Individual Financial Statements Research Articles

Earnings Management in Business Groups during the SARS-CoV-2 Pandemic

Abstract This paper aims to assess the influence of the SARS-CoV-2 pandemic on the accrual-based earnings management patterns in non-financial business groups in the Warsaw Stock Exchange (WSE). This study contributes to the existing literature by considering earnings manipulation behaviours in assessing the reporting data quality, both in consolidated financial statements of business groups and individual financial statements of parent undertakings. The research methods are based on the Modified Jones Model with the simultaneous separation of individual subcategories of accruals via cross-sectional analysis and time-series data approach (separately for each business group). Empirical findings supported the presumption that earnings manipulation schemes in the SARS-CoV-2 transitional (2020) and crisis (2021) periods differed statistically compared to the previous 2019 and 2020 years, respectively. Moreover, this article proved that the company‘s potential financial distress could imply accrual-based earnings management behaviours and moderate the association between the SARS-CoV-2 pandemic and earnings manipulations activities. Finally, the obtained results confirmed that although business groups have an expanded set of balance sheet policy instruments, the quality of earnings reported in the individual financial statements of parent undertakings and the consolidated financial statements of business groups were similar during the SARS-CoV-2 pandemic.

How does the effect of external financing on profitability differ across tiers? Evidence from the automotive supply chain

Due to the importance of automotive industry for the Czech Republic (in a broader sense for European countries) and due to the unprecedented development of both national and European economies caused by the COVID-19 outbreak, also having implications on the financial sector, we aim to explore the main determinants of operating performance within the automotive supply chain. This study is based on the data sample composed of complete individual financial statements (audited if available) of firms conducting their business in the Czech Republic from 2011 to 2018 and belonging to the automotive supply chain. This supply chain is defined as (sub) deliveries of the Czech automotive industry represented mainly by companies classified under NACE 22, 27, 25, 24. The hypothesis claiming that the investment and leverage-based variables are the important drivers of operating profitability was only partly confirmed (valid predominantly for Tier 3), which shows that the supply chain organization also plays a crucial role as well as (valid for Tier 1). Also, we have shown (illustrated) that the assumption of different capital structures among tiers is valid. The average overall indebtedness of Tier 3 is higher by approximately 50% (altogether, the short- and long-term leverage are higher by 40% and 62% respectively) than Tier 1 firms. The need for relatively high capital expenditures (applicable to Tier 1) and working capital investments (applicable to Tier 3) is partly facilitated by external funds reflected in the indebtedness, which is associated with the costs reducing overall low profits from these investments. The leverageprofitability relationship seems to be nonlinear for long-term debts contrary to short-term debts where the linear relationship prevails.

Accounting Policies and Dividend Limitation: A European Comparison

Abstract The adoption of IFRS by the EU has raised issues about its economic consequences in terms of, among others, volatility of corporate profits, taxation of profit and distribution of dividends. Indeed, it has brought the interactions between legal rules for dividend distribution and accounting policies back into focus. The EU company and accounting regulations are based on capital maintenance rules that involve limitations on dividend distribution when certain accounting policies are implemented in individual financial statements under local GAAP. However, while a majority of member states permit IFRS for individual financial statements, the EU regulations are silent on this issue. In this article, we outline an in-depth analysis on legal dividend distribution rules interactions with accounting policies in European countries, whether local GAAP or IFRS are applied. We have selected nine cases of potential recognition of unrealised gains in individual financial statements under local GAAP and/or IFRS, some of which are already specified in the EU regulations. For each case, we have analysed the national accounting regulations and the corporate laws. Our analysis reveals that the limitations on dividend distributions recommended by the EU have been most largely implemented in the national regulations, but not in all countries. It also sheds light on potential loopholes in the current European regulation regarding unrealised gains that may be more systematically recognised under IFRS than under local GAAP: unrealised gains arising from the recognition of deferred tax assets and unrealised gains arising from benefit pensions plan. To fill these gaps in the national regulations and to harmonise the legal basis for dividend distribution better within the EU, we suggest including in the European regulation the concept of ‘realised profits’ and thus ‘distributable profits’ as a required basis for dividend distribution. It involves in the first place identifying relevant criteria that may enable disentangling realised and unrealised profits or losses.

The first attempt to uniform accounting in the USA: Individual and consolidated financial statements

Subject. This article examines the first attempts to unify accounting in the United States and analyzes the information needs of users of accounting information, which led to the emergence of consolidated financial statements. Objectives. The article aims to study the theoretical and methodological foundations of unification of US accounting in the context of individual and consolidated financial statements, as well as identify the theoretical and methodological foundations of consolidated financial statements as an independent type of financial reporting. Methods. For the study, I used combinations of analysis and synthesis, induction and deduction, and historical and logical research methods. Results. The article shows that the unification of accounting in the United States took place through the adoption of uniform rules, not through the recognition of generally accepted accounting principles. The first unified accounting rules were focused on meeting the information needs of banks and banking organizations as the main source of investment of commercial companies. Despite the existence of theoretical developments in the field of consolidated financial statements and the preparation of the first consolidated balance sheets in practice, preference was given to individual financial statements, which was due to the need to assess the creditworthiness of a potential borrower applying for bank financing. Relevance. The results obtained can be used in the development of the theory and methodology of consolidated accounting as an independent type of accounting of a group of companies.

THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (II)

The existence of groups of companies is a relatively new issue for professional accountants, the academic environment, as well as for regulatory bodies in the field of accounting in Romania. In this context, the theoretical and practical aspects of the preparation of the consolidated annual financial statements generate extensive debates among accounting specialists, in order to find practical solutions to support the understanding and correct application of accounting regulations in the field of the consolidation of accounts. In two articles, we will present the accounting treatment of the disposal of securities held, within subsidiaries, associates, as well as in jointly controlled companies, by companies that prepare consolidated annual financial statements. The issue of disposal of securities held with entities whose individual financial statements are subject to consolidation will be presented in the form of case studies, structured as follows: Elimination of securities held with affiliated entities (object of previous article); Elimination of securities held in associates and jointly controlled entities (joint ventures) - object of this article.

THE ELIMINATION OF SECURITIES HELD IN THE ENTITIES WITHIN THE GROUP. ACCOUNTING APPROACH IN THE CONTEXT OF THE CONSOLIDATION OF ACCOUNTS (I)

The existence of groups of companies is a relatively new issue for professional accountants, the academic environment, as well as for regulatory bodies in the field of accounting in Romania. In this context, the theoretical and practical aspects of the preparation of the consolidated annual financial statements generate extensive debates among accounting specialists, in order to find practical solutions to support the understanding and correct application of accounting regulations in the field of the consolidation of accounts. In two articles, we will present the accounting treatment of the disposal of securities held, within subsidiaries, associates, as well as in jointly controlled companies, by companies that prepare consolidated annual financial statements. The issue of disposal of securities held with entities whose individual financial statements are subject to consolidation will be presented in the form of case studies, structured as follows: Elimination of securities held with affiliated entities (object of this article); Elimination of securities held in associates and jointly controlled entities (joint ventures) - object of the next article.

Convergence to IFRS in Romania – Score per Minute

The current stage of evolution of our society includes the extension of economic, social and political phenomena beyond the physical boundaries that history has drawn and thus requires a change in approach to accounting by adapting specific practices to the new needs of the market. The impact of digitization leads to the visible dissolution of borders and the generalization of accounting practices and tools. The accounting profession is moving towards increasing standardization and national regulations in this area tend to become more international, in an attempt to optimize one of the most important qualities of financial reporting: comparability. In this context, the present study aimed to compare and analyze the divergences between the Romanian accounting regulations applied according to EU Directive 34/2013 through the Order of the Minister of Public Finance no. 1802/2014 for the approval of the Accounting Regulations regarding the individual annual financial statements and the consolidated annual financial statements (OMFP 1802/2014) and the International Financial Reporting Standards. In terms of research methodology, the authors’ approach is a qualitative one with quantitative elements, starting from the analysis of the relevant literature in order to understand and deepen the general context. To investigate the main similarities and differences between the sets of accounting rules the comparative method was used, but also tools specific to quantitative methods for the mathematical calculation of convergence scores between OMFP 1802/2014 and IFRS. Although the Romanian accounting framework has been aligned in many respects with the international one, the obtained results reveal a series of divergences between the two sets of regulations, materialized in different ways of approaching economic transactions.

The Adjustment of Individual Annual Financial Statements

The aim of this article is to present, according to the Order of the Minister of Public Finance No. 1802/2014 for the approval of the Accounting regulations regarding the individual annual financial statements and consolidated annual financial statements, as subsequently amended and supplemented, of the adjustment mechanism for individual annual financial statements, of the adjustment rules for the individual financial statements in the case of consolidation based on the cumulation of balances (accounts), as well as of certain practical examples regarding the performance of adjustments both for the differences related to the current year, and to the ones related to the previous years.

The disclosure of events after the reporting period. The example of listed companies from selected European countries

Purpose: The aim of this article is to present a practical study of disclosures of events after the reporting period in the financial reports of listed companies from selected European countries. The paper presents the results of empirical research based on the source material in the form of financial statements for the year 2018 of listed companies included on the following stock exchange indices: DAX, PSI-20, OMX25, BUX, WIG20, which comprise companies listed on the stock exchanges in Germany, Portugal, Denmark, Hungary and Poland. Methodology/approach: The research sample includes 110 companies. Content analysis of full versions of individual financial statements was performed. Findings: The results show that listed companies comply with the International Financial Reporting Standards regarding the disclo-sure of events after the reporting period. The occurrence of such events in the business practice of com-panies listed on the Warsaw Stock Exchange is much more frequent than in other European countries. The results of the study also present the diversity of events disclosed by respective companies included in the sample after the reporting period. Originality/value: The research allowed us to compare the scope of financial reporting disclosures of events after the reporting period in companies listed on the Warsaw Stock Exchange and in other European companies. Comparisons of this kind have not yet been carried out in international empirical research, which makes this article all the more valuable.

Analysis of factors that affect the reporting of impairment losses on net fixed assets by companies listed on the Warsaw Stock Exchange

The paper aims to present the results of the authors’ own research, including an analysis of factors that may have a significant impact on reporting impairment losses of net fixed assets in the financial state- ments of companies listed on the Warsaw Stock Exchange. As part of the research, the authors tested the following hypotheses: (1) entities that prepare financial statements in accordance with IAS, (2) large entities, (3) production units, (4) entities that have been listed on the stock exchange for more than 13 years, and (5) entities in a poor financial condition are significantly more likely to make impairment losses. In the research, the hypotheses were verified by analyzing data contained in the financial statements of 148 com-panies listed on the Warsaw Stock Exchange for the years 2007−2014: a total of 1184 individual financial statements were analyzed using statistical testing. Audits may be important for the bodies that constitute accounting regulations, as well as for the users of financial statements in the broadest sense, in particular, auditors, accountants, and investors. The research broadens the cognitive achievements of the current re-search on the quality of year-end disclosure documents.

Predicting Audit Opinion in Consolidated Financial Statements with Artificial Neural Networks

The models for predicting audit opinion analyze the variables that affect the probability of obtaining a qualified opinion. This helps auditors to plan revision procedures and control their performances. Despite their apparent relevance, existing models have only focused on the context of individual financial statements and none have referred to consolidated financial statements. The consolidated information is essential for decision-making processes and understanding the true financial situation of a company. Our objective is to provide a new audit opinion prediction model for consolidated financial statements. To this end, a sample of group of Spanish companies was chosen and an artificial neural network technique, the multilayer perceptron, was used. The results show that the developed method managed to predict the audit opinion with accuracy above 86%. Moreover, there exist important differences concerning the most significant variables in the audit opinion prediction for individual accounts, since when using consolidated financial statements, the variables referring to industry, group size, auditor, and board members were converted into the main explanatory parameters of the prediction.

The effect of IFRS adoption on the value relevance of accounting information: evidence from South Korea

This study investigates whether the value relevance of accounting information was changed after IFRS adoption in South Korea. Related prior studies have found mixed empirical evidence depending on research methodologies or research periods. Moreover, the effect of IFRS adoption on value relevance can be different between Korean stock markets (KSE and KOSDAQ) because they have different characteristics. Also, the main financial statements reported by Korean firms had changed from individual financial statements to consolidated financial statements after IFRS adoption. Thus, this study analyzes the effect of IFRS adoption on the value relevance of individual and consolidated accounting numbers expanding research periods (5 years before and after IFRS adoption) and comparing changes in explanatory powers of Ohlson (1995) model on each listing market. The empirical results indicate that the value relevance of Korean listed firms generally decreased after IFRS adoption. However, the value relevance of KSE listed firms decreased, while the value relevance of KOSDAQ listed firms increased after IFRS adoption. In addition, it was found that the effects of IFRS adoption on value relevance of individual and consolidated financial information were different depending on listed markets. This implies that different level of demand for information environment may induce differential effects of IFRS adoption on value relevance.

DETERMINANTS OF FINANCIAL PROFITABILITY OF FEEDINGSTUFFS PRODUCERS

Return on equity is among the basic ratio of economic benefit for enterprise owners. It must be generated as a fundamental condition for the continuous operation and development of an enterprise, regardless of the type of business. The main purpose of this paper was to identify the strength and direction of impact of selected determinants behind financial profitability of animal feed producers. The analysis was based on a six-factor cause-and-effect model linking the determinants of financial profitability to three areas of business activity: the operating, financial and fiscal area. This study relied on the financial data between the years 2011–2016 of individual financial statements of animal feed producers. Based on the results of multiple regression analysis, no factors could be identified that consistently affect the return on equity in the period considered. However, the following can be concluded to be the main factors affecting the variation in return on equity of animal feed producers: the ratio of cash from operating activities to net sales; the return on capital employed; and the financing structure. As shown by this study, in order to improve profitability ratios and, thus, to provide more value to owners and increase the value of the company, managers of establishments producing animal feed should focus their efforts on improving cash management efficiency and asset turnover as well as managing sources of funding.

Benefits of global financial reporting models for developing markets: The case of Romania.

The paper explores the benefits of global financial reporting models for developing countries, discussing the case of Romania, which, at the recommendations of the World Bank and the International Monetary Fund, exceeded the minimum requirements of the European Union, by imposing the full adoption of the International Financial Reporting Standards (IFRS) in individual financial statements of listed companies. Using regression analysis and decomposition techniques, the paper explores the evolution in value relevance of financial variables based on pre-(2009–2012) and post-(2014–2016) adoption samples, showing that after IFRS adoption financial information becomes significantly more relevant for equity valuations. We also provide empirical evidence showing that the degree of relevance for stock valuation, as well as the IFRS impact varies across types of firms. Overall, our findings tend to indicate the success of the financial reporting reform, which could be relevant for other jurisdictions facing similar decisions.

Assessing the existence of synergistic effect in the consolidated accounting entities in the Czech Republic

The objective of the research was to identify possible positive synergistic effect of concerns. Because of the advantages of the existence of consolidated financial statements, the focus is on the Czech consolidated groups.Consolidated financial statements of 719 groups of accounting entities – concerns in the Czech Republic were studied, i.e., the statistical population consisted of 719 reporting units, which can be considered as the total population of all published consolidated financial statements. Following economic indicators were analyzed to discover the existence of positive synergistic effect: cash position ratio, return on equity, return on sales.Based on the research, it the authors concluded that return on equity revealed dependency between change in the value of the indicator of the parent company and consolidated unit. Values of this indicator are interesting from the investment point of view. They confirm success of capital acquisitions.Cash ratio monitoring revealed an inconsistent environment, unambiguous data correlation between the group data and the individual financial statements of the parent companies.Return on sales indicator showed that consolidated groups had reached higher values of the indicator, i.e., lower total cost ratio than parent companies. Data correlation was found at the low level, i.e., the parent companies did not influence consolidated data.Acquisition companies in the Czech Republic in the period 2008–2013 generated positive financial synergy. For financial indicator of return on equity, dependence between consolidated groups and parent companies was confirmed. Positive financial synergy was found out for all monitored financial indicators.

Segment Reporting Level And Analyst Forecast Accuracy

In a setting where the primary financial statements have been converted from individual financial statements to consolidated financial statements in Korea, we examine the effect of segment information disclosed by the firm on analysts’ consolidated-base earnings forecast accuracy. Since Korean firms have prepared the primary financial statements on a non-consolidated basis in the pre-IFRS regime, the adoption of International Financial Reporting Standards (IFRS) leads to a great deal of difficulties and complexities in making accurate consolidated forecasts for users of financial statements, even for financial analysts who are sophisticated users of financial statements. In this situation, we conjecture that the amount of details and types of information in segment disclosure will influence analysts’ forecast accuracy. Consistent with the prediction, we find that financial analysts are able to make more accurate earnings projections when firms provide more disaggregated accounting figures by each segment. Moreover, we find that analysts can make forecasts more accurately when firms disclose more persistent earnings component (i.e., segment operating income). Furthermore, we find that the effect of the segment disclosure levels on analysts’ forecast accuracy is more pronounced for firms with multi-segments. Our results indicate that disaggregated segment information is a useful source for financial analysts to have better understanding about complete picture of firms’ consolidated earnings and improve their forecasting performance.

The impact of mandatory IFRS adoption on capital markets: evidence from Korea

PurposeThe purpose of this paper is to examine the effects of adoption of the mandatory International Financial Reporting Standards (IFRS) on the cost of equity capital in a unique Korean setting. In Korea, individual financial statements were taken as primary financial statements. Before the adoption of IFRS, consolidated financial statements were taken as supplementary financial statements.Design/methodology/approachThe authors measure the cost of equity using the average estimates from the implied cost of capital models proposed by Claus and Thomas (2001), Gebhardt et al. (2001), Easton (2004) and Ohlson and Juettner-Nauroth (2005), using it as the primary dependent variable. Mandatory IFRS adoption, the independent variable in this study, is assigned a value of 1 for the post-adoption period and 0 otherwise.FindingsUsing a sample of listed Korean companies during the period from 2000 to 2013, the authors find evidence of a significant reduction in the cost of equity capital in Korean listed companies after mandatory adoption of the IFRS in 2011, after controlling for a set of market variables.Originality/valueThis study is one of a growing body of literature on the relations between mandatory IFRS adoption and the cost of equity capital (Easley and O’Hara 2004; Covrig et al. 2007; Lambert et al. 2007; Daske et al. 2008). According to the results of this study, increased financial disclosure and enhanced information comparability, along with changes in legal and institutional enforcement, seem to have had a joint effect on the cost of equity capital, leading to a large decrease in expected equity returns.

SPECIFIC OPERATIONS FOR ACCOUNTS’ HOMOGENIZATION WITH A VIEW TO CONSOLIDATION

<p>The preparation of annual consolidated financial statements by group companies represents a relatively new problematic issue for regulating bodies, the world of the academia, as well as for accounting practitioners. The current national and international accounting standards undergo a continuous change and updating to the economic and judicial reality of the business environment which, in turn, goes through a permanent transformation as a result of the globalization of national economies. These novelties raise the necessity of debates organised by accounting specialists with the aim of finding solutions that respect legal regulations related to the preparation of financial statements for consolidation. The present article approaches accounting aspects related to the operation of adjusting individual financial statements that are the object of consolidation.</p>

The effects of the International Financial Reporting Standards (IFRS) adoption on earnings quality: evidence from Korea

This study investigates whether earnings quality of Korean listed firms was substantially improved after the IFRS adoption in long-term aspect and which firms listed in KOSPI or KOSDAQ market had been more enjoyed the benefit. Prior studies related to this subject don’t provide consistent results and have a limitation of insufficiency of research periods. Therefore, this study analyzes the positive effect of the IFRS adoption in Korea using long-term based approach and comparative analysis on each Korean stock market. Furthermore, this study considered Korean specific institutional environment in which main financial statements prepared and disclosed by listed firms were changed from individual financial statements to consolidated financial statements after the IFRS adoption. Results of the study found that earnings quality of Korean listed firms had been significantly improved during 5 years after the IFRS adoption. In addition, earnings quality on consolidated financial statements of KOSDAQ listed firms has improved more than that of KOSPI listed firms. The results provide meaningful implications to evaluate the effects of IFRS adoption on earnings quality and to assess accomplishment of fundamental purpose of the IFRS adoption in Korea.

Measuring the intellectual capital of Italian listed companies

PurposeThe purpose of this paper is to investigate the relationship between intellectual capital (IC), measured in terms of the market to book (MTB) ratio, and potential key determinants of IC value such as intangible assets (IA) and a range of other factors.Design/methodology/approachThe study is conducted for a sample of 140 Italian corporations over the period 2009-2013. Applying a holistic market-based approach, the relationship between IC value and selected determinants from the extant literature is tested. Five hypotheses are tested using a pooled OLS regression model, while controlling for time. ROE is employed as a useful firm profitability indicator from the perspective of an equity investor. Moreover, four robustness tests are undertaken.FindingsThe results show that IA, profitability, leverage, industry type, auditor type, and family ownership positively affect IC value, whereas SIZE and AGE negatively affect IC value. Moreover, the findings of the robustness tests suggest that all firms, and not just knowledge-intensive business service industry firms, manage knowledge.Research limitations/implicationsThe validity of the findings is limited to the Italian context, as the study focuses on a sample of companies listed on the Milan Stock Exchange, all of which prepare their individual financial statements according to IFRS. Further limitations are related to the use of market value in the short term, as it is influenced by market volatility. The study may allow academic researchers to investigate the impact of other non-accounting sources of information on market value within a multidisciplinary perspective.Practical implicationsThis paper also has implications for managers and practitioners. The findings suggest that managers should not take for granted that firm growth (an increase in SIZE) alone will lead to an increase in IC value, in the absence of a consistent IC-oriented investment strategy. Managers should also avoid smoothing their IC investment as the company grows, in order to maintain a stable MTB ratio. Further, standard setters should seek to explore better means of disclosing non-accounting information relating to IC value.Originality/valueThis paper contributes to the IC literature as it is the first study which applies the market capitalization approach to analyze IC value determinants in the Italian context, within the framework of IFRS. The findings reveal some interesting relationships between the MTB ratio and recognized intangible investments, which are found to be insignificant in previous studies, confirming that, through the holistic effect, the MTB ratio may be a good proxy for IC.