Economic consequences(PPT 18)

1、Economic consequencesShanghai University of Finance and EconomicsYUAN HONGQI1DIFINITIONZeff (1978): the impact of accounting reports on the decision making behavior of business, government and creditorsThe essential of the concept is that the accounting policy choice can affect the firm value. The i

2、s an opposite view to the implication of EMH.Management is ignored in EMH while emphasized in economic consequences.If a change of accounting policy affect the interest of management it will also have influence on the investors directly.All accounting policy will matter despite lake of cash flow eff

3、ects2why economic consequence is important?Many of interesting events in accounting practice derive from ECAccounting choice doesnt matter is odds with practice experiences.The research on the reasons of EC leads to several important accounting theory branches.3The rise of ECthe accounting standard-

4、setting is a political process rather than a neutral processa well-defined concept of net income is not exist and this give other constituencies a excuse to intervene accounting standards.third-party intervention: the choice of accounting policy affect the interest of various constituenciesbroadenin

5、g the representation on the standard-setting body using exposure draft to allow various constituencies to comment on proposed accounting policy changes4Illustration of Economic ConsequencesForeign Exchange Translationthe Investment Tax Credit(ITC)Full-cost method or Successful-efforts method5Foreign

6、 Exchange Translationthe question is how to deal with the gains and losses from changes in exchange ratestwo types of gains and lossestransaction gains and losses are realizedtranslation gains and losses are not be realized6 SFAS 8 (1975)Use of temporal methoddistinction between nonmonetary and mone

7、tary itemsnonmonetary items: historical ratemonetary items: current ratetranslation adjustments included in net income, management couldnt control this kind of impact7SFAS 52 (1981)Functional currencyself-sustaining subsidiary vs. Integrated foreign operationsubsidiary was a separate operation and p

8、arents exposure is equal to its net investmentfor self-sustaining subsidiarycurrent rate translation methodtranslation adjustments recognized as shareholders equityfor integrated foreign operation and highly inflationary economies: temporal method(why?)8economic theories of exchange rate determinati

9、on (1)purchasing power (PP) PARITYA currency represents PP over goods and servicesmarket forces will operate on the exchange rates so as to keep PP constant across different countriesthe theory also applies to inflationary economiesempirical tests support the view reasonably well in the long run9eco

10、nomic theories of exchange rate determination (2)interest rate (IR) parityhigher interest rates of a country will encourage capital flows into that country, this creates a demand for that countrys currency and a higher value for that countrydistinction between two theoriesPP parity theory: flows of

11、goods and servicesIR parity theory: capital flows10implications of two theories for translation adjustmentsSFAS 8 was consistent with PP parity theory( nonmotary items) and, to a lesser extent, with IR parity theory(monetary items)the fact that no translation gains or losses were recognized with res

12、pect to non-monetary assets seemed consistent with PP theoryinclusion of translation gains or losses on net monetary liabilities supported IR theoryno much connection between economic theory and SFAS 5211why SFAS 8 received so much criticism?The key problem was that the translation adjustments were

13、unrealized but included in net income. The treatment was inconsistent with generally accepted historical cost accounting. Realization of translation gains or losses would take a long time.Inclusion of unrealized gains or losses in income introduced a volatile and uncontrollable elementthe treatment

14、improved the relevance of the information while ignored the reliability. 12ERCs of multinational firmsthe empirical problem was whether the SFAS 8 or SFAS 52 improve the usefulness of accounting informationresearch by Collins and Salatka (1993) :they think the noise effect dominate in the empirical

15、testsfour hypothesisH1: during the SFAS 8 period, the ERCs of multinational firms would be lower than the ERCs of the same firms during SFAS 52.H2: the ERCs of control samples should be constant during the period of SFAS 8 and SFAS 52.H3: during the SFAS 8 period, the ERCs of the multinational firms

16、 should be lower than those of the control firmsH4: during the SFAS 52 period, the ERCs of the multinational firms should be the same as those of the control firms13results of research by Collins and Salatka (1993)the researchers admitted the results provided weak evidence through the evidence was c

17、onsistent with three of their four predictions.Reasons of weak evidenceno control sample that is identical to the multinational sample in all respects except the applicability of SFAS 8.Maybe the quality of SFAS 8 earnings was not as bad as Collins and Salatka suggest.The research proved an informat

18、ion example of how empirical ERC methodology can be used to resolve a complex and controversial accounting policy issue.14Illustration of EC- The Investment Tax Credit (ITC)Four ways to account for the ITC APB2 (1962): alternative 2 or 3SEC (1963): either the APB2 or the 48-52% method SEC felt APB2

19、objected to by enough firms APB4 (1964): APB2 as the preferred method but also allowed the ITC to be brought into income currentlyregulated public utility industry15FC(full-cost method) or SE(successful-efforts method) in oil and gas industrysmall oil and gas firms prefer FC to SELEV(1977)Study concern: FC or SESFAS 19(1977), all U.S. Oil and gas firms acccount for their exploration costs using SE Event studyevent date: July 18, 1977 (ED for S