop–soil–region combination (CSR unit), 2. preparation of irrigation programmes for each irrigation strategy, 3. selection of specified number of irrigation programmes for each CSR unit and 4. optimum allocation of land area and water to different parts of the irrigation scheme (allocation units) for maximizing productivity. In the modified AWAM model, the adequacy is included at Phase-2 (by including only the irrigation programmes for full irrigation of each CSR unit) and equity is included at Phase-4 (by including the constraints for equity). The paper briefly discusses the applicability of the modified AWAM model for a case study of Nazare medium irrigation scheme in Southern India. The results of the case study indicated that the performance measures of productivity, equity and adequacy conflict with each other.

Accounting for the Buyback Boom - The Next Step for Options and Equity Expensing

Stock boomed in the first years of the 21st century even while their returns trended towards 0%. Unlike dividends, which can never be mispriced and treat all shareholders equally, can be good (when shares are underpriced) or bad (when shares are overpriced) and may systematically favor one group of shareholders over another. Bad buybacks are now estimated to generate over $10 billion annually in excess costs borne largely by public (non-management) shareholders. Various works have identified options as a stimulant to the use (and misuse) of buybacks. This essay goes the additional step of suggesting that equity accounting has accelerated the boom. Whether options should be expensed was extensively debated before SFAS 123R was adopted in 2004, and focus then shifted to the merits of competing valuation models. But, in all the sound and fury, either exhausted by the initial debate or mesmerized by the subsequent models, accounting authorities neglected to rest the mechanism for option expense recognition on the most elemental foundation: The actual value of an option grant. Eventually, an option is worth something or nothing. However, in a practice peculiar to option compensation recognition, estimated and actual expense remain unreconciled. Though submitted to the IRS for a tax credit, the expense otherwise is neither recorded nor reported. Other equity transactions, most notably stock buybacks, are unique in being excluded from income reports. Opposition to accounting changes may be intense, but correctly recording and reporting equity transactions would likely encourage dividend payouts and return stock to a more appropriate role as a tool to capitalize on undervaluation. Accounting for options is so off base that a change in policy seems reasonably likely within a relatively short time (more than two years, less than a decade). The timeframe for a review of equity accounting for may be longer since buyback accounting does not currently appear to be a subject of great interest.

Beringer Wine Estates Holdings, Inc.1

The Beringer Wine Estates Company has been expanding its market share in the premium segment of the wine industry in the 1990's. After operating as a wholly owned subsidiary of the giant Nestlé food company for almost a quarter of a century, the firm was sold in 1996 to new owners, in a leveraged buyout. For the next year and a half, management and the new owners restructured the firm and expanded through internal growth and strategic acquisitions. With a heavy debt load from the LBO, it seemed prudent for management to consider a significant rebalancing of its capital structure. By paying off a portion of its debt and enhancing the equity account, the firm would achieve greater financial flexibility which could enhance its growth rate and business options. Finally, a publicly held common stock would provide management with another “currency” to be used for enhancing its growth rate and overall corporate valuation. With the equity markets in turmoil, significant strategic decisions had to be made quickly. Should the IPO be completed, with the district possibility of a less than successful after market price performance and these implications for pursuing external growth initiatives? A variety of alternative courses of action and their implications for the financial health of the Beringer Company and the financial wealth of Beringer stockholders are integral components of this case.

Equity accounting adoption in regulated and unregulated settings: an empirical study

This article examines equity accounting adoption by Australian companies before and after standard AAS 14 (1984), the first standard on equity accounting in Australia. To bypass a legal constraint, AAS 14 and its successor ASRB 1016 (1989) required that equity accounting of associates appear in supplementary disclosures (third‐column or footnote) and not in consolidated accounts. Before AAS 14, extensive voluntary adoption of equity accounting occurred in consolidated accounts. Equity accounting adopters from 1971 to 1989 were matched in their adoption years with companies that could have used equity accounting but did not. Throughout, equity accounting adopters’ EPS tended to be declining and equity accounting adoption tended to increase reported earnings. After AAS 14, adopters showed equity accounting via a third column if it increased reported earnings but in footnote disclosures if it reduced reported earnings. Leverage is associated with adoption before but not after AAS 14, perhaps because the standards required equity accounting in supplementary disclosures which had no impact on borrowing constraints, while no such restriction on equity accounting existed before regulation. Pre‐AAS14 adopters tended not to be audited by large audit firms. Adopters after AAS 14 had higher ratios of investments in associates to total tangible assets; before AAS 14 they did not. The results are consistent with equity accounting being adopted opportunistically; there is limited evidence to support contractual efficiency motives.

The Economic Paradigm in Management Accounting: An Empirical Study on the Association Between Return on Equity and Different Management Accounting Profiles

This study aims to analyze possible association between entities's conceptual framework adherence in relation to management accounting artifacts, with different levels of success in obtaining return for the stockholders. The paper is based on a field research whose sample was taken from a database with more than two thousand Brazilian medium and large-sized entities. Although conclusions cannot be generalized beyond the sample, the analysis results suggest some kind of relation between management accounting profiles and return on equity. In this sense, it was observed that organizations with higher return rates focused more on tactics and control than on strategic tools and, with respect to planning, the focus is more on the long than on the short term.

Performance measurement in women’s health: the women’s health report, hospital report 2001 series, a Canadian experience

The Women’s Health Report was a preliminary study that formed part of the Hospital Report 2001 Series; an evaluation of hospital performance in the province of Ontario using a balanced scorecard framework. The Report reflects the importance of including a women’s health perspective in the evaluation of health system performance and the need for increased accountability for equity in access to, and delivery of, care. This paper outlines the methodology that was used to develop the Women’s Health Report and highlights important findings from this early stage in the development of performance measurement for hospital care for women in Canada.

The value relevance of equity accounting in Australia during the pre-recognition regulatory period

For a period of 26 years, Australian reporting requirements for equity accounting were out of step with international accounting practice, requiring equity accounting to be reported in a note to the accounts and the cost method to be employed in the statutory financial statements. This paper utilises the uniqueness of the Australian regulatory setting to investigate whether equity accounting has greater value relevance than the cost method and whether it provides information incremental to the cost method during the “note disclosure period”. The results of both the valuation and returns models provide evidence that equity accounting has value relevance that is incremental to the cost method. Direct comparison of the two methods of accounting provides less conclusive evidence. Equity accounting is found to have statistically greater value relevance than the cost method for the valuation models, but not for the returns models. Differential reporting practices during the period of this study allow an extension of the study to consider two related issues. The first issue looks at the use of supplementary financial statements to report equity accounting as a signal by management of the relevance and/or reliability of equity accounted values. The results indicate that supplementary financial statements do not convey additional relevance or reliability to the market for equity accounted figures. The second extension of the study considers the effect of market value disclosure on the value relevance of equity accounting for companies with investments in publicly traded associates. The results indicate that although market value has incremental value relevance to the cost method equity, accounting has incremental value relevance to market value. © City University of Hong Kong.

Governing European Policing: Some Problems and Prospects

In this article, I address some of the 'democratic deficits' raised by the development of a cross-border policing capacity within the European Union and consider how these might best be made good. The argument unfolds in three parts. I seek, first of all, to clear a little ground by offering a critique of two currently prevalent and - in certain political quarters - appealing responses to European policing's democratic shortcomings. Secondly, I identify some key properties of the European policing field that future regulatory strategies must take proper account of. I then outline a framework for regulating European policing networks in ways that sustain considerations of equity and democratic accountability and sketch some tentative institutional proposals that can advance such a 'project'. A brief conclusion assesses the prospects for this project within contemporary European politics.

Response to Skrla et al. The illusion of educational equity in Texas: a commentary on 'accountability for equity'

(2001). Response to Skrla et al. The illusion of educational equity in Texas: a commentary on 'accountability for equity' International Journal of Leadership in Education: Vol. 4, No. 3, pp. 267-275.

Response to Skrla et al. The illusion of educational equity in Texas: a commentary on 'accountability for equity'

Response to Skrla et al. The illusion of educational equity in Texas: a commentary on 'accountability for equity'

Response to Skrla et al . The illusion of educational equity in Texas: a commentary on 'accountability for equity'

Response to Skrla et al . The illusion of educational equity in Texas: a commentary on 'accountability for equity'