nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2007‒12‒19
five papers chosen by
Alexander Harin
Modern University for the Humanities

  1. To plug or not to plug, that is the question. No plugs, no circularity: A better way to forecast financial statements By Ignacio Velez-Pareja
  2. Annuities in Switzerland By Ruesch, Martin; Butler, Monika
  3. Prospective analysis: guidelines for forecasting financial statements By Ignacio Velez-Pareja; Joseph Tham
  4. Opinion-based surveys in the conjunctural analysis of the Spanish economy By Javier Jareño
  5. A Note on Business Cycle Accounting By Gregor Baeurle; Daniel Burren

  1. By: Ignacio Velez-Pareja
    Abstract: Typical textbooks on corporate finance and forecasting and budgeting recommend “closing” and matching the financial statements using what is known as a plug. A plug is a formula to match the Balance Sheet using differences in some items listed in it in such a way that the accounting equation holds. This is a very easy way to do it but it encompasses some risks. The risks are that certain numbers in the financial statements could be in error and still the plug would indicate that everything is correct because the Balance Sheet matches. In this teaching note we show how to construct financial statement without plugs and circularity.
    Date: 2007–12–04
  2. By: Ruesch, Martin; Butler, Monika
    Abstract: Switzerland ' s pension system has attracted considerable attention, mainly due to its reliance on a three-pillar structure. A relatively small pay-as-you-go system (first pillar) is complemented by a mandatory, employer-based, fully funded occupational pension scheme (second pillar). The main goal of this paper is to provide a detailed description and analysis of the Swiss pension system. Particular emphasis is placed on the second pillar and its role in the provision of old age benefits within the Swiss social security system. The paper shows, for example, that a typical individual with an uninterrupted career can expect a net (after-tax) replacement rate of at least 70 percent. Occupational pension plans are highly regulated. Minimum interest rate requirements and minimum conversion rates (at which the accumulated retirement balances are transformed into annuity streams) introduce many elements of defined benefit plans into notionally defined contribution schemes. The resulting money ' s worth ratios are very high (with the exception of single males). Switzerland also has a high annuitization rate by international standards (approximately 80 percent). However, due to high fragmentation of the scheme and non-uniform accounting practices, some aspects of the system are not very transparent. The paper sheds light on the financial health of the pension system and the evolution of the regulatory framework in the past two decades.
    Keywords: ,Debt Markets,Pensions & Retirement Systems,Emerging Markets,Gender and Law
    Date: 2007–12–01
  3. By: Ignacio Velez-Pareja; Joseph Tham
    Abstract: We discuss some ideas useful when forecasting financial statements that are based on historical data. The chapter is organized as follows: First we discuss the relevance of prospective analysis for non traded firms. In a second section we a basic reviews of subjects that will be needed for forecasting financial statements. We discuss the use of plugs for financial forecasting. We show an alternate approach to avoid such popular practice. The approach we propose follows the Double Entry Principle. This principle guarantees consistent and error free financial statements. We show with a simple example how the plug works and its limitations and problems that arise when using it. Next, the reader will find what information is needed for the forecasting of financial statements and where and how to find it. We present the procedure to identify policies that govern the ongoing of a firm such as accounts receivable and payable, inventories, dividend payout, and identify price increases and other basic variables. We also deal with the real life problem of a firm with multiple products and/or services. We start with historical financial statements, We include inflation rates, real increases in prices and volume and policies in order to construct intermediate tables that make very easy the construction of the pro forma financial statements. We use a detailed example to illustrate the method. We derive the cash flows that will be used in the book to value a firm. This type of models might be used by non traded firm for a permanent assessment of the value creation. Finally we show some tools to perform sensitivity analysis for financial management and analysis.
    Date: 2007–12–04
  4. By: Javier Jareño (Banco de España)
    Abstract: Opinion-based surveys, or quantitative surveys, are potentially very powerful tools for conjunctural analysis in view of their rapid availability and nature. This paper addresses the usefulness of these surveys for monitoring the Spanish economy. To do this it analyses the two most important opinion-based surveys, namely the European Commission's Business and Consumer Survey and the NTC-Research Purchasing Managers’ Indices, and their relationship to the Quarterly National Accounts macroeconomic data and to the Spanish economy's key conjunctural indicators. The results show that opinion-based surveys are generally useful tools for the conjunctural analysis of the Spanish economy, although they should be used with caution. Their usefulness is apparent in all the areas analysed: as indicators of economic developments, as pointers to changes in the trend of the economy and as tools for predicting the economic situation.
    Keywords: opinion survey, short-term analysis, Spain
    JEL: E20
    Date: 2007–12
  5. By: Gregor Baeurle; Daniel Burren
    Abstract: Chari, Kehoe and McGrattan (2007) (CKM) show that a large class of dynamic stochastic general equilibrium (DSGE) models with various frictions and shocks is observationally equivalent to a benchmark real business cycle (RBC) model with correlated “wedges” in the RBC model's first-order conditions. The wedges in the static first-order conditions of the RBC model can be readily computed by evaluating the first-order conditions at the data and then solving for the wedges. In contrast, identification of the “investment wedge” in the RBC model's dynamic Euler equation requires the researcher to make assumptions about the expectation formation by agents in the RBC model. In particular, CKM assume that expectations are formed as if, from the perspective of the model's agents, wedges followed a vector autoregressive process of order one (VAR(1)). We show that wedges generally do not have a VAR(1) representation, implying that CKM's procedure is based on model-inconsistent expectations. We also provide an alternative, model-consistent approach to modeling expectation formation. On the former issue, we present a necessary and sufficient ``rank condition'' under which a detailed economy can be mapped into a benchmark model where wedges follow a VAR(1) process. On the latter issue, we suggest that the information set underlying the expectation formation should not only contain current wedges, but also all predetermined variables.
    Keywords: Business Cycle Accounting; Model Consistent Expectations
    JEL: C50 E10
    Date: 2007–10

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