Recognition Of Expenses Research Articles

Negative Special Items and Future Earnings: Expense Transfer or Real Improvements?

ABSTRACT Burgstahler et al. (2002) investigate the implications of special items for future earnings and report that firms use negative special items to accelerate the recognition of future expenses into the current period. That is, negative special items serve as an “inter-period transfer” device. We extend their analysis and find that earnings increase in post-special item quarters beyond the four quarters considered in Burgstahler et al. (2002). In particular, we find that future earnings increase over the subsequent 16 quarters by more than 130 percent of the reported negative special item. The earnings increases are greater for restructuring charges than for asset write-downs or goodwill impairment charges. Such patterns suggest that negative special items also signal real future performance improvements (i.e., performance improvement hypothesis) in addition to inter-period expense transfer (i.e., inter-period transfer hypothesis). Moreover, the real improvement effect appears to be driven by restructuring charges, the most prevalent type of special item.

Dissecting Earnings Recognition Timeliness

We dissect the portion of stock price change of the fiscal year that is recognized in reported accounting earnings of the year. We call this portion earnings recognition timeliness (ERT). The emphasis in our dissection is on empirical identification of two fundamental precepts of financial accounting: (1) the matching principle, which is manifested in the recognition of expenses in the same period as the related benefits (i.e., sales revenue) accrue; and, (2) recognition of expenses in the current period due to changes in expectations regarding earnings of future periods (we refer to these expenses as the expectations element of expenses). Although the expectations element has implicitly been at the core of much of the recent empirical literature on asymmetry in the earnings/return relation, it has not been explicitly identified. This recent literature is based on the premise that bad news about the future leads to more recognition of expenses in the current period (such as write-downs) whereas good news about the future tends to have a much lesser effect on expenses of the current period; asymmetry in the expenses/return relation is captured implicitly via the observation of asymmetry in the earnings/return relation (i.e., asymmetry in ERT). Since the ERT reflects the relation between sales revenue and returns, matched expenses and returns, as well as the relation between the expectations element of expenses and returns, a focus on the expectations element may lead to sharper inferences. Our straightforward empirical procedure permits a focus on this element.

Negative Special Items and Future Earnings: Expense Transfer or Real Improvements?

Burgstahler et al. (2002) evaluate special items, a component of earnings with time series properties that differ from recurring earnings, to determine whether the market correctly prices these transitory items. In addition, they investigate the implications of special items for future earnings and report evidence consistent with the notion that firms use negative special items to accelerate the recognition of future expenses into the current period. That is, negative special items serve as an “inter-period transfer” device. We examine additional predictions suggested by the inter-period transfer hypothesis. We find that earnings increase in post-special item quarters beyond the four quarters considered in Burgstahler et al. (2002). In addition, we find that the future earnings increases over the subsequent 16 quarters amount to over 130 percent of the negative special item reported in quarter t and over 40 percent of these increases are realized in operating cash flows. These earnings increases are greater for restructuring charges than for asset write-downs or goodwill impairment charges. Such patterns are more consistent with negative special items, and in particular restructuring charges, signaling real future performance improvements (i.e., performance improvement hypothesis) rather than inter-period expense transfer (i.e., inter-period transfer hypothesis).

국제회계기준 도입에 따른 법인세법 개정방향 -재정부 발표 개정안에 대한 세무사 대상 설문조사-

본 연구는 국제회계기준이 도입될 경우 기업의 세무조정 과정과 과세소득에 어떠한 영향이 있는지 살펴보고, 이에 따른 문제점을 해결하기 위한 실무적 방안을 제시하는데 목적이 있다. 또한, 2010년 6월 재정부가 발표한 법인세법 개정안에 대해 세무사를 대상으로 한 설문조사를 실시하였으며, 이를 통해 개정안의 실효성을 사전 검토하고자 하였다. 설문조사의 결과는 다음과 같다. 먼저 공정가치 평가와 외화환산손익인식 및 자산유동화 분류 규정은 현행 법인세법을 유지하는 것이 타당하다고 응답하였다. 리스분류에 대해서는 이원화된 기업회계의 수용시 자의적으로 분류가능성이 발생하므로 타당하지 못하며, 예약매출 수익인식은 국제회계기준을 수용하는 방안이 타당하다고 응답하였다. 또한 기능통화와 관련하여 개념의 도입 필요성은 인식하면서도, 환산된 재무제표가 과세소득의 기초자료로 과연 적절한가에 대한 깊은 우려를 나타냈다. 감가상각은 현행 결산조정제도를 유지하되, 장기적 관점에서는 기업회계와 세무회계의 분리방안에 대한 논의가 필요하다고 응답하였다. 마지막으로 대손충당금은 신고조정으로 손금인식하는 것이 더욱 타당하다고 응답하였다. 둘째, 개정안의 시행시 기업의 업무가 경감될 것인지에 대한 질문에서는 모든 개정항목에 대해 보통이하로 응답하였다. 특히, 재정부가 기업의 업무부담 경감을 최우선으로 고려하였다고 발표한 기능통화, 리스분류 등의 항목에 대한 기대치도 낮게 나타났다. This study aims at investigating the possible effects on the tax accounting practices stemming from adopting the IFRS in financial reporting process. It also seeks for policy implications to help alleviate practical conflicts likely to arise from the inconsistencies between the existing tax law and the tax related IFRS provisions. The results of the survey analysis are summarized as follows: firstly, majority opinion is opposed to the fair value based revaluation of property assets as well as the application of immediate recognition of foreign currency translation gains/losses. It favors the existing provision on asset securitization which adopts sales transaction view. Secondly, most of the respondents oppose the proposed amendments which allows dual classification of lease contracts on the ground. Third, functional currency appears acceptable on a conceptual level, even though a deep concern is expressed regarding the practical feasibility of computing taxable income using financial statements translated on the basis of functional currency on a practical viewpoint. Fourth, many respondents support the existing convention of recognizing depreciation expenses for taxation purposes and are in favor of the separation of accounting and tax books on a long-term basis. Fifth, the majority opinion approves the maintenance of existing tax reconciliation system and the recognition of expenses related with the doubtful accounts on reporting basis. Finally, a concern is raised with regard to the added burden of practical job loads needed to comply with the proposed amendments.

Creative accounting exposed

Contents Revenue Recognition Stock Options: The Great Accounting Fallacy Off-Balance-Sheet Financing Risk Coverage, Derivatives and Hybrid Instruments Recognition of expenses, balance sheet alterations, cash flow and quality of earnings Subjectivness in the Consolidation of Companies Creative Accounting in Public and Private Entities Bibliography Index

Negative Special Items, Tax Rates, and the Income-Transfer Hypothesis

Burgstahler, Jiambalvo, and Shevlin (2002) evaluate the implications of special items for future earnings and report evidence consistent with the notion that firms use negative special items to accelerate the recognition of future period expenses. That is, negative special items serve as an income-transfer device. In this analysis, we examine additional predictions suggested by this income-transfer hypothesis not considered in their analysis. Specifically do the augmented future income values they report decline in future quarters as the transfer effect dissipates? Contrary to this prediction, we find that future income values increase in post-special-item quarters beyond the four quarters considered in Burgstahler et al. (2002). Thus, our results are more consistent with real future rewards to costly short-term business decisions than with income-transfer. We also find that the tax rate assumptions made in the Burgstahler et al. (2002) greatly impact the magnitude of the estimated special items future income effect. Utilizing an empirically derived tax rate, we find that the magnitudes of income increases associated with the recognition of negative special items are substantially smaller than those they report.

Opportunity costs incurred by the RTC in cleaning up S&L insolvencies

This paper draws attention to an important but neglected component of the costs of the thrift cleanup as reported by the Resolution Trust Corporation (RTC). The RTC resolved 747 thrift institutions over the period 1989–1995 at an estimated cost of $90.1 billion. Since the RTC 's loss exposure indirectly represented a taxpayer-funded equity position in troubled thrifts, the associated opportunity costs constitute significant costs that are in addition to the reported resolution costs. Recognition of this important category of costs raises the taxpayer burden from the official estimate of $90.1 billion to a cost of between $112 and $146 billion. Budgetary recognition of these implicit expenses would have had to affect the operations of the RTC and Congressional decisions to fund RTC activities.

Expenses and underwriting strategy in competition

An earlier paper [Taylor (1986)] developed optimum underwriting strategies under the assumption of constant unit expense rates. In the discussion of the paper, it was suggested that such a strategy might be substantially affected if marginal expense rates were property taken into account. The theory for doing so is developed in Section 2, and further in Section 4. It is noted that the optimal strategy is not affected by the introduction of a component of fixed expenses, irrespective of the size of that component (Section 2.2). Sections 3 and 4 set limits on the effect of expenses on optimal underwriting strategy. The sharpness of these limits depends on: 1. the extent of variation in marginal expense rates as demand varies; 2. the price-elasticity of demand. The case in which the marginal expense rate is constant and price-elasticity is directly proportional with price is a particularly simple one. In this case, the optimal premium rates taking expenses into account are precisely equal to the optimal premium rates ignoring expenses, increased by the marginal expense rates. As factors (i) and (ii) depart from this particular case, the behaviour of optimal premium rates with expenses taken properly into account becomes less predictable relative to the optimal rates ignoring expenses. Some numerical examples are examined in Section 6. The empirical results obtained suggest that the general ‘shape’ of the optimal strategy, in terms of the optimal premium rate as a function of time measured between the present and the planning time horizon, is to a large extent unaffected by whether they incorporate proper allowance for (possibly varyong) marginal expenses or approximate these by assumed constant unit expenses. The general level of optimal premiums may, however, be shifted to a material extent by the proper recognition of expenses. It is found that in examples in which the assumption of constant unit expense rates leads to optimal premium rates of substantial negative profitability, the adjustment to reflect marginal expenses properly can cause very significant changes to these low premium rates.