Estimation Of Future Cash Flows Research Articles

The Crusin Lines: Asset Impairment, Ethical Issues, and Reputation Risk

ABSTRACTA real-world incident inspired this instructional case involving a highly publicized cruise ship mishap that signaled a possible impairment loss. The case requires students to apply fair value standards relevant to nonfinancial assets and perform impairment testing using United States Generally Accepted Accounting Principles (U.S. GAAP) and/or International Financial Reporting Standards (IFRS) in the context of judgment-based estimates of future cash flows, emerging incentives, and pressures facing the divisional chief financial officer (CFO). In addition to asset impairment calculations, the complexities of this situation challenge students to evaluate ethical issues, develop alternatives, and recommend a course of action for the divisional CFO. Finally, the case requires students to explore corporate reputation risk and the accounting implications for reputation-damaging incidents. This case can fit in an international accounting, intermediate, or graduate-level financial accounting course.

The Financial Valuation Risk in Pepper Production: The Use of Decoupled Net Present Value

Greenhouse peppers are one of the most important crops globally. However, as in any production activity, especially agricultural, they are subject to important risk factors such as price fluctuations, pests, or the use of bad quality water. This article aims to evaluate the viability of these types of crops by using discounted cash flows. Risk evaluation has been carried out through the analysis of pepper plantations for 2016 and 2017. The traditional application of this tool has significant limitations, such as the discount rate to be used or the estimation of future cash flows. However, by using discount functions that decrease over time in combination with decoupled net present value, these limitations are expected to improve. The use of decoupled net present value has permitted an increase in the accuracy and quantification of risks, isolating the main risks such as price drops (EUR 3720 ha−1 year−1) and structural risks (EUR 1622 € ha−1 year−1). The use of decreasing discount functions has permitted a more realistic investment estimation. Finally, the sensitivity analysis shows that decoupled net present value (DNPV) is little affected by changes in interest rates in contrast to traditional net present value (NPV).

ACCRUALS IN THE PREDICTION OF FORTHCOMING CASH FLOWS IN THE COMPANIES LISTED AT PAKISTAN STOCK EXCHANGE

This research founds the relative predictabilities of accruals and further disaggregated accruals– trading accruals, non-trading accruals, and financial accruals in the estimation of future cash flows. The research also examines the effect of the global financial crisis on this association between accruals and future cash flow prediction. The research uses annual data from the period of 1999 to 2018 from 453 firms, which includes 9060 observations. The whole sample period covers data from 1999 to 2018, during the financial crisis period from 2008-2009 and Pre financial crisis period from 1999 to 2007 and Post global financial crisis period 2010 to 2018. To examine the relationship between accruals, disaggregated accruals, and estimation of future cash flows, hypotheses were developed and seasoned through OLS. The outcomes confirm that financial accruals, non-trading accruals, and total aggregated accruals were significant, but trading accruals was not a significant contributor to the estimation of future cash flows. Moreover, there was no significant effect of the global financial crisis on the relationship among disaggregated accruals and forecast of imminent cash flows during Pre and Post and during the global financial crisis period. Keyword: Accruals, Trading Accruals, Financial Accruals, Non-trading Accruals, Global Financial Crisis JEL Classifications: GO1; G30 DOI: https://doi.org/10.32479/ijefi.10313

The Effect of Financial Reporting Quality on Firm Performance in Preemptive Corporate Restructuring Deals in Korea

Purpose - The purpose of this study is to examine the effect of financial reporting quality on firm performance in preemptive corporate restructuring deals in Korea. Design/methodology/approach - The 347 corporate restructuring deals examined in this study was extracted from the S&P Capital IQ database. Multiple regression analysis was performed. Findings - High-quality financial reporting of preemptive corporate restructuring firms is associated with more profitable corporate restructuring, as measured by announced returns. High quality accounting information transparently reflects the past and present financial position and performance, thereby these enhance the estimation of future cash flows of the corporate restructuring firms, and thus this reduces uncertainty about the firms. Therefore, the agreed-upon price about the assets to be sold between the corporate restructuring firm and acquirer is higher and this leads to positive corporate restructuring performance. In addition, the importance of financial reporting quality increases when corporate restructuring firms have high debt ratios. Research Implications or Originality - The quality of accounting information is an important success factor in corporate restructuring.

INNOVATION COMPONENT OF POLYSTRUCTURAL PROCESS OF FORMATION AND DIAGNOSTICS OF ECONOMIC SECURITY OF ENTERPRISE

For the first time, the use of the V&V concept for the diagnosis of economic security of agricultural enterprises was proposed. This study creates regulatory models for enterprises to make the best decisions in the network of values, when the goal is an efficient and structurally reliable cooperation. The models use theoretical game concepts for multilateral decision making, which involves both cooperation and competition. The purpose of the article was to identify the innovative component of the polystructural process of forming and diagnosing economic security of the enterprise. From a conceptual point of view, it is useful to distinguish between the analysis and diagnostics of the system of economic security of an individual enterprise, from the analysis of economic security of a set of enterprises with clear group characteristics or models. Each individual enterprise or set of enterprises has its own peculiarities that arise as a result of changes in resources and circumstances in the context of local institutions and policies. They turn into productive activities, as well as enterprise consumption and decision-making activities. In this analysis, the system of economic security of a set of enterprises is defined as a combination of small and large enterprises, which, like a group, have similar patterns of life and consumption, as well as constraints and opportunities, and for which such development strategies and interventions would be appropriate. Often such systems have similar agroecological and market conditions. Enterprises usually make their decisions to maximize profits. Profit is the result of incoming and outgoing cash flows, which, on the one hand, depend on the success of the market, and, for example, on operating costs and capital costs, on the other. Consequently, future cash flows determine the level of success, as long as the cost of time is recorded. However, an accurate estimate of future cash flows at the time of the decision is usually unrealistic. Uncertainty, for example, the development of the market, the decisions of competitors, as well as future costs, give rise to high uncertainty in future cash flows.

New Proposal on Reporting Intangible Resources on the Organizational Level

Abstract In recent years, it has become increasingly evident that existing information systems at the level of organizations do not allow for a performing management because they fail to capture a wide range of intangible resources, which represent one of the most important variables for the success and progress of any organization. As a result of the fact that the annual financial reporting cannot give a real basis for making accurate estimates of future cash flows that can be made by organizations, or of their associated risk, this article states the need to report intangible resources at the organizational level. The concept, content and advantages of an Intangible Resources Report (IRR) are presented, and in the final part of the article it is presented an example of IRR, detailed in a specific case for an intangible resource. This Intangible Resources Report has the advantage of providing a generous and documented framework for managing and disclosing intangible resource information for any type of organization. Through its implementation, it is possible to compare strengths and weaknesses in intangible resources for different organizations, becoming a good benchmark tool, thus facilitating the exchange of experience and learning in different areas of intangible resource management at the level organizations

The pricing of accruals quality in credit default swap spreads

AbstractWe examine the association between accounting information risk, measured with accruals quality (AQ), and credit spreads, primarily measured with credit default swap (CDS) spreads. Theoretically, AQ measures the precision with which accruals map into cash flows. Better AQ implies a more precise estimate of future cash flows and, we predict, a reduction in credit spreads due to resulting lower uncertainty regarding the ability to meet debt interest and principal payments. In support of this hypothesis, we find a negative relationship between AQ and CDS spreads whereby better AQ is associated with lower CDS spreads. Additionally, we investigate the components of total AQ and find that innate AQ is more strongly associated with CDS spreads than is discretionary AQ. We further show that AQ moderates the market's pricing of earnings: the relationship between earnings and CDS spreads weakens as AQ worsens. Together, our results indicate that accounting information risk is priced in credit spreads and that the CDS market responds not only to the level of earnings, but the quality thereof as well.

The Economic Consequences Associated with Integrated Report Quality: Capital Market and Real Effects

We examine whether integrated report quality (IRQ) is associated with stock liquidity, firm value, expected future cash flows, and cost of capital. Our study is motivated by the recent focus on sustainable capitalism and the global interest shown by firms, investors, and regulators in integrated reporting. We use data from South Africa because it is the only country where integrated reporting is mandatory. We use a measure of IRQ based on proprietary data from EY, which rates these reports as part of its Excellence in Integrated Reporting Awards. We find that IRQ is positively associated with stock liquidity, measured using bid-ask spreads, and firm value, measured using Tobin’s Q. Our results are consistent whether we analyze levels or changes. When we decompose the firm value into an expected future cash flows effect and a cost of capital effect, we find that the positive association between IRQ and firm value is attributable mainly to the cash flows effect, which is consistent with investors revising estimates of future cash flows upward as a result of better understanding the firm’s capitals and strategy or future cash flows increasing because of improved internal decision making. We provide evidence on these two explanations and find it is more likely that our results are attributable to improved decision making by managers than to analysts forecasting future cash flows more accurately.

English

This study determines the relationship between the impairment decision, as well as its magnitude, and two earnings management motivations, namely increasing management compensation, and meeting debt requirements. The computation of value in use in the impairment loss is subject to management’s estimate of future cash flows and choice of discount rate, which tolerates earnings management. Certain indicators and financial ratios were used to depict the effect of the two motives on impairment. In addition to this, the effect of firm size on impairment was also analyzed. The data were obtained from the OSIRIS database and the SEC form 17-A of the respective companies, as well as from telephone interviews and surveys. Probit regression was used to analyze the effect of the different motives to the impairment decision while multiple linear regression was used for the impairment magnitude. The findings show that publicly listed companies in the Philippines are engaging in “income smoothing” and “big bath” accounting with the use of impairment. Results also indicate that most “big bath” happens during periods where changes in the company’s executive officers occur. Lastly, there is also evidence that financially strong companies are deferring their impairment recognition to obtain a lower cost of financing.

Unallocated loss adjustment expense reserving

In non-life insurance, the provision for outstanding claims (the claims reserve) should include future loss adjustment expenses, i.e. administrative expenses to settle the claims, and therefore we have to estimate the expected Unallocated Loss Adjustment Expenses (ULAE) – expenses that are not attributable to individual claims, such as salaries at the claims handling department. The ULAE reserve has received little attention from European actuaries in the literature, supposedly because of the lack of detailed data for estimation and evaluation. Having good estimation procedures will, however, become even more important with the introduction of the Solvency II regulations, which require unbiased estimation of future cash flows for all expenses. We present a model for ULAE at the individual claim level that includes both fixed and variable costs. This model leads to an estimate of the ULAE reserve at the aggregate (line-of-business) level, as demonstrated in a numerical example from a Swedish non-life insurer.

IFRS for Insurance: CFO Forum Proposals

European insurers who have to establish financial statements under IFRS must apply a temporary international accounting standard for insurance contracts which provides a flawed picture of their business. The IFRS long-term project for insurance is still under preparation by the IASB. The standard should not be issued until mid-2009 following a discussion paper to be submitted for comments in the first quarter 2007. The insurance industry has been involved for several years in a proactive way, including participation in the International Insurance Working group set up by the IASB. The European CFO Forum has proposed principles on which the international accounting standard for insurance should be based. The key elements are as follows: the insurance liabilities should be valued on a market consistent measurement including the management's best estimate of future cash flows discounted at a risk-free rate and a margin for risks and uncertainties; the profit should be recognized as the insurer is released from risks, and services are provided to the policyholders over the term of contracts and not at inception. Participating contracts liabilities should be based on an economic valuation. Liabilities should be reassessed at each closing. If applied, the CFO Forum‘s principles would have positive impacts for the investors and other users of the financial statements while entailing huge operational implications. The proposals from the European industry for accounting are closely linked to the proposals for Solvency II that the European Commission is preparing in the meantime: the measurement of the insurance liabilities proposed for both purposes by the CFO Forum, the CRO Forum and the CEA is the same. The American insurers members of the GNAIE and four Japanese Life Insurance groups have made similar propositions for accounting but with some differences that are under debate with the CFO Forum.

From Accounting to “Forecounting”*

ABSTRACTUsing Ross Skinner's 1995 CA Magazine article, “Judgment in Jeopardy", as a stepping stone, we revisit the meaning of professional judgment in accounting in light of developments in standard setting, financial markets, and business operations that have taken place over the past two decades. We argue that it is time to change the view that accountants' professional judgment is the application of accounting‐based knowledge and experience in the selection of an appropriate accounting method. Accountants now face a standard‐setting context that emphasizes the estimation of future cash flows as well as new business and financial realities. This context implies that, in exercising their professional judgment to choose between forecast alternatives, accountants must rely on knowledge and experience from other disciplines (even though this is not well integrated into accounting). Hence, accounting must evolve from its traditional stewardship role to the new role of “forecount‐ing” (the estimation of future cash flows). The implications as well as the challenges of that evolution are discussed.

Conservatism in Accounting

This paper examines conservatism in accounting. Conservatism is defined as the differential verifiability required for recognition of profits versus In its extreme form the definition incorporates the traditional conservatism adage: no profit, but anticipate all losses. Despite criticism from many quarters, including standard-setters, conservatism appears not only to have survived in accounting for many centuries, but also to have increased in the last 30 years. The paper lays out the various alternative explanations for conservatism: contracting; shareholder litigation; taxation and accounting regulation (e.g., SEC and FASB). It also summarizes the empirical evidence on the existence of conservatism and the extent to which it is consistent with the alternative explanations for conservatism. The evidence is consistent with both the existence of conservatism and its increase in recent years. Contracting and shareholder litigation explanations appear to be important in these results. The evidence on the effect of taxation and regulation is weaker, but is still consistent with those explanations playing a role. Earnings management could also produce some of the evidence on conservatism, but it is unlikely to be the major explanation. The explanations and evidence have important implications for accounting regulators (SEC and FASB). First, the contracting explanation implies that conservatism will exist even in the absence of formal contractual use of financial statements. As long as income and net asset measures have meaning and are used in a way that affects management's welfare, conservatism is likely to be an optimal accounting principle. Absent differential verifiability, financial measures such as income and net assets are likely to be subject to sufficient manipulation to render them meaningless. Second, recent FASB moves to apply rules such as mark-to-market without appropriate concern for verifiability are likely to be disastrous for the FASB and capital markets. Third, attempts to introduce unverifiable estimates of future cash flows into the financial statements are likely to just as disastrous.

A critique of using real options pricing models in valuing real estate projects and contracts

AbstractDiscounted cash flow (DCF) models have been criticised for using risky discount rates and subjective estimates of future cash flows. In addition, DCF models do not incorporate valuations of implicit options imbedded in capital projects. Recently, researchers have applied real options pricing models to evaluate real estate projects and contracts. However, the required assumptions and criteria for using these models may be absent in real estate projects, which raises the question whether these models produce better results or create more uncertainties for end users. This paper contains a review of the conditions and methods that have been proposed for applying real option models in real estate valuations. Copyright © 2002 Henry Stewart Publications

The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors

This paper suggests a new measure of one aspect of the quality of working capital accruals and earnings. One role of accruals is to shift or adjust the recognition of cash flows over time so that the adjusted numbers (earnings) better measure firm performance. However, accruals require assumptions and estimates of future cash flows. We argue that the quality of accruals and earnings is decreasing in the magnitude of estimation error in accruals. We derive an empirical measure of accrual quality as the residuals from firm-specific regressions of changes in working capital on past, present, and future operating cash flows. We document that observable firm characteristics can be used as instruments for accrual quality (e.g., volatility of accruals and volatility of earnings). Finally, we show that our measure of accrual quality is positively related to earnings persistence.

Lack of timeliness and noise as explanations for the low contemporaneuos return-earnings association

We assess earning's lack of timeliness and value-irrelavant noise in earnings as explanations for the weak contemporaneous return-earnings assocation. Earnings lack timeliness because objectivity, verifiability, and conservatism conventions underlie the accounting measurement process. Noise in earnings is uncorrelated with returns in all periods. It likely gets introduced when estimates of future cash flows that differ from the market's estimates are included in earnings determined by accounting rules. Consistent with earning lacking timeliness, we find current and future earnings adjusted for expectational errors explain roughly 3–6 times as much of the annual return variation as current earnings alone.

ESTIMATING THE VALUE OF A SMALL FIRM

The article is concerned with how objective data (production, sales, raw material shortages, etc) and subjective data about the capabilities and weaknesses of the directors as managers and entrepreneurs, may be integrated to provide an estimate of future cash flows and hence the value of the firm.

Accounting Changes and the Accuracy of Analysts' Earnings Forecasts

In the cornerstone document of its conceptual framework, Objectives of Financial Reporting by Business Enterprises (SFAC No. 1), the FASB states that the primary objective of financial reporting should be to [1978, para. 37]: provide information to help present and potential investors and creditors and other users [assess] the amounts, timing, and uncertainty of prospective net cash inflows to the related enterprise. In order to estimate cash flows, the FASB maintains that users focus on earnings numbers rather than on cash flows themselves [1978, para. 43]. relationship between estimates of future cash flows and future earnings numbers is highlighted by the FASB in its document, Reporting Earnings [1979, para. 8]: The relationship may be identified in a two-step process for the assessment of future cash flows: a. Reports of past earnings are used as a basis for the assessment of future earnings. b. An adjustment is then made to the assessment of future earnings to derive an assessment of future cash flows. present study focused on step one of this twostage process, the assessment of future earnings numbers.