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So far Financial Reporting has created 115 blog entries.

The Severity of Internal Controls over Financial Reporting Deficiencies: Differences among Types and Industries

By | 2017-12-27T14:17:36+01:00 December 27th, 2017|

Mazza Tatiana, Azzali Stefano/ Financial Reporting, Riviste / Fascicolo: 1-2014

This study analyzes the severity of Internal Control over Financial Reporting deficiencies (Deficiencies, Significant Deficiencies and Material Weaknesses) in a sample of Italian listed companies, in the period 2007- 2012. Using proprietary data the severity of the deficiencies is tested for account-specific, entity level and information technology controls and for industries (manufacturing and services vs finance industries). The results on ICD severity is compared with one of the most frequent ICD (Acc_Period End/Accounting Policies): for account-specific, ICD in revenues, purchase, fixed assets and intangible, loans and insurance are more severe while ICD in Inventory are less severe. Differences in ICD severity have been found in the characteristic account: ICD in loan and insurance for finance industry and ICD in revenue, purchase for manufacturing and service industry are more severe. Finally, we found that ICD in entity level and information technology controls are less severe than account specific ICD in all industries. However, the results on entity level and information technology deficiencies could also mean that the importance of these types of control are under-evaluated by the manufacturing and service companies.

Keywords: Internal control, financial reporting, significant deficiencies, material weaknesses.

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The relation between R&D accounting treatment and the risk of the firm: Evidence from the Italian market

By | 2017-12-27T14:15:59+01:00 December 27th, 2017|

Cimini Riccardo, Gaetano Alessandro, Pagani Alessandra/Financial Reporting, Riviste / Fascicolo: 1-2014

In this paper, we investigate the relation between the different accounting treatments of R&D expenditures and the risk of the entity in order to identify under which treatment insiders are more likely to carry out earnings management. By analysing the R&D investment strategies of a sample of 137 listed Italian entities that complied with the requirements of IAS 38 during fiscal year 2009, following Lantz and Sahut (2005), we calculate several indexes that show the preferences of insiders to account R&D expenditures as costs or capital assets, and we study the relation of such preferences with the risk of the entity, which we measure with the unlevered beta. We hypothesize that the entities, which considered the R&D investments as costs, are the riskiest ones due to the higher probability that insiders carried out earnings management. Our results confirm such hypothesis. This paper could have implications for academics and standard setters that could learn that behind accounting discretion, insiders could opportunistically behave against outsiders.

Keywords: IAS 38, R&D accounting treatment, risk, earnings management.

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Do Corporate Governance Characteristics Affect Non-Financial Risk Disclosure in Government-owned Companies? The Italian Experience

By | 2017-12-27T14:14:26+01:00 December 27th, 2017|

Allini Alessandra, Manes Rossi Francesca, Macchioni Riccardo/ Financial Reporting, Riviste / Fascicolo: 1-2014

While a considerable amount of research has already been carried out into the corporate governance determinants of non-financial risk disclosure in companies in the private sector, such determinants in the annual reports of listed Governmentowned Companies (LGCs) have yet to be investigated fully. This study attempts to complete the picture. Italian LGCs have been selected for analysis and agency theory has been applied in the public sector under the accountability paradigm. The research investigates whether non-financial risk disclosure provided in the Management Commentary (MC) of Italian LGCs may be affected by ownership concentration, corporate governance mechanisms and company-specific features. The issue is of particular importance in a country where Government intervention has significantly affected its economic development since the nineteenth century. Our findings show that there is a relationship between the level of non-financial risk disclosure and Board diversity, leverage and sector. Our findings also reveal some useful insights concerning policy makers and standard setters.

Keywords: Government-owned companies, accountability, non-financial risk disclosure, corporate governance.

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Towards the international convergence of accounting standards: the case of Business Combinations and Goodwill

By | 2017-12-27T14:12:19+01:00 December 27th, 2017|

Olante Maria Elena/ Financial Reporting, Riviste /Fascicolo: 2-2014

Accounting for business combinations and for goodwill has profoundly changed during the last ten years both in the US and in Europe, as a consequence of the common effort of the FASB and the IASB towards the international convergence of accounting standards. The Business Combinations project has been the first major project undertaken jointly by the accounting standard setters and it has resulted in the issue of substantially converged accounting standards with some remaining differences. The aim of this paper is to review and comment the evolution and the major changes occurred in accounting for business combinations and for goodwill and their current status in the light of the process of convergence of accounting standards on these crucial economic transactions.

Keywords: Business combinations, goodwill, IFRS, USGAAP

 

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Dialogue with standard setters. The harmonization of public sector accounting in the European Union: The EPSAS Project

By | 2017-12-27T14:09:31+01:00 December 27th, 2017|

Sforza Vincenzo/ Financial Reporting, Riviste /Fascicolo: 2-2014

On 25 November 2013, the European Commission and its Directorate-General (DG) for Statistics, Eurostat, officially launched a public consultation paper to issue a Framework Regulation related to the EPSAS, the European Public Sector Accounting Standards (Eurostat, 2013a). This is a novelty, which indisputably recognizes the need to provide harmonized accounting standards for the public sector of EU member states. The sovereign debt crisis, especially with reference to the situation in Greece (European Commission, 2010), opened a debate to find solutions to demonstrate government financial stability and improve accuracy and transparency of financial reporting: a) for that which regards the EU institutions, to strengthen the economic governance for the Euro zone, so far rather weak, in order to safeguard economic and monetary union; b) with regard to market participants, to provide owners of government debt securities, potential investors and other stakeholders a full and accurate disclosure of government financial statements, useful to more carefully assess the risk level associated with their investments.  In order to illustrate the reasons for which the European Commission/Eurostat have released their consultation, we will proceed, first of all, by defining the context within which the consolidation of accounts of the EU governments takes place, evidencing the existing accounting diversity: […]

 

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Impairment estimates for available-for-sale equity instruments under IFRS: evidence from italian Banks

By | 2017-12-27T14:07:55+01:00 December 27th, 2017|

Sannino Giuseppe, Ginesti Gianluca, Drago Carlo/Financial Reporting, Riviste / Fascicolo: 2-2014

Literature indicates that accounting choices under a given set of standards is an important topic due to the different economic implications. Daske et al. (2013) suggest that firms have substantial discretion in applying IFRS. Despite the implications on how the firms apply IFRS have motivated many studies, to our knowledge, little is known about the impairment estimates for the Available-for- Sale (AfS) equity instruments. Using a sample of Italian banks over the period 2010-2011, we investigate the determinants of the accounting decisions for impairment estimates. We find that the reporting quality and profitability are explanatory factors of the banks’ decisions to modify the thresholds of the impairment indicators used to assess AfS equity instruments. Our study also suggests that banks use a substantial discretion in implementing the IAS 39 for the AfS equity instruments.

Keywords: Financial instruments, IAS/IFRS, accounting choices, impairment, financial reporting.

 

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The value relevance of earnings and book value across the EU. A comparative Analysis

By | 2017-12-22T17:52:03+01:00 December 22nd, 2017|

Mechelli Alessandro, Cimini Riccardo/ Financial Reporting, Riviste / Fascicolo: 2-2014

This paper aims to investigate whether the value relevance of accounting amounts differs across nations depending on the country characteristics identified by Nobes (2008) and Nobes and Parker (2010) that is the source of funds, the legal system and the fiscal legislation that led them to identify, in the EU, the so-called strong-equity and the weak-equity countries. Because of the different disclosure needs, our hypothesis is that insiders, within the strong-equity countries, disclose more relevant information than in weak-equity countries. To test this hypothesis, we analysed a sample including all the listed entities belonging to the EU at the time of the issuance of EU Regulation 1606/2002. The sample covered the period of 2006-2011 and included 16,513 firm-year observations. Our sample selection strategy allowed us to include entities required to comply with the same accounting standards (IAS/IFRS), so our findings do not depend on differences between requirements of different standard setters. Comparatively, our findings demonstrate that the value relevance of accounting amounts not only is higher in strong-equity countries than in weak-equity countries – validating our research hypothesis – but also that it is not driven by specific firms’ characteristics that are the size, the future growth opportunity and the source of funds of the single entity.

Keywords: Value relevance, weak-equity countries, strong-equity countries, IFRS.

 

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Estimating credit default swap spreads using accounting data, market quotes and credit ratings: the European Banks Case

By | 2017-12-22T17:14:24+01:00 December 22nd, 2017|

Laghi Enrico, Di Marcantonio Michele, D’Amico Eugenio/Financial Reporting, Riviste / Fascicolo: 2-2014

The aim of this paper is to define a model for estimating the theoretical Credit Default Swap spread of European banks considering firms’ accounting data, market quotes, official ratings and macroeconomic variables. We detect a significant log-linear relation between Credit Default Swaps spreads and four explanatory variables determined on the basis of the stock price, the financial structure, the equity composition, the incidence of the reserve for loan losses on total loans, the official ratings and macroeconomic indicators of the country of domicile of each company. The empirical results show that for the period from 2008 to 2013 the model has a high statistical significance and a remarkable explanatory power. Our main contribution to the existing literature is the exploration of new determinants of banks’ credit risk and the provision of new evidence on the determinants of banks’ default risk in the crisis and post-crisis European context. Furthermore, we define a practical model for estimating Credit Default Swap spreads of banks suitable for professional use.

Keywords: Credit default swaps, credit risk, default risk determinants, structural models

 

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Comparing the effects of IASB Proposal on leasing: an impact assessment of EU listed Companies

By | 2017-12-22T17:13:13+01:00 December 22nd, 2017|

Fabi Tommaso, Laghi Enrico, Mattei Marco, Sura Alessandro/ Financial Reporting, Riviste / Fascicolo: 2-2014

In August 2010, the IASB and the FASB jointly released an exposure draft proposing a “right-of-use” model for the recognition of lease-related assets and liabilities. The literature shows that leasing is a relevant subject for study. Many studies have investigated the point of view of users and preparers about lease accounting. Moreover, significant studies on the impact assessment of new accounting models for leases have been conducted. The objective of this paper is to perform an impact assessment of the new standard on leases that takes into account companies listed on the main EU stock exchanges. Specifically, this paper try to estimate the magnitude of the change in some ratios that would have been produced by the new treatment with reference to 2011. The results of the paper show that the debt-to-equity ratio increased significantly and, subject to the IASB final decisions on profit or loss accounting, the EBITDA should also have increased, while ROA should not significantly be affected. Furthermore, the results show that the impact of the introduction of the IASB proposal on financial ratios will differ both among industries and among European Union countries.

Keywords: IAS 17, leasing, right of use, impact assessment, lease capitalization

 

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Detecting Earnings Manipulations: Time think about European SMEs. A call for a Joint International Research Project

By | 2017-12-22T15:04:41+01:00 December 22nd, 2017|

Giunta Francesco/ Financial Reporting, Riviste /Fascicolo: 2-2014

A large part of the world economic system is in a state of crisis. The financial system has paid very close attention to this problem, developing specific models to predict insolvency. All of the rating systems related to the Basel Accords use these kinds of models. The insolvency prediction models represent a broad research area, which many researchers have been delving into for many years. These models are largely based on accounting data. As a consequence, the effectiveness of any model depends on the accounting data quality. The accounting data quality is menaced by accounting manipulation actions carried out by mangers. Considering many accounting scams, all over the world, it is evident that sometimes managers cope with the crisis by doctoring their accounting data. That is the reason why, in this period of dire straits, many rating systems have shown strong limitations. According to Healy-Wahlen (1999) , earnings management occurs when mangers use judgment in financial reporting and in structuring transactions to alter financial reports to either mislead some stakeholders about underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers. On the same wavelength, the Association of Certified Fraud Examiners (ACFE) maintains that a company is engaged in earnings manipulation when it asks itself “How can we best report desired results?”, instead of “How can we best report economic reality?”. […]

 

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