Statement Recognition Research Articles

Using Religious Affiliation to Spontaneously Categorize Others

The informativeness of a social category strongly influences the degree to which a target will be categorized along that dimension; given the social significance of religion, categorizing on the basis of religious affiliation seems likely. We used a statement recognition paradigm across 3 studies to assess this hypothesis. In Study 1, participants categorized targets along a religious dimension but not a visually salient alternative dimension. In Study 2, two replications revealed religious categorization took place in addition to categorization by another prominent and visually salient alternative social category (race). In Study 3, targets were categorized along the religious dimension even though target religiosity had to be extrapolated from a variety of social group memberships. The results are discussed in terms of the prominence of categorization along a religious dimension relative to alternative social categories that have received more attention in the social psychology literature.

Market Valuation of Stock Option Compensation: Changes in Sentiment or Reporting?

This study examines whether market valuation of stock option compensation has changed as the accounting for stock option compensation moved from footnote disclosure to income statement recognition. We also examine whether market sentiment for stock options shifted following the financial scandals of 2001-2002. Using a market returns model, we find that the market initially valued stock option compensation positively, suggesting that stock option grants provide a net accretive effect on firm value. However, investor sentiment towards option compensation turned significantly negative in the period after 2001. Further, although prior studies document that there was a positive abnormal return at the time firms first announced their decision to voluntarily recognize option expense, this benefit may have proved short-lived as the market reacts negatively to options compensation once included in income.

The Influences of Financial Statement Recognition and Analyst Coverage on the Market's Valuation of R&D Capital

Statement of Financial Accounting Standards No. 141 (SFAS No. 141)'s requirement that an acquirer in a business combination estimate the fair value of the target's separately identifiable assets and liabilities (including research and development capital) provides a rare occasion where estimated fair values of U.S. firms' research and development (R&D) capital based on private information about their R&D activities are publicly disclosed. The degree to which equity values impound the estimated fair values of R&D depends upon the extent to which the private information implicit in the R&D estimates is reflected in investor expectations. Financial statement recognition of R&D capital and analyst activities have been cited as alternative mechanisms by which private information about firms' R&D activities can be revealed to investors. I investigate the degree to which both mechanisms lead to the public revelation of the private information implicit in the R&D fair value estimates by examining whether financial statement recognition of R&D assets by the target prior to the merger announcement and/or analyst coverage of a target prior to the merger announcement influence the degree to which the target's pre-merger announcement equity value reflects the acquirer's subsequently disclosed estimate of the fair value of the target's R&D capital. I find that the degree to which a target's pre-merger announcement equity value reflects the estimated fair value of its R&D capital is increasing in the amount of R&D-related intangibles captured in the target's pre-merger announcement balance sheets and in the number of analysts covering the target prior to the merger announcement. This evidence is consistent with the notion that both financial statement recognition and analysts' private information search activities lead to the revelation of private information about the value of R&D assets that investors incorporate into equity values. I further find that the positive relation between analyst following and the market's valuation of R&D capital is strongest for the portion of the estimated fair value of R&D capital that is unrecognized by the target prior to the merger announcement. This finding is consistent with analysts filling in the information gap left by the lack of financial statement recognition. The results of this study confirm the theorized roles of financial statement recognition and analyst activities in aiding the market's valuation of intangible assets.

Do Management Disavowals of Mandated Employee Stock Option Disclosures Affect Financial Report User Judgments and Decisions?

In this study we report the results of an experiment that examines how relatively sophisticated financial statement users interpret management stock option compensation disclosures under SFAS No. 123 and SFAS No. 123R. We predict and find that mandated income statement recognition, as required under SFAS No. 123R, leads to higher user assessments of reliability than either voluntary income statement recognition or voluntary footnote disclosure, options allowed under SFAS No. 123. Users view voluntary footnote disclosure as the least reliable reporting alternative. We also examine the amount users invest in response to these accounting treatments, and find that users invest more in a firm when management chooses income statement recognition than when management chooses footnote disclosure. We find no difference in investment amounts between mandated recognition and either voluntary recognition or footnote disclosure. Finally, although we find that these results are insensitive to whether management explicitly disavows the reliability of stock option expense, we present evidence that in side-by-side comparisons, where one firm disavows and the other does not, disavowals may affect user judgments and decisions.

Goodwill and Criteria for its Recognition in Financial Statements

The article summarises a research on goodwill which is one of the most controversial assets. The research includes a comparison between the descriptions of the economic nature of goodwill and an analysis of various valuation methods and accounting policies. The article discusses the internationally recognised problem that there coexist several accepted methods of accounting for goodwill arising from the acquisition of an enterprise, as a result of which the accountancy data of different enterprises and countries are incomparable.

The Evolution of Stock Option Accounting: Disclosure, Voluntary Recognition, Mandated Recognition, and Management Disavowals

In this study we report the results of an experiment that examines how relatively sophisticated financial statement users interpret management stock option compensation disclosures under SFAS No. 123 and SFAS No. 123R. We predict and find that mandated income statement recognition, as required under SFAS No. 123R, leads to higher user assessments of reliability than either voluntary income statement recognition or voluntary footnote disclosure, options allowed under SFAS No. 123. Users view voluntary footnote disclosure as the least reliable reporting alternative. We also examine the amount users invest in response to these accounting treatments, and find that users invest more in a firm when management chooses income statement recognition than when management chooses footnote disclosure. We find no difference in investment amounts between mandated recognition and either voluntary recognition or footnote disclosure. Finally, although we find that these results are insensitive to whether management explicitly disavows the reliability of stock option expense, we present evidence that, in side-by-side comparisons, where one firm disavows and the other does not, disavowals may affect user judgments and decisions.

Permanently Reinvested Foreign Earnings, Taxes, and Earnings Management

Firms can delay financial statement recognition of U.S. taxes on repatriations by designating foreign subsidiary earnings as “permanently reinvested” under APB Opinion No. 23. This paper examines (1) whether firms use the permanently reinvested earnings (PRE) designation to manage reported earnings, and (2) whether amounts reported as permanently reinvested reflect investment and tax incentives to reinvest foreign subsidiary earnings abroad. Consistent with the prediction that firms use PRE to manage earnings, year-to-year changes in amounts reported as PRE are positively related to the difference between analyst forecasts and pre-managed earnings. Additionally, changes in reported PRE are positively related to the difference between the foreign and domestic after-tax return on assets and negatively related to the tax benefit of deductible repatriations, thus reflecting investment and tax incentives to reinvest abroad.

Evaluation of the FASB's Proposed Accounting and Disclosure Requirements for Guarantors

INTRODUCTION The May 22, 2002 FASB Exposure Draft, Guarantor's Accounting and Disclosure Requirements, Including Indirect Guarantees of Indebtedness of Others (hereafter ED), addresses initial recognition, initial measurement, and disclosure issues related to guarantees. Although it undertook the guarantee project in conjunction with its project on consolidation guidance related to special-purpose entities (SPEs), the FASB addressed guarantees in a separate project because guarantees also arise in situations other than those associated with SPEs. The ED calls for recognition and increased disclosure of the liability associated with a guarantor's obligations under guarantees. It takes the position that a guarantee obligates the guarantor in two respects: (1) the guarantor undertakes a noncontingent obligation to stand ready to perform over the term of the guarantee in the event that the specified triggering events or conditions occur and (2) the guarantor undertakes a contingent obligation to make future payments those triggering events or conditions occur. The noncontingent obligation occurs when the guarantor commits to the guarantee, while the contingent obligation occurs only when certain future conditions arise; for example, the entity whose debt is guaranteed defaults on payments. While the ED is not explicit on the nature of the noncontingent liability, we believe it is best characterized as deferred revenue for most guarantees. An example in the ED sets the stage for this interpretation: if a seller-guarantor issues to its customer's bank a guarantee of the customer's loan whose proceeds are used to pay the seller for the assets being purchased, the failure to recognize a liability for the issuance of the guarantee overstates the profit on the sale. (1) Just as an insurer charges a premium as compensation for its exposure to losses, the guarantor in this example must be compensated for its guarantee commitment and resulting exposure under the guarantee--the noncontingent element. (2) This example suggests that a portion of the proceeds from the sale be deferred, and recognized over the period of time covered by the guarantee. The ED calls for the guarantor to recognize as a liability the fair value of the noncontingent element of the guarantee, (3) and confirms the applicability of FASB Statement No. 5, Accounting for Contingencies, to the contingent element of the guarantee. The ED also identities four disclosure items to be provided by the guarantor. These include: * the nature of the guarantee, including how it arose and the circumstances that require the guarantor to perform under the guarantee, * the maximum potential amount of (undiscounted) payments the guarantor could be required to make under the guarantee, * the current carrying amount of the liability, and * the nature of (1) any recourse provisions that enable the guarantor to recover from third parties any of the amounts paid under the guarantee, and (2) any assets held either as collateral or by third parties that the guarantor can obtain and liquidate to recover all or a portion of the amounts paid under the guarantee. The ED raises issues related to valuation of contingent liabilities, financial statement recognition vs. footnote disclosure, and effects of increased footnote disclosure. This article examines academic research relevant to the issues raised in the ED and presents the views of the AAA Financial Accounting Standards Committee (FASC) (hereafter the Committee) on the ED. The Committee based these views on inferences from existing research findings, an understanding of the Conceptual Framework, and views expressed in previous Committees' communications with the FASB and IASC on guarantees related to transfers of financial assets and contingent liabilities. (4) REVIEW OF RELATED ACADEMIC LITERATURE Capital Markets (Archival) Research Valuation Implications of Contingent Liabilities Capital markets research provides evidence that contingent liabilities are relevant to capital market participants' valuation decisions. …

Managing Pro Forma Stock Option Expense under SFAS No. 123

We investigate whether footnote disclosures under Statement of Financial Accounting Standards (SFAS) No. 123 are managed in 1996, the first year that the disclosure was required. The 1996 phase-in of SFAS No. 123 provided firms with a unique opportunity to manipulate the pro forma disclosure in the initial years. SFAS No. 123 allows firms discretion in estimating the value of their stock option grants and in allocating that value across accounting periods. Although we find little evidence that firms manage the estimated value of their option grants, we find that firm-specific incentives affect how that value is allocated. Specifically, firms that provide high levels of either CEO compensation or stock option compensation relative to performance allocate a smaller proportion of the options' value to the 1996 pro forma expense, apparently to reduce criticism of that compensation. Small firms and firms that recently went public also allocate a smaller proportion of option value to the 1996 pro forma expense, apparently to increase perceptions of their profitability. We conjecture that firms were less likely to manage the value of the options granted than the allocation of that value in 1996 because the parameter estimates underlying the reported option value must be disclosed in the footnote, whereas the inputs to the allocation computation are not disclosed. These results, which suggest that firms manipulated pro forma stock option expense when their estimate choices cannot be observed, have implications for both standard setters and financial statement users. In particular, the FASB's current deliberations on the transition from footnote disclosure to income statement recognition for stock options should consider additional disclosures to minimize unobservable choices. More generally, the FASB may reduce potential manipulation by requiring expanded disclosures about the choices used in computing both pro forma and reported numbers.

Corporate Lobbying Behaviour on Accounting for Stock‐Based Compensation: Venue and Format Choices

This article investigates U.S. corporate lobbying of the Financial Accounting Standards Board (FASB) in the U.S. on the exposure draft to Financial Accounting Standard No. 123 (FAS 123), Accounting for Stock‐Based Compensation. Essentially, firms lobbied the FASB in one of three ways: (a) against disclosure/recognition of any additional information beyond that already required in U.S. proxy statements, (b) for summary footnote disclosure of all employee stock‐based compensation (SBC), or (c) for either pro forma or formal income statement recognition of all employee SBC.This study finds that the higher the level of the SBC of the top five executives, the less likely firms are to favour disclosing that information. This finding supports the hypothesis that economic self‐interests motivated lobbying behaviour on FAS 123. Furthermore, the study finds that U.S. corporations lobby against disclosure of executive SBC in the annual reports even when the annual reports would disclose no additional information beyond that currently disclosed in proxy statements. This is evidence that managers perceive that the venue of disclosure (proxy versus annual report) matters. It is posited that managers lobbied against disclosure of SBC to avoid possible changes to compensation contracts which in turn could adversely affect stock prices. In sum, the results support the notion that managerial self‐interest affects lobbying behaviour on the venue as well as the format of disclosure.

Analyst Coverage and Intangible Assets

This study examines the relation between analysts' incentives to cover firms and the extent of their intangible assets. Because intangible assets typically are unrecognized and estimates of their fair values are not disclosed, absent analyst coverage firms with more intangible assets likely have less informative prices. Accordingly, we expect analysts have greater incentives to cover firms with more intangible assets and, thus, predict they have higher analyst coverage. As predicted, we find that analyst coverage is significantly greater for firms with larger research and development and advertising expenses relative to their industry, and for firms in industries with larger research and development expense. We also predict and find that analyst coverage is increasing in firm size, growth, trading volume, equity issuance, and perceived mispricing, and is decreasing in the size of the firm's analysts' brokerage houses and the effort analysts expend to follow the firm. These findings indicate that analyst coverage depends on private benefits and costs of covering a firm. We also test hypotheses related to analyst effort. We predict and find that analysts expend greater effort to follow firms with more intangible assets, after controlling for other factors associated with analyst effort. Our evidence indicates that intangible assets, most of which are not recognized in firms' financial statements, are associated with greater incentives for analysts to cover such firms, and greater costs of coverage. An open question is whether financial statement recognition of intangible assets could more efficiently provide information about such assets to investors.

Analyst Coverage and Intangible Assets

This study examines the relation between analyst activity and intangible assets. Because intangible assets typically are unrecognized and estimates of their fair values are not disclosed, absent analyst coverage, firms with more intangible assets likely have less informative prices. Accordingly, we expect analysts have greater incentives to cover firms with more intangible assets and, thus, predict that they have higher analyst coverage. Our tests employ eight proxies that reflect industries' and firms' intangible assets related to research and development and advertising activities, and sundry other intangible assets. We also predict and find that analyst coverage is increasing in firm size, growth, trading volume, equity issuance, and perceived mispricing, and is decreasing in the size of the firm's analysts' brokerage houses and effort analysts expend to follow the firm. These findings indicate that analyst coverage depends on private benefits and costs of covering a firm. We also test hypotheses related to analyst effort. We predict and find that analysts expend greater effort to follow firms with more intangible assets, after controlling for other factors associated with analyst effort. Our evidence indicates that intangible assets, most of which are not recognized in firms' financial statements, are associated with greater incentives for analysts to cover such firms, and greater costs of coverage. An open question is whether financial statement recognition of intangible assets could more efficiently provide information about such assets to investors.

The Value Relevance of Financial Statement Recognition vs. Disclosure: Evidence from SFAS No. 106

This study examines whether the market values financial statement data differently if it is disclosed instead of recognized in the body of the financial statements. We identify a sample of 229 SFAS No. 106 adopters who disclose an estimate of their anticipated liability for retiree benefits other than pensions (PRB) in their financial reports prior to the year of recognition. We then test whether the disclosed estimate of the PRB liability is valued differently by the market than is the subsequently recognized PRB liability. We provide modest and model-sensitive evidence that the recognized PRB liability receives more weight than the disclosed liability in market value association tests.

Instructional Case: Worldwide Shipping Corporation Ltd: Early or Late Adoption of a New International Accounting Standard?

The management of Worldwide Shipping Corporation Ltd (hereafter “Worldwide Shipping”) is confronted with a dilemma when a new international accounting standard on leases is introduced which contains a transitional provision allowing firms to defer implementation for a period of four years. Students are required to put themselves in the position of managers who have to weigh the adverse impact of early adoption of the new accounting standard against a responsibility for fair financial reporting. Worldwide Shipping is a multifaceted case that can be used as an accounting case study or a financial analysis study. The objectives of the case are threefold. First, it aims to provide students with a better understanding of the impact of off-balance sheet transactions (in this case, sale-leaseback contracts) on a firm's financial statements. Second, it requires students to examine implications of accounting choice on management compensation and debt-contracting costs, as well as the perplexing problem of recognition in financial statements vs. footnote disclosures. By putting students in the position of managers, the case increases students' awareness of the possible economic consequences arising from accounting choice. Third, it provides students with a useful exercise in the mechanics of effecting a change in accounting method using the retroactive method.

Brand Values and Capital Market Valuation

Brand value estimates are significantly positively related to prices and returns, incremental to accounting variables. Questionable brand value estimate reliability underlies lack of financial statement recognition for brands. Findings suggest estimates are relevant and sufficiently reliable to be reflected in share prices. Simultaneous equations estimation reveals inferences are unaffected by potential bias resulting from simultaneity between brand value estimates and equity market value. Brand value estimates are positively associated with advertising expense, operating margin, and market share. Yet, brand value estimates provide significant explanatory power for prices incremental to these variables, and to recognized brand assets and analysts earnings forecasts.

SAC 4 And The Challenge To The Mandatory Status Of Concepts Statements

This paper expresses no doubt about the worth of concepts statements such as Statement of Accounting Concepts SAC 4 Definition and Recognition of the Elements of Financial Statements, which spells out the essential characteristics of assets, liabilities, equity, revenues and expenses along with broad criteria for their recognition in financial statements. However, the authors have reservations about giving mandatory status to such a statement. It is, after all, but one piece of a conceptual framework and as the other pieces take shape they may call for alterations in the interpretation and operation of the elements. Without the benefit of the light which might be cast by reference to other concepts statements, SAC 4 in isolation could lead to undebated and questionable consequences, as well as supplying equivocal guidance on many important issues. This paper examines the reasons for unrest about the mandatory status of concepts statements.

A system program generator

This paper describes a self expanding program generator aimed at the general area of system programming. A syntax directed scan is used for statement recognition. The set of statements is extended by additions to the syntax tables.