Corporate Balance Sheets Research Articles

Intellectual Property Rights - The New Wealth of Knowledge Economy: An Indian Perspective

Intellectual Property, in its literal sense means the things that originate from human brain. This creation of human mind or Intellectual Property is considered to be the most invaluable assets, when compared to movable or immovable property, in knowledge based industries. The industries that have knowledge as its core resource and where the profits are generated mainly through the commercialization of new ideas and innovations are categorized as knowledge industries. The emphasis is not on physical or tangible assets but on intangible knowledge assets. The value of Intellectual Assets determines the rank and competitiveness of the corporate organizations. Wealth generation through creation, production, distribution and consumption of knowledge and knowledge based products are the key characteristics of knowledge economy. The major growth industries such as micro-electronics, biotechnology and telecommunications are 'brain power' industries. These knowledge industries stimulate other industries in turn to become knowledge based. Until recently capital was a scarce commodity. With rapid globalization and easy access to international finance, capital is no longer scarce. It is the Intellectual Assets that are knowledge based, non-replicable, unique and proprietary are increasingly becoming scarce. World Intellectual Property Organization (WIPO) and World Trade Organization (WTO) are the key organizations at international level which sets standards, frames rules and regulations and acts as enforcers of Intellectual Property Rights (IPRs). The role of WTO is distinct from that of WIPO in respect of enforcement. The strong protection system for Intellectual Property Rights advocated by the WTO has enhanced the value of Intellectual Property Assets in the corporate balance sheet, though hidden hitherto. India is a founder member of GATT and therefore enjoys the same status in WTO also. India had necessary legislations to protect the IPRs even before the advent of TRIPS. India is emerging as the hub of 'knowledge economy' in South Asia. India has proved her strength in Information Technology. The Bio-technology and Pharmaceutical industry are considered to be the next avenues of proving the Knowledge Prowess of India. These industries are attempting to quantify their Intellectual Assets - comprising mostly of Intellectual Property, to enhance their performance. Some Information Technology and Pharmaceutical companies have explicitly valued their portfolio of Intellectual Assets, by appending to their financial statements. The Indian Accounting Standards are also being reformed, to accommodate the value of Intellectual Property in the Accounting Statements.

Be careful what you ask for: Is fair value accounting really fair?

The World Economy is going through a true revolution in financial reporting. Rather than show assets on corporate balance sheets at their original historical cost, companies are being required to determine, and then report, what those assets are worth today. The current term for this new wave of financial reporting is ‘Fair Value’ accounting. Fair Value reporting is being pushed in the name of transparency. In the author's opinion Fair Value accounting is likely to be neither relevant nor reliable, two of the requirements for financial reporting.

Re‐equitizing Corporate Balance Sheets: Choosing Among the Alternatives

Companies are generally reluctant to issue new equity because it can be expensive capital. Among the largest costs of an equity offering are so‐called “market‐impact” costs. To the extent the typically negative market reaction to a stock offering causes an issue to be underpriced, such underpricing dilutes the value of current shareholders.Despite such costs, many companies—particularly financial institutions—are raising equity capital to “delever” balance sheets that have been squeezed by the credit crunch and economic slowdown. And far from transferring value from existing shareholders, these offerings can preserve and even increase the value of highly leveraged companies by shoring up their capital bases and providing the flexibility to get through a difficult period. According to recent studies, announcements of equity offerings by distressed companies have been accompanied by positive stock returns in excess of 5 %.The challenge for CFOs is to determine why and when issuing equity is the value‐maximizing strategy. The kinds of companies that are most likely to benefit from equity offerings are those that score low on credit metrics, have experienced cyclical declines in operating performance, and have growth opportunities as part of their recovery.There are a number of options for raising equity capital, but no set rules for identifying the optimal one. Nevertheless, the author offers a number of suggestions designed to help CFOs make smarter decisions:Communicate clearly to investors the intended uses of the proceeds from the equity offering and how they are expected to create value;Consider judicious cuts to the dividend to preserve capital;Involve current shareholders to minimize dilution, perhaps by considering a rights offering, and strengthen their commitment;Seek out “smart money” such as private equity or SWFs as long‐term investors;Get the offer size right the first time so a second offering can be avoided; andMonetize volatility in uncertain markets by issuing convertible securities.

SFAS 157: An Overview of Fair Value and Valuation Standards for Intangibles

Abstract The United States is increasingly a knowledge-based economy. However, corporate balance sheets still only present asset values at a given moment in time, and intangible asset values are often not disclosed. A recent accounting pronouncement, SFAS 157, requires more detail and is an important step toward more meaningful presentation of the value of companies' assets. However, analysis and reconciliation will still be required, particularly for intangible assets.

Currency Crises, Monetary Policy and Corporate Balance Sheets

Abstract This paper studies how the exposure of a country’s corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis. To analyze this question, we present a model that defines currency crises as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment. The results show that a higher exposure to interest rate changes increases the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output. A higher exposure to exchange rate changes also increases the need for output loss compensation. However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation. As a result, its effect on the probability of crisis is ambiguous.

How would the introduction of an EU-wide formula apportionment affect the distribution and size of the corporate tax base? An analysis based on German multinationals

This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU-wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank's Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data are used to construct (i) a separate accounting and (ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss offset, the EU-wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioral responses of companies caused by such a system change.

Is the Credit Cycle Dead?

The credit cycle is dormant, not dead. The structured credit markets have caused spreads to remain unusually tight, but credit fundamentals are sound: Corporate balance sheets are strong, and profits are on the rise. Therefore, the market is responding in rational, if unexpected, ways. The cycle will eventually turn, but the market is not in a bubble, and the global economy is most likely headed for a soft landing.

Corporate Marginal Tax Rate, Tax Loss Carryforwards and Investment Functions: Empirical Analysis Using a Large German Panel Data Set

This study is the first empirical analysis to investigate the relationship between the investment behaviour of firms resident in Germany and the empirically determined marginal tax rates developed by John R. Graham. It is based on the Bundesbank's corporate balance sheet statistics for the period 1971-2002. In an autoregressive distributed lag model, the marginal tax rate is shown to be significant, with an elasticity of between 0.1 and 0.2. An error correction model does not produce any plausible results for the marginal tax rate. Graham's marginal tax rates are a complement to the methods typically used to determine the effective marginal tax rates and effective average tax rates.

Highlights of Recent Trends in Financial Markets

After some significant corrections in the second half of May and in early June, major equity markets have resumed their growth, in some cases regaining levels reached before the May-June contraction. Against a backdrop of healthy corporate balance sheets, robust earnings growth and low default rates, investor sentiment has remained positive, as reflected in these equity market developments and compressed credit spreads. However, there are signs of increasing nevousness, which include the May/June market turbulence and somewhat increased levels of historical and implied volatility. The increased nervousness may reflect in part downward revisions to economic forecasts.

Corporate Marginal Tax Rate, Tax Loss Carryforwards and Investment Functions - Empirical Analysis Using a Large German Panel Data Set

This study is the first empirical analysis to investigate the relationship between the investment behaviour of firms resident in Germany and the empirically determined marginal tax rates developed by John R. Graham. It is based on the Bundesbank's corporate balance sheet statistics for the period 1971-2002. In an autoregressive distributed lag model, the marginal tax rate is shown to be significant, with an elasticity of between 0.1 and 0.2. An error correction model does not produce any plausible results for the marginal tax rate. Graham's marginal tax rates are a complement to the methods typically used to determine the effective marginal tax rates and effective average tax rates.

How would the introduction of an EU-wide formula apportionment affect the distribution and size of the corporate tax base? An analysis based on German multinationals

This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU-wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank's Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data are used to construct (i) a separate accounting and (ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss offset, the EU-wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioral responses of companies caused by such a system change.

Voluntary disclosure on project intangibles from R&D in business reporting

PurposeSpecific asset recognition rules often bar expenses for research and development (R&D) from recognition on corporate balance sheets. This tangible‐intangible accounting asymmetry has led to the development of intellectual capital reports (ICRs) for intangibles in general and for R&D in particular. Thus, two dichotomous reporting formats coexist in corporate disclosure. The purpose of this article is to bring together more closely the information on project intangibles from R&D provided by voluntary and mandatory reporting systems.Design/methodology/approachThe authors used an experimental case study approach in a joint research project with a non‐university research and technology organisation (RTO). The methods deployed in the project included semi‐structured interviews, Delphi techniques and normative reasoning.FindingsThe results show that it is possible to use financial reporting's systematic approach and typical layout to ally the presumed strengths of financial reporting (i.e. the existence of standardised ways of interpretation and an educated readership) and indicator‐based ICRs (i.e. the capability of capturing the generic features of innovation activity).Practical implicationsGiven the predominance of financial reporting's educated readership, it is useful to produce voluntary disclosures in such a form that the information can easily be embedded in the overall picture painted by financial numbers.Originality/valueInductive‐analytical ICRs are typically not intertwined with financial accounting. The article elaborates on linkages between financial accounting and inductive‐analytical reporting models and proposes a classification scheme for project intangibles from R&D based on information reliability.

How Would Formula Apportionment in the EU Affect the Distribution and the Size of the Corporate Tax Base? An Analysis Based on German Multinationals

This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank's Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data is used to construct i) a separate accounting and ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss-offset, the EU wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in the light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioural responses of companies caused by such a system change.

“De‐risking” Corporate Pension Plans: Options for CFOs

Until the stock market bubble burst in 2000–2002, most CFOs viewed their defined benefit pension plans as profit centers and relatively risk‐free sources of income. Since neither pension assets nor liabilities were reported on corporate balance sheets, and expected returns on pension stocks could be substituted for actual returns when reporting net income, the risks associated with DB plans were masked by GAAP accounting and thus assumed to have no bearing on corporate capital structure. But when stock prices and corporate profits fell together, the risks associated with conventional stock‐heavy pension plans showed up first in reduced pension surpluses (or, in many cases, deficits) and then later in higher required cash contributions and lower reported earnings. As a consequence, today's investors (and rating agencies) are viewing pension and other legacy liabilities as corporate debt, and demands for transparency and increased funding have triggered accounting changes and proposed legislative reforms that will further unmask the economics.This article aims to provide both private‐sector and public‐sector CFOs with suggestions for reducing and controlling the cost of providing for the retirement of their employees. Profitable, tax‐paying companies with DB plans should consider (1) funding any unfunded liabilities (if necessary, by issuing debt) and (2) reducing pension equity and interest rate exposures by shifting some (if not all) pension assets into bonds and defeasing the pension liability (achieving a tax arbitrage in the process). And in cases where the expected costs of maintaining DB plans outweigh the benefits, companies should consider freezing or terminating their plans and switching to a defined contribution (DC) or some form of hybrid plan. The authors also propose similar changes for public pension plans, where underfunding and mismatch problems are greater, less transparent, and in some ways less tractable than those of corporate DB plans.

Allocating Shareholder Capital to Pension Plans

This article discusses the corporate challenge of providing retirement income to employees while limiting the costs and risks of pension plans to the companies themselves by addressing five main questions: What are the major issues and challenges surrounding pensions? Although the pension shortfalls have been the focus of attention, the author argues that the more serious concern is the risk stemming from the mismatch between pension assets and pension liabilities— that is, the funding of debt‐like liabilities with equity‐heavy asset portfolios. To what extent do the equity market and equity prices reflect the shortfall in value and the mismatch in risk? While the author describes some evidence of the market's ability to capture pension risk, analysts' P/E multiples and management's assessments of cost of capital may still be distorted by failure to take full account of the risks associated with pension assets. How should management analyze and formulate strategic solutions? Without offering specific solutions, the author presents a framework for analyzing the problem from a strategic perspective that can be used in formulating a company's pension policy. In particular, the article recommends that companies take an integrated perspective that views pension assets and liabilities as parts of the corporate balance sheet, and the pension asset allocation decision as a critical aspect of a corporate‐wide enterprise risk management program. If a company chooses to make a major change in its pension policy, such as a partial or complete immunization accomplished by substituting bonds for stocks, how would you communicate the new policy to the rating agencies and investors? What are the major issues to be thinking about when contemplating a change from a DB plan to a defined contribution, or DC, plan? The author argues that DC plans without some corporate oversight or responsibility for results are not a long‐term solution.

The Elusive Income of Synthetic CDOs

Investment banks/arrangers sometimes increase the risk profiles of CDOs without receiving or paying investors commensurate increases in income. Arrangers created STCDOs so that they could still do business without developing a deeper investor base for those transactions, but the STCDO always leaves the arranger with residual credit risk and a huge position to hedge. Correlation trading has grown rapidly, but it is based on false analogies to the conventional options markets and unreliable data on factors such as relative spread movements and subordination required for desired credit quality. The models are unstable. Hedging should focus instead on default probability and recovery rates based on fundamental corporate balance sheet analysis. Arrangers of synthetic CDOs should report entire notional amounts, but they have been reporting only the amounts of tranches they have sold for fear that huge notional amounts will make bank managers and regulators uncomfortable. Investors in synthetic CDOs should insist on a cash flow analysis that shows the timing, magnitude, and probability of receipt of cash flows—and that requires knowledge of the full notional amount of the CDO. “Delta” hedging strategies can be a source of moral hazard because the income produced by correlation-driven delta hedging is easily manipulated by fudging the hedge ratio. Arrangers can manipulate hedge ratios so that they sell more credit protection and increase their income without a perceived increase in risk. <b>TOPICS:</b>CLOs, CDOs, and other structured credit, information providers/credit ratings, credit risk management

ANALISIS KORELASI KANONIKAL KOMPONEN AKTIVA DAN PASIVA

The independence of asset and liability composition is obvious in Modigliani and Miller’s capital structure proposition. While, independence of investing and financing decisions is a very useful assumption to simplify corporate financial decisions, the actual balance sheets of corporations do not reveal independence between the two sides of the balance sheet. The purposes of this paper are to empirically identify relationship between the structures of left side and right side of balance sheet and to explain the nature of these relationships by using canonical correlation analysis. Canonical correlation analysis shows that firms match the maturity structure of their assets and liabilities, short-term (long-term) assets tend to be financed with short-term (long-term) liabilities, accounts receivable are used as collateral for short-term loan, and fixed assets are use as collateral for long-term loan.

Currency Mismatches and Corporate Default Risk: Modeling, Measurement, and Surveillance Applications

Currency mismatches in corporate balance sheets have been singled out as an important factor underlying the severity of recent financial crises. We propose several structural models for measuring default risk for firms with currency mismatches in their asset/liability structure. The proposed models can be adapted to different exchange rate regimes, are analytically tractable, and can be estimated using available equity price and balance sheet data. The paper provides a detailed explanation on how to calibrate the models and discusses two applications to financial surveillance: the measurement of systematic risk in the corporate sector and the estimation of prudential leverage ratios consistent with regulatory capital ratios in the banking sector.

Currency Mismatches and Corporate Default Risk: Modeling, Measurement, and Surveillance Applications

Currency mismatches in corporate balance sheets have been singled out as an important factor underlying the severity of recent financial crises. We propose several structural models for measuring default risk for firms with currency mismatches in their asset/liability structure. The proposed models can be adapted to different exchange rate regimes, are analytically tractable, and can be estimated using available equity price and balance sheet data. The paper provides a detailed explanation on how to calibrate the models and discusses two applications to financial surveillance: the measurement of systematic risk in the corporate sector and the estimation of prudential leverage ratios consistent with regulatory capital ratios in the banking sector.

How Would Formula Apportionment in the EU Affect the Distribution and the Size of the Corporate Tax Base? An Analysis Based on German Multinationals

This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank's Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data is used to construct i) a separate accounting and ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss-offset, the EU wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in the light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioural responses of companies caused by such a system change.