Investment Accounting Research Articles

Earnings Management and Ethical Decision Making: Choices In Accounting for Security Investments

General Electric, Matell, NationsBank, and W. R. Grace are among companies recently under scrutiny for managing their earnings. This case uses a fictitious data set to simulate a decision environment in which earnings are managed in the context of accounting for investments in marketable securities. Decisions are made from the perspective of management interests and other stakeholders, the FASB's conceptual framework, and GAAP. These competing interests may lead to inconsistent conclusions. As a result, proper analysis of the issues and framing of defensible positions requires more than application of professional accounting standards. Resolution of conflicts of interest is made using appropriate ethical analysis based upon a philosophical framework of Utilitarian-Theory, Rights-Theory and Justice-Theory.

Fair Value Accounting for Property-Liability Insurers and Classification Decisions under FAS 115

The first objective of this study is to describe the substantial differences across property-liability insurers in accounting classification decisions for fixed maturity securities during 1991–1995. This period includes the years before adoption, upon initial adoption, and after adoption of Statement of Financial Accounting Standards No. 115 (FAS 115, “Accounting for Certain Investments in Debt and Equity Securities”). The second and more important objective of this study is to test two risk-based explanations for differences in investment classification decisions under FAS 115. Under this new standard, firms are required to classify fixed maturity investment securities into trading portfolios, available-for-sale portfolios, or held-to-maturity portfolios. These classification decisions determine whether these securities are recognized at fair value or historical cost. On one hand, the decision to classify securities as available-for-sale rather than held-to-maturity (and thus apply fair value accounting) increases the time-series volatility of key accounting numbers such as owners' equity and total assets, which may be costly for insurers with low tolerance for accounting volatility. On the other hand, the choice to classify securities as available-for-sale (and thus apply fair value accounting) reduces liquidity risk because the accounting standards (and SEC enforcement practices) limit management's ability to sell securities that are not recognized at fair value. The empirical analyses examine whether the security classification decisions of the sample property-liability insurers are associated with firm specific characteristics that reflect liquidity risk and the tolerance for accounting volatility. The findings show that managers of property-liability insurers make tradeoffs between liquidity risk and concerns about accounting volatility when making investment classification decisions under FAS 115.

Evidence of the Relation between Accounting for Equity Investments and Equity Valuation

Income recognition events for equity investments reflect an investor's ability to influence the activities of an investee and therefore the timing of income realization to the investor. Investor firms with passive equity investments recognize investment income when investee dividends are declared, whereas investors with nonpassive equity investments recognize investment income as investee income is earned. To determine whether market participants associate investor income realization with the income recognition events, investor and investee security return correlations are examined around investee dividend and earnings announcements. The correlations suggest an association between passive and nonpassive investor valuation and investee dividend and earnings announcements that corresponds to the accounting income recognition procedures for equity investments. Analysis of the relative timing of investor and investee announcements indicates that the results are not due to a naive fixation on accounting revenue recognition events. Rather, the results suggest differences in the substance of the investor-investee relation between passive and nonpassive investments. The results are robust to alternative specifications and controls for relative investment size and industry affiliation.

Choice of accounting method by not-for-profit institutions accounting for investments by colleges and universities

This study reports a preliminary empirical investigation into the relation between the choice of investment accounting method used by colleges and universities and factors such as type of institution, endowment size and returns, and debt. Because these institutions use fund accounting, the effects of the choice of investment accounting method can reasonably be isolated from other accounting decisions. The results indicate that the selection of investment accounting method is influenced by type of institution, endowment size and returns, but not by debt covenants.

Determinants of the Choice of Accounting for Investments in Associated Companies*

Abstract. The Australian standard on investments in associated companies first took effect in 1984. It prohibited the use of equity accounting in the primary financial statements but required the provision of supplementary equity accounting disclosures. Prior to this, firms voluntarily adopted either of the alternative cost and equity methods in their primary financial statements. This paper contributes to the positive accounting literature by analyzing the accounting policy choice of listed Australian companies in the first year in which the standard took effect. Noncompliance with the standard took the form of either adopting the equity method in the primary financial statements or using the cost method without supplementary disclosures. We focus on the choice of noncompliance procedures. The results support the contractual efficiency but not the alternative opportunistic behavior perspective on accounting method choice. They indicate that the choice is associated with the proportion of listed associates, the materiality of investments in associates, and the existence of guarantees but not with the degree of ownership nor the number of associates.Résumé. La premiére norme australienne au sujet des participations dans des sociétés apparentées remonte à 1984. Cette norme proscrit le recours à la méthode de la comptabilisation à la valeur de consolidation dans les états financiers de base, tout en exigeant la présentation d'information complémentaire préparée selon cette méthode. Auparavant, la comptabilisation des participations à la valeur d'acquisition ou à la valeur de consolidation était laissée à la discrétion des entreprises dans leurs états financiers de base. Les auteurs ajoutent ici aux écrits portant sur la théorie comptable positive en analysant le choix des méthodes comptables effectué dans les sociétés australiennes dont les valeurs sont cotées, au cours de la première année d'existence de la norme. Le non‐respect de la norme se manifeste tantôt par l'adoption de la méthode de la comptabilisation à la valeur de consolidation dans les états financiers de et base tantôt par celle de la méthode de comptabilisation à la valeur d'acquisition sans information complémentaire. Les auteurs s'intéressent particulièrement au choix des avenues de non‐conformité. Les résultats obtenus confirment l'efficience du contrat mais non l'autre perspective, celle du comportement opportuniste en ce qui a trait au choix de la méthode comptable. Ils révèlent que le choix de la méthode est lié à la proportion de sociétés apparentées dont les valeurs sont cotées, à l'importance des participations dans les sociétés apparentées et à l'existence de garanties, mais qu'il n'est pas lié aux pourcentages de participation ou au nombre des sociétés apparentées.

ACCOUNTING FOR INVESTMENTS IN UNINCORPORATED JOINT VENTURES

AbstractA consideration of the pertinent legal and commercial features of unincorporated joint ventures reveals some accounting and disclosure issues that are not adequately dealt with by existing accounting standards or disclosure rules. In addition, a review of current practice reveals major deficiencies in reporting the financial results of investments in joint ventures. Some deficiencies, especially the disclosure of contingent liabilities, may be in breach of the requirements of the Companies Act, 1961. Our conclusion on accounting methods is that the equity method is to be preferred to the more popular proportionate consolidation method.

RECONCILING INVESTMENT PLANNING AND ACCOUNTING CONTROL MECHANISMS

RECONCILING INVESTMENT PLANNING AND ACCOUNTING CONTROL MECHANISMS

Alternative Methods of Accounting for Equity Investments in the Stock P-L Insurance Industry

The question of accounting for investments in marketable equity securities has been sinrnmering in the accounting community for over a decade. Resolution of the issue will particularly affect the financial statements of property and liability insurance companies because of their typically substantial holdings of such securities. Five accounting methods have been under serious consideration by accounting authorities. These include the two methods now commonly used within the property and liability insurance industry as well as two methods which would reflect changes in unrealized appreciation on the equity security portfolio in the income statement. This article discusses the current status of the issue within the accounting community, describes the methods under consideration, and evaluates them in terms of their intrinsic merit and their potential implications for the industry. The question of accounting for marketable equity securities held for long-term investment purposes is one of the front-line issues in the fair value asset valuation controversy now simmering in the accounting comnmunity. Academic accountants have been particularly prominent in advocating the use of market values for accounting for determining periodic income from such investments. Under this concept, equity investments would be shown on the balance sheet at year-end market values and changes in unrealized appreciation or depreciation reported as a component of net income. The Accounting Principles Board (APB), the major standardsetting body within the accounting community until this past year also seemed persuaded of this view at one time. Industry, on the other hand, remains strongly opposed to this method, tending to favor more traditional approaches to the problem. Net income figures reported by the insurance industry, and particularly the property and liability segment of the industry, may be greatly affected by the resolution of the question because of the large proportion of the typical insurance company's assets invested in such securities. This article explores the various accounting methods considered by the APB in terms of their potential impact on the property and liability insurance industry. John J. Anderson, Ph.D., CPA, is Associate Professor of Accounting in The University of Missouri-St. Louis. His earlier teaching included service at Michigan State University, The University of Wisconsin-Madison, and Kent State University. This paper was submitted in February, 1974.

An Appraisal of Computerized Life Insurance Estate Planning

For over a decade, a number of life insurance companies have attempted to use the power of the computer to assist in the direct selling of individual life insurance policies. chief form this assistance has taken has been the comprehensive planning of the customer's insurance needs. While this use has grown in recent years (from 17 percent in 1966 to 45 percent in 1970 among those companies surveyed by the Life Insurance Agency Management Association), there is nevertheless fairly wide spread resistance to this technique, particularly among individual agents. Although preliminary evidence seems to indicate that larger sales do result from computer-aided selling, a closer look at the data suggests that these conclusions are flawed by the failure to take into account certain key variables. Thus the potential benefit from this application of the computer to life insurance marketing still remains to be proved. With the development of electronic computers in the early 1950's, insurance companies were among the first to recognize the potential that this equipment had to offer in helping to improve and streamline home office operations. large number of clerical activities, mostly highly routine, were in many cases tailor-made for computerization. Indeed, it is almost impossible today to imagine the task of policyowner accounting and recordkeeping-to say nothing of actuarial analysis, employee payrolls, agent compensation calculations, and investment accounting, to name a few-without the aid of the computer. But what of the vital task of selling the policy in the first place? How has the computer helped in supporting the sales effort? In 1967, the author made an initial study of the sales-related use of computers in life insurance marketing' and recently had the opportunity to update his investigations. Although the technology has improved over the last five years, the types of sales applications have remained fairly stable. Basically, computers have been programmed to provide assistance in three major areas: in reducing Ephraim R. McLean, Ph.D., is Assistant Professor of Information Systems in the Graduate School of Management at the University of California, Los Angeles. He is also Director of the Center for Information Studies in the University. This p-aper was submitted in April, 1973. 1 Ephraim R. McLean, The Use of Computers in the Selling of Individual Life Insurance, unpublished masters thesis, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, Mass., June 1967.

Discussion of Accounting for Intercorporate Investments: A Behavior Field Experiment]: A Reply

Discussion of Accounting for Intercorporate Investments: A Behavior Field Experiment]: A Reply

Discussion of Accounting for Intercorporate Investments: A Behavior Field Experiment

Professor Barrett is aware of the limitations of his conclusions because of a response ratio of about 9%. He sees a general trend toward lower response and fears that future studies may experience increasing difficulty in obtaining adequate responses to questionnaires. I share his apprehension on that point. Although the Accounting Research Division of the AICPA has used questionnaires sparingly, we experienced greater difficulty in obtaining adequate response in 1970 and 1971 than in 1965. And our experience parallels Barrett's in that our poorest response ratio was from financial analysts. A significant part of the downward trend in responses may be explained by fairly obvious factors that are either self-reversing or controllable. For example, our 1970 questionnaire to industrial companies was admittedly more difficult to answer and covered a subject that was probably of less interest to management than our 1965 questionnaire. Similarly, recent business conditions in which earnings of companies declined and colleagues of financial analysts lost their jobs undoubtedly inhibited response.' Nevertheless, I believe that another cause of low response is at work that is not self-reversing and may not be controllable.

Discussion of Accounting for Intercorporate Investments: A Behavior Field Experiment

Barrett's effort to improve on related prior studies is commendable. In this regard, several factors should be mentioned. First his use of data relating to a specific industry imparts a potentially realistic interpretation to the experimental statements. Second, his inclusion of analysts familiar with this industry (oil) in his questionnaire sample reinforces this realism. Third, his attempt to winnow out nonpracticing analysts also improves the authenticity of the generated responses. Finally, by avoiding the approach of disguising essentially identical data in order to test for functional fixation, Barrett sidesteps a possible difficulty. One recent pilot study did use this disguising approach, and the experimenters found a tendency for subjects to play the game even after discovering the contrived nature of the underlying data.' The comments which follow are in keeping with the interative view of research progress implicit in this study. Just as Barrett attempts to refine and clarify the findings of Dyckman and Jensen, later researchers may attempt a similar undertaking with this study. To facilitate such efforts, my comments are intended to highlight several problems inherent to this study. Since, with one possible exception, the issues to be raised suggest only potential difficulties, they represent problems which should be considered in later replications by other researchers and are not to be construed as a condemnation of Barrett's approach. The issues to be raised all involve experimental design.

Common Dollar Accounting for Investments

Common Dollar Accounting for Investments