nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2006‒03‒25
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Preparation and Analysis of Cash Flow Statements: The Net Profit Approach and Operating Profit Approach By Jaan Alver
  2. Practical Issues in the Valuation of Real Properties with Special Reference to Income Approach and Financial Reporting Purpose By Veronika Ilsjan; Kaia Kask
  3. Rent Extraction by Large Shareholders: Evidence Using Dividend Policy in the Czech Republic By Jan Bena; Jan Hanousek
  4. Protected by the family? How closely-held family firms protect minority shareholders By PABLO MARTIN
  5. Golden Handshakes: Separation Pay for Retired and Dismissed CEOs By Yermack, David

  1. By: Jaan Alver (Department of Accounting at Tallinn University of Technology)
    Abstract: A cash flow statement is required as part of a complete set of financial statements prepared in conformity with IFRS as well as US GAAP for all business enterprises. IAS 7 lays down a formal structure for the cash flow statement. Cash flows should be classified under the following three standard headings: “Operating activities”, “Investing activities”, “Financing activities”. The classification of cash flows among operating, investing and financing activities is essential to the analysis of cash flow data. Net cash flow (the change in cash and equivalents during the period) has little informational content by itself; it is the classification and individual components that are informative. Although the classification of cash flows into the three main categories is important, it should be mentioned that classification guidelines are arbitrary. IAS 7 has not indicated how to classify certain items that might fit logically in more than one of the major categories of the statement of cash flows. Examples: 1) Interest and dividends received can be presented as an operating activity, despite their close association with other activities presented as investing activities. 2) Interest and dividends paid can be presented as an operating activity, despite their close association with other activities presented as financing activities. Additional troubles arise from case that there is no standard definition of operating activities and consequently, cash flows from operating activities. Both IASB and FASB have taken position that operating activities are activities that are not investing or financing activities. At the same time the opinion that the association of a cash flow with profit is the primary criterion for classifying the flow as operating, is expressed. The examples illustrate the influence of the differences in the classification of cash flow data on net cash from different kinds of activities.
    Keywords: cash flows, IAS 7, SFAS 95.
    Date: 2005
  2. By: Veronika Ilsjan (School of Economics and Business Administration, Tallinn University of Technology); Kaia Kask (School of Economics and Business Administration, University of Tartu)
    Abstract: During the past few years there have been many changes in financial reporting rules in EU countries. One significant change from the real estate point of view has taken place in balance sheet, where property investment account is switched to the asset side of the balance sheet, separate from the property, plant and equipment. Since 2005, all companies listed in the stock market have the obligation to apply International Accounting Standards/International Financial Reporting Standards (IFRS) in their everyday practice. At the same time, more and more researchers have pointed to the problem of valuation accuracy and to the uncertainty of the valuation product. The aim of the paper is to explore practical problems in implementing the income approach in the valua­tion for financial reporting purposes in Estonia. To achieve the aim of the paper, the authors conducted a survey, sending out a comprehensive questionnaire to all certified general appraisers (GA). The survey findings show that the valuation for accounting purposes is topical mainly in major cities in Estonia. The valuers’ behaviour refers to overconfidence in their actions together with above-average self-esteem, which is not supported by actual survey results. However, one of the main reasons here is that some theoretical regulations in standards are too general and need some specification to harmonise appraisers’ behaviour in practice.
    Keywords: real estate appraisal, appraiser behaviour, uncertainty in valuation, valuation for valuation reporting, income approach
    JEL: G2 M4
    Date: 2005
  3. By: Jan Bena; Jan Hanousek
    Abstract: Using cross-sectional analysis of corporate dividend policy we show that large shareholders extract rents from firms and expropriate minority shareholders in the weak corporate governance environment of an emerging economy. By comparing dividends paid across varying corporate ownership structures— concentration, type, and domicile of ownership—we quantify these effects and reveal that they are substantial. We find that the target payout ratio for firms with majority ownership is low but that the presence of a significant minority shareholder increases the target payout ratio and hence precludes a majority owner from extracting rent. In contrast to other studies from developed markets, our unique dataset from the Czech Republic for the period 1996-2003 permits us to take account of the endogeneity of ownership.
    Keywords: Rent extraction, Large shareholders, Corporate governance, Dividend policy.
    JEL: D21 G32 G35
    Date: 2006–02
  4. By: PABLO MARTIN (Instituto de Empresa)
    Abstract: Most companies in the world are owned by families, and a majority of them are registered in countries where the legal protection of minority shareholders is weak. Is family control the consequence of the lack of investor protection? It is known that agency problems among owners actually increase in family-ownership situations, so family control by itself may not be an efficient substitute for the legal protection of minority investors. In this article we analyze successful strategies used by Canadian and Latin American business groups and firms to increase the satisfaction of their minority shareholders and to limit the incentives of the controlling shareholders to abuse them.
    Keywords: Corporate governance, Family firms, Investor protection
    Date: 2006–01
  5. By: Yermack, David (New York University)
    Abstract: This paper studies separation payments made when CEOs leave their firms. In a sample of 179 exiting Fortune 500 CEOs, more than half receive severance pay and the mean separation package is worth $5.4 million. The large majority of severance pay is awarded on a discretionary basis by the board of directors and not according to terms of an employment agreement. For the subset of exiting CEOs who are dismissed, separation pay generally conforms to theories related to bonding and damage control. Shareholders react negatively when separation agreements are disclosed, but only in cases of voluntary CEO turnover.
    Keywords: CEO turnover; severance pay
    JEL: G34
    Date: 2006–02–15

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