Economic consequences(PPT 18).ppt

Economicconsequences,ShanghaiUniversityofFinanceandEconomicsYUANHONGQI,DIFINITION,Zeff(1978):theimpactofaccountingreportsonthedecisionmakingbehaviorofbusiness,governmentandcreditorsTheessentialoftheconceptisthattheaccountingpolicychoicecanaffectthefirmvalue.TheisanoppositeviewtotheimplicationofEMH.ManagementisignoredinEMHwhileemphasizedineconomicconsequences.Ifachangeofaccountingpolicyaffecttheinterestofmanagementitwillalsohaveinfluenceontheinvestorsdirectly.Allaccountingpolicywillmatterdespitelakeofcashfloweffects,whyeconomicconsequenceisimportant?,ManyofinterestingeventsinaccountingpracticederivefromECAccountingchoicedoesntmatterisoddswithpracticeexperiences.TheresearchonthereasonsofECleadstoseveralimportantaccountingtheorybranches.,TheriseofEC,theaccountingstandard-settingisapoliticalprocessratherthananeutralprocessawell-definedconceptofnetincomeisnotexistandthisgiveotherconstituenciesaexcusetointerveneaccountingstandards.third-partyintervention:thechoiceofaccountingpolicyaffecttheinterestofvariousconstituenciesbroadeningtherepresentationonthestandard-settingbodyusingexposuredrafttoallowvariousconstituenciestocommentonproposedaccountingpolicychanges,IllustrationofEconomicConsequences,ForeignExchangeTranslationtheInvestmentTaxCredit(ITC)Full-costmethodorSuccessful-effortsmethod,ForeignExchangeTranslation,thequestionishowtodealwiththegainsandlossesfromchangesinexchangeratestwotypesofgainsandlossestransactiongainsandlossesarerealizedtranslationgainsandlossesarenotberealized,SFAS8(1975),Useoftemporalmethoddistinctionbetweennonmonetaryandmonetaryitemsnonmonetaryitems:historicalratemonetaryitems:currentratetranslationadjustmentsincludedinnetincome,managementcouldntcontrolthiskindofimpact,SFAS52(1981),Functionalcurrencyself-sustainingsubsidiaryvs.Integratedforeignoperationsubsidiarywasaseparateoperationandparentsexposureisequaltoitsnetinvestmentforself-sustainingsubsidiarycurrentratetranslationmethodtranslationadjustmentsrecognizedasshareholdersequityforintegratedforeignoperationandhighlyinflationaryeconomies:temporalmethod(why?),economictheoriesofexchangeratedetermination(1),purchasingpower(PP)PARITYAcurrencyrepresentsPPovergoodsandservicesmarketforceswilloperateontheexchangeratessoastokeepPPconstantacrossdifferentcountriesthetheoryalsoappliestoinflationaryeconomiesempiricaltestssupporttheviewreasonablywellinthelongrun,economictheoriesofexchangeratedetermination(2),interestrate(IR)parityhigherinterestratesofacountrywillencouragecapitalflowsintothatcountry,thiscreatesademandforthatcountryscurrencyandahighervalueforthatcountrydistinctionbetweentwotheoriesPPparitytheory:flowsofgoodsandservicesIRparitytheory:capitalflows,implicationsoftwotheoriesfortranslationadjustments,SFAS8wasconsistentwithPPparitytheory(nonmotaryitems)and,toalesserextent,withIRparitytheory(monetaryitems)thefactthatnotranslationgainsorlosseswererecognizedwithrespecttonon-monetaryassetsseemedconsistentwithPPtheoryinclusionoftranslationgainsorlossesonnetmonetaryliabilitiessupportedIRtheorynomuchconnectionbetweeneconomictheoryandSFAS52,whySFAS8receivedsomuchcriticism?,Thekeyproblemwasthatthetranslationadjustmentswereunrealizedbutincludedinnetincome.Thetreatmentwasinconsistentwithgenerallyacceptedhistoricalcostaccounting.Realizationoftranslationgainsorlosseswouldtakealongtime.Inclusionofunrealizedgainsorlossesinincomeintroducedavolatileanduncontrollableelementthetreatmentimprovedtherelevanceoftheinformationwhileignoredthereliability.,ERCsofmultinationalfirms,theempiricalproblemwaswhethertheSFAS8orSFAS52improvetheusefulnessofaccountinginformationresearchbyCollinsandSalatka(1993):theythinkthenoiseeffectdominateintheempiricaltestsfourhypothesisH1:duringtheSFAS8period,theERCsofmultinationalfirmswouldbelowerthantheERCsofthesamefirmsduringSFAS52.H2:theERCsofcontrolsamplesshouldbeconstantduringtheperiodofSFAS8andSFAS52.H3:duringtheSFAS8period,theERCsofthemultinationalfirmsshouldbelowerthanthoseofthecontrolfirmsH4:duringtheSFAS52period,theERCsofthemultinationalfirmsshouldbethesameasthoseofthecontrolfirms,resultsofresearchbyCollinsandSalatka(1993),theresearchersadmittedtheresultsprovidedweakevidencethroughtheevidencewasconsistentwiththreeoftheirfourpredictions.ReasonsofweakevidencenocontrolsamplethatisidenticaltothemultinationalsampleinallrespectsexcepttheapplicabilityofSFAS8.MaybethequalityofSFAS8earningswasnotasbadasCollinsandSalatkasuggest.TheresearchprovedaninformationexampleofhowempiricalERCmethodologycanbeusedtoresolveacomplexandcontroversialaccountingpolicyissue.,IllustrationofEC-TheInvestmentTaxCredit(ITC),FourwaystoaccountfortheITCAPB2(1962):alternative2or3SEC(1963):eithertheAPB2orthe48-52%methodSECfeltAPB2objectedtobyenoughfirmsAPB4(1964):APB2asthepreferredmethodbutalsoallowedtheITCtobebroughtintoincomecurrentlyregulatedpublicutilityindustry,FC(full-costmethod)orSE(successful-effortsmethod)inoilandgasindustry,smalloilandgasfirmspreferFCtoSELEV(1977)Studyconcern:FCorSESFAS19(1977),allU.S.OilandgasfirmsacccountfortheirexplorationcostsusingSEEventstudyeventdate:July18,1977(EDforSFAS19issued)sample:49FCfirms(wouldmovetoSE)acontrolsample:34SEfirms(alreadyusedSE),LEVSSTUDY(2),Resulttherewasasignificantnegative,abnormalreturnforthesharesof49sampleFCfirmsaffectedbytheEDofSFAS19.Themarketdidreacttoanaccountingeventwithnocashflowimplicationsthissupportedthe