Accounting Series Release Research Articles

THE ASSOCIATION BETWEEN LEASE DISCLOSURE AND THE LESSEE'S SYSTEMATIC RISK

This paper investigates the effect of a firm's lease commitment disclosure under Accounting Series Release 147 on its systematic risk. The three hypotheses are: (1) there will be no change in the lessee's systematic risk; (2) the lessee's systematic risk will increase because the disclosure increases the debt ratio; and (3) the lessee's systematic risk decreases because the disclosure reduces the uncertainty related to risk‐assessment. A hedge portfolio approach is used to test these hypotheses. The results indicate that the null hypothesis is to be rejected in favor of the third hypothesis.

Stock Returns and Oil and Gas Pronouncements: Replication and Extension

On October 22, 1971, the Accounting Principles Board (APB) tentatively endorsed the successful efforts (SE) method over the full cost (FC) method of accounting for extractive industries. Because of the negative reaction to this memorandum no formal opinion was released regarding this issue. On July 15, 1977, the Financial Accounting Standards Board (FASB) issued an exposure draft which also favored the SE technique as the appropriate method. This proposal was affirmed on December 5, 1977, by the release of FASB Statement No. 19. The unfavorable reaction to FASB Statement No. 19 led to the release of Accounting Series Release (ASR) No. 253 by the SEC (reported 8/30/78) which overruled the FASB and indicated the SEC's intention to develop a form of the FC method that would be acceptable for SEC reporting purposes. The FASB subsequently suspended the portion of Statement No. 19 that required the SE method. These events were subjected to the typical event-type studies in accounting. With respect to the 1971 APB memorandum Patz and Boatsman [1972] found no significant decline in the stock prices of FC firms relative to SE firms in the six weeks surrounding the APB announcement. In contrast, both Collins and Dent [1979] and Lev [1979] concluded that FC stock prices responded negatively to FASB Statement No. 19. However, Dyckman and Smith [1979] and Haworth, Matthews, and Tuck [1978] did not feel their evidence was strong enough to warrant such a conclusion for 19. Collins, Rozeff, and Dhaliwal [1981] also found that firms whose financial statements were deemed materially affected by the

Auditor independence, ‘low balling’, and disclosure regulation

This paper investigates the allegations of the Commission on Auditors' Responsibilities and the Securities and Exchange Commission that ‘low balling’ on initial audit engagements impairs auditor independence. We demonstrate that, contrary to these claims, ‘low balling’ does not impair independence; rather it is a competitive response to the expectation of future quasi-rents to incumbent auditors (due, e.g., to technological advantages of incumbency). ‘Low balling’ in the initial period is the process by which auditors compete for these advantages. Critically, initial fee reductions are sunk in future periods and therefore do not impair auditor independence. The implications for current regulation governing changes of auditor (Accounting Series Release No. 165 et al.) and audit fees (Accounting Series Release No. 250) are also discussed.

Discussion of The SEC "Reversal" of FASB Statement No 19: An Investigation of Information Effects

Professor Smith conducts an interesting and creative study examining the security market reaction to the Financial Accounting Standards Board (FASB) Exposure Draft for Statement No. 19 and the subsequent by the Securities and Exchange Commission (SEC) with the Accounting Series Release (ASR) No. 253. Two general sets of results are presented. First, there appears to be no aggregate share price response for full cost (FC) firms to the release of ASR No. 253. This result, coupled with that of Dyckman and Smith [1979], indicates that FC firms in the aggregate did not experience a security market reaction to either FASB No. 19 or ASR No. 253. Second, the reversal hypothesis is not supported using individual FC firms as the unit of analysis, but the reversal hypothesis may be supported when selected portfolios are used as the unit of analysis. Hence, these results provide additional empirical evidence to be integrated with the prior research of Collins and Dent [1979], Dyckman and Smith [1979], Haworth, Matthews, and Tuck [1978], Lev [1979], Collins, Rozeff, and Dhaliwal [1981], and Collins, Rozeff, and Salatka [1981]. The following comments on Smith's paper address three general areas of concern. First, the appropriateness of the reversal test is considered given the characteristics of the prediction errors at the test periods. Second, potential statistical and experimental design problems are considered. Finally, an alternative method of conducting reversal tests is proposed.

Discussion of Voluntary Corporate Disclosure: The Case of Interim Reporting

It seems appropriate that a commentator's prejudices and shortcomings be laid out so that his comments may be put in perspective. So let me begin by both legitimizing and illegitimizing myself. I have long been interested in interim reporting and I am an advocate on an a priori basis of extended interim reporting. When I was chief accountant at the Securities and Exchange Commission, I was instrumental in the expansion of the Commission's requirements in this area as evidenced by Accounting Series Release No. 177 issued in 1976. I view reporting ideally as a continuous process in which outside investors would have continuous access to certain elements of corporate information systems so that they could obtain up-to-the-minute information subject to the constraints of competitive disadvantage in an operating sense and subject to an appropriate user charge. Thus, I am interested in seeing the window described in Nils Hakansson's paper made much smaller. Expanded interim reporting is a move in this direction. While I reach these conclusions on an a priori basis, the evidence I have seen in empirical and analytical literature has been supportive. In the empirical literature, there has been evidence of equal market impact of interim earnings announcements and annual earnings announcements.! In addition, Ng2

The information content of SEC accounting series release no. 190

The study examines the security price behavior of firms at the time of three events: the proposal of the SEC's accounting series release (ASR 190) to require replacement cost disclosures, the adoption of ASR 190, and the initial filing of the data with the SEC. The primary analysis focuses upon differential security return behavior among reporting firms. Several extensions, including a comparison with nonreporting firms, are also conducted. The basic findings indicates no security price effects and is consistent with the hypothesis that no information was provided to the market during the three time intervals studied. Alternatively, the inability to find an effect may be due to a misspecification in the research design. However, the basic finding is robust under several additional analyses and specifications.

Market reaction to the 1976 replacement cost disclosures

A variety of tests are conducted to determine whether replacement cost disclosures as mandated by the Securities and Exchange Commission's Accounting Series Release 190 provided information to capital market agents. In particular, the fiscal year 1976 disclosures made in early 1977 are examined. Information content is assessed by observing distributions of rates of return on common stocks. These distributions are estimated using both time series and cross-sectional data. No evidence of information content is found.

The adjustment of security returns to the disclosure of replacement cost accounting information

In March 1976, the Securities and Exchange Commission (SEC) promulgated Accounting Series Release No. 190 (ASR 190) requiring the disclosure of certain replacement cost (RC) accounting data by its registrants. The purpose of this study is to assess whether the RC disclosure rule had any effect on common stock returns for firms affected by the new rule. Distinguishing the effect of compliance costs from the effect of information in the RC data, we found no sign of a cost effect and no strong evidence of an information effect. This result appears to imply (a) that the burden of the ASR 190 compliance costs was not large enough to induce downward adjustments of the firms' security returns; and (b) that the RC data did not provide new information useful to investors as asserted by the SEC.

The Economic Effects of Involuntary Uniformity in the Financial Reporting of R&D Expenditures

In December 1973 the Financial Accounting Standards Board (FASB) released a Discussion Memorandum on alternative accounting and reporting practices for R&D costs. This was followed by a public hearing in March 1974, the issuance of an Exposure Draft (ED) in June 1974, the receipt of letters evaluating the ED, and finally the publication of Statement No. 2, Accounting for Research and Development Costs, in October 1974, effective for annual reports issued after January 1, 1975. In October 1975 the Securities and Exchange Commission (SEC) accepted FASB Statement No. 2 in Accounting Series Release No. 178 which applied to all financial statements filed with the SEC. Both regulations required that all research and development (R&D) costs be charged to expense when incurred.'

The Disclosure of Capitalized Lease Information and Stock Prices

This research empirically examines whether the recent Securities and Exchange Commission (SEC) decision calling for disclosure of capitalized accounting data for noncapitalized financing leases had any impact on the pricing of securities. The results of this research may be relevant in evaluating the lease disclosure requirements set forth by the Financial Accounting Standards Board, as well as by the SEC. In June 1973, the SEC proposed to amend Rule 3-16' of Regulation S-X calling for improved disclosure of lease information by lessees in their 10-K reports filed with the SEC.2 After evaluating many letters of comment received in response to the proposal, the SEC eventually adopted the extended lease disclosure requirements in Accounting Series Release (ASR) No. 147 in October 1973.3 The Release was effective as of November 30, 1973.

On the Association between Net Monetary Position and Equity Security Prices

Since the theory of the consumer-investor begins with preferences over goods and services, there have been frequent proposals to measure assets and income in units of general purchasing power (GPP) rather than nominal dollars. In 1974, the Financial Accounting Standards Board (FASB) proposed that accounting data expressed in units of GPP supplement traditional nominal-dollar statements.' This proposal was the FASB's initial response to the continuing and increasing inflation of the early 1970s, but was tabled in light of the replacement cost requirements of SEC Accounting Series Release No. 190 (ASR 190) and the inclusion of GPP accounting as part of the conceptual framework project.2 Although similar disclosures were advocated-but not required-by the Accounting Principles Board (APB) in 1969, few companies chose to prepare the GPP accounting statements recommended in APB Statement No. 3. Given the Sandilands'Report [1975], the FASB discussion memorandum on the conceptual framework of accounting [1976a], and the provisions of ASR 190, it is possible that some form of adjustment for the effects of changing prices will be incorporated in a revised financial reporting model that will either supplement or supplant the traditional, historical-costba-ed reporting system. Since GPP adjustments in a current value model differ from the proposed adjustments to the historical cost

Balance Sheet Classification of Deferred Income Taxes Arising from Installment Sales

INCOME on installment sales is generally recognized in the financial statements at the date of sale and the receivables are shown as current assets. Many companies, particularly in the merchandising field, defer the income on such sales for Federal income tax purposes until the receivables are collected. Some of these companies had been reflecting the deferred taxes as current liabilities, while other companies had been reflecting them as noncurrent liabilities. In order to require the correct classification of the deferred taxes on a uniform basis, the SEC issued Accounting Series Release No. 102 in December 1965, stating that the deferred taxes must be shown as a current liability if the related installment receivables are shown as a current asset. The arguments which have been advanced against the current classification of the deferred taxes cannot be justified either from a theoretical or from a practical standpoint.