Else_IAS-GREG_prelims.qxd 3/22/2006 8:36 PM Page i International Accounting Standards, Regulations, and Financial Reporting Edited by Greg N. Gregoriou and Mohamed Gaber AMSTERDAM ● BOSTON ● HEIDELBERG ● LONDON ● NEW YORK ● OXFORD i PARIS ● SAN DIEGO ● SAN FRANCISCO ● SINGAPORE ● SYDNEY ● TOKYO Else_IAS-GREG_prelims.qxd 3/22/2006 8:36 PM Page ii Elsevier Linacre House, Jordan Hill, Oxford OX2 8DP 30 Corporate Drive, Suite 400, Burlington, MA 01803, USA First edition 2006 Copyright © 2006, Elsevier Ltd. All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Permissions may be sought directly from Elsevier’s Science & Technology Rights Department in Oxford, UK: phone (+44) (0) 1865 843830; fax (+44) (0) 1865 853333; email: [email protected]. Alternatively you can submit your request online by visiting the Elsevier web site at http://elsevier.com/locate/permissions, and selecting Obtaining permission to use Elsevier material British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloguing in Publication Data Control Number: 2006922981 ISBN–13: 978-0-7506-6983-2 ISBN–10: 0-7506-6983-7 For information on all Elsevier publications visit our web site at http://books.elsevier.com Typeset by Macmillan India Printed and bound in The Netherlands 06 07 08 09 10 10 9 8 7 6 5 4 3 2 1 ii Else_IAS-GREG_CONTENTS.qxd 3/20/2006 4:44 PM Page iii Contents About the editors xiii About the contributors xiv 1 Lobbying towards a global standard setter – do national characteristics matter? An analysis of the comment letters written to the IASB 1 Ann Jorissen, Nadine Lybaert, and Katrien Van de Poel 1.1 Introduction 3 1.2 Literature review and hypotheses development 5 1.2.1 Literature review 5 1.3 The development of hypotheses 10 1.4 The IASB and the standard-setting process 14 1.4.1 The transformation into a global standard setter 15 1.4.2 The mission of the IASB and its due process 15 1.4.3 The standard-setting process or due process 16 1.5 Research method 18 1.5.1 Data collection 18 1.5.2 Measurement of variables 20 1.6 Research results 23 1.6.1 The preparers lobby more often than the users 23 1.6.2 Large companies participate more often in the lobbying process 25 1.6.3 Companies that suffer from a larger negative economic impact of the standards will lobby more often 26 1.6.4 The position of the auditor in the lobbying process 28 1.6.5 The influence of country-level variables on the lobbying behavior 30 1.7 Conclusion 32 References 33 Appendix A 36 Appendix B 39 2 A fair go for fair value 41 Janice Loftus 2.1 Introduction 43 2.2 Experimental fair value initiatives 44 2.3 Proposals and requirements for fair value for financial instruments 46 2.4 IAS 39 and the mixed measurement model 49 iii Else_IAS-GREG_CONTENTS.qxd 3/20/2006 4:44 PM Page iv Contents 2.5 Conclusion 53 References 54 3 The behavior modification impact of International Accounting Standards on decision-making and risk management 57 Stanley C.W. Salvary 3.1 Introduction 59 3.2 The capital market and the commodity market 62 3.3 The role and the psychological effect of the capital market 66 3.4 Simplifying assumptions versus necessary conditions for measurement 71 3.5 Economic reality, decision-making, and operating dynamics 75 3.6 Risk management and performance measurement 77 3.7 Structural and operating differences of companies 82 3.8 Sanity in market pricing and sensibility in financial reporting 86 3.9 The investment decision, capital budgeting, and recoverable cost 89 3.10 Discussion and conclusion 90 References 92 4 Fair value – the basis of International Financial Reporting Standards: a conceptual contradiction of the relevant measurement attribute in financial accounting 97 Stanley C.W. Salvary 4.1 Introduction 99 4.2 Money, a credit economy, and the cash-flow process 102 4.3 Profit measurement and management’s performance assessment 104 4.4 Neutrality, stewardship, and financial reporting 107 4.5 The lower of cost and market rule, fair valuation, and realization 109 4.6 The IASB’s association of fair market value with the cash-flow process 114 4.7 The Frameworks’ measurement bases and the mixed attribute model 116 4.8 Investments, measurement rules, and market simulation 118 4.8.1 Lower of cost and market valuation 120 4.8.2 Realizable value 120 4.9 Summary, discussion, and conclusion 121 References 123 iv Else_IAS-GREG_CONTENTS.qxd 3/20/2006 4:44 PM Page v Contents 5 Fair value accounting under IAS/IFRS: concepts, reasons, criticisms 127 Jochen Zimmermann and Jörg Richard Werner 5.1 Introduction 129 5.2 Fair value accounting and the IFRS: basic properties and scope of application 130 5.2.1 Definition of fair values 130 5.2.2 Treatment of holding gains and losses 130 5.2.3 FVA and capital maintenance 131 5.2.4 FVA and IAS/IFRS: scope of application 133 5.3 Justifications for the use of fair values in financial reporting 139 5.3.1 Value relevance and standard setting 139 5.3.2 Revaluations as signals 141 5.3.3 Fair value accounting, contracting, and incentives 144 5.4 Conclusion 146 References 148 6 Does Delaware incorporation add value? An accounting-based analysis 151 Feng Chen, Kenton K. Yee, and Yong Keun Yoo 6.1 Introduction 153 6.2 Development of hypotheses 154 6.3 Sample selection 156 6.4 Empirical results 160 6.4.1 Descriptive statistics 160 6.4.2 Is there a Delaware value premium? 162 6.5 Conclusion 165 References 166 7 Empirical evidence on the relation between revaluations of fixed assets and the future performance of firms in Brazil 169 Alexsandro Broedel Lopes 7.1 Introduction 171 7.2 Revaluation of fixed assets in Brazilian GAAP and related literature 174 7.2.1 Brazilian GAAP for revaluation 174 7.2.2 Previous research 178 7.3 Models and results 180 7.3.1 Descriptive statistics 180 7.3.2 Research design and results 180 v Else_IAS-GREG_CONTENTS.qxd 3/20/2006 4:44 PM Page vi Contents 7.4 Conclusions and implications for future research 185 Acknowledgments 187 References 187 8 Hedge funds and the stale pricing issue 189 Greg N. Gregoriou, William Kelting, and Mohamed Gaber 8.1 Introduction 191 8.2 Background information 194 8.3 Recent developments 195 8.4 Checklist of questions 196 8.5 Conclusion 197 References 197 9 Adopting and implementing International Financial Reporting Standards in transition economies 199 Robert W. McGee 9.1 Introduction 201 9.2 Adopting and implementing IFRS 202 9.3 Translation problems 205 9.4 Teaching the new rules to practitioners 209 9.5 Reforming university curriculums 209 9.6 Credible accounting certification 218 9.7 Conclusion 220 Acknowledgments 221 References 221 10 International convergence: the Australian journey 225 Janice Loftus 10.1 Introduction 227 10.2 Models of international harmonization or convergence of accounting 228 10.3 Models of accounting regulation 230 10.4 Australian standard setting 1970–1983 230 10.5 International harmonization of accounting 1970–1983 232 10.6 Australian standard setting 1984–1988 235 10.7 International harmonization of accounting 1984–1988 238 10.8 Australian standard setting 1988–1990 240 10.9 International harmonization of accounting 1988–1990 242 10.10 Australian standard setting 1991–1999 243 10.11 International harmonization of accounting 1991–1999 247 10.12 Australian standard setting 2000 onwards 252 10.13 International harmonization of accounting 2000 onwards 254 vi Else_IAS-GREG_CONTENTS.qxd 3/20/2006 4:44 PM Page vii Contents 10.14 The beginning of a new journey or the end of the road? 258 Acknowledgments 261 References 261 11 Determinants of bias in management earnings forecasts: empirical evidence from Japan 267 Koji Ota 11.1 Introduction 269 11.2 Background on Japanese management forecasts 270 11.3 Data 272 11.3.1 Sample selection 272 11.3.2 Management forecast error 272 11.4 Determinants of bias in management earnings forecasts 273 11.4.1 Univariate analysis 273 11.4.2 Multivariate analysis 286 11.5 Market awareness of bias in management earnings forecasts 288 11.6 Conclusion 290 Acknowledgments 292 References 293 12 Expected earnings growth when there is a growth option 295 Kenton K. Yee 12.1 Introduction 297 12.2 Perpetual growth option: model setup 299 12.3 Accounting policies and earnings–value relations 303 12.4 Long-run earnings growth with a growth option 307 12.5 Conclusion 312 References 315 Appendix 317 13 The true cost of employee share options: the recent debate and potential costs for a case study firm 325 Colette Grey, Derry Cotter, and Edel Barnes 13.1 Introduction 327 13.2 Literature review 329 13.2.1 ESO value and accounting income 329 13.2.2 Recognition date 331 13.2.3 Measuring fair values 332 13.3 Case study: ESAT Telecom Group 333 13.4 Results 338 vii Else_IAS-GREG_CONTENTS.qxd 3/20/2006 4:44 PM Page viii Contents 13.5 Discussion 340 13.6 Conclusion 343 Acknowledgments 345 References 345 14 Impairment of fixed assets: perceived implementation problems associated with International Accounting Standard No. 36 347 Mohamed E. Ibrahim 14.1 Introduction 349 14.1.1 Indications of impairment 352 14.1.2 The impairment test 353 14.1.3 Accounting for impairment 353 14.2 Previous studies 354 14.3 Methods 359 14.3.1 Sample 359 14.4 Results 361 14.4.1 Sample profile 361 14.4.2 Implementation problems 362 14.5 Conclusion 364 References 365 15 The rise and impact of hybrid securities in Australian listed corporations 367 Tyrone M. Carlin and Nigel Finch 15.1 Introduction 369 15.2 The Australian hybrids market 370 15.3 Measuring the impact of hybrids 375 15.4 Results 376 15.5 Conclusion 383 References 385 16 Empirical evidence on the use, size, concentration, and cost of executive options schemes in Australia 387 Tyrone M. Carlin and Guy Ford 16.1 Introduction 389 16.2 How prevalent are executive options plans in Australia? 390 16.3 Size, activity, and concentration of the observed options schemes 392 16.4 Estimated cost of executive options schemes 396 16.5 Conclusion 398 References 399 viii Else_IAS-GREG_CONTENTS.qxd 3/20/2006 4:44 PM Page ix Contents 17 The introduction of fair value in Italy: economic and financial reporting issues 401 Giovanni Melis, Andrea Melis, and Alessandro Pili 17.1 Introduction 403 17.2 The adoption of the International Financial Reporting Standards in Italy 404 17.3 Accounting for the fair value changes: a comparative analysis of IFRS, US GAAP, and Italian GAAP 406 17.3.1 Intangibles and fixed assets 406 17.3.2 Investment properties 415 17.3.3 Assets and liabilities in foreign currency 415 17.3.4 Actuarial gains and losses on defined benefit plans 418 17.3.5 Financial assets and liabilities 419 17.3.6 Biological assets 424 17.4 The entity’s capital maintenance 425 17.4.1 Example 1 (investment property) 426 17.4.2 Example 2 (financial liability) 430 17.5 Accrual basis vs prudence: a comparative analysis of IFRS, Italian, and US GAAP 433 17.6 The underlying reasons for the importance of the prudence principle in Italy 438 17.6.1 Ownership, capital, and control structures of Italian nonfinancial listed companies 439 17.6.2 Generally accepted concept of the corporate entity: IASB vs Italy 440 17.6.3 Cultural issues concerning prudence and risk avoidance 441 17.7 The adoption of the comprehensive income statement in Italy 443 17.7.1 Example 1 (investment property) 445 17.7.2 Example 2 (financial liability) 445 17.8 Conclusion 450 Acknowledgments 451 References 454 18 Factors affecting accounting development in the harmonization process with the international framework: the case of Estonia 457 Toomas Haldma 18.1 Introduction 459 18.2 Literature review 460 18.3 Factors influencing accounting reform in Estonia 462 ix