nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2015‒03‒05
twelve papers chosen by
Alexander Harin
Modern University for the Humanities

  1. Is Historical Cost Accounting a Panacea? Market Stress, Incentive Distortions, and Gains Trading By Ellul, Andrew; Jotikasthira, Chotibhak; Lundblad, Christian T; Wang, Yihui
  2. Taxing investments in the Asia-Pacific region: The importance of cross-border taxation and tax incentives By Wiedemann, Verena; Finke, Katharina
  3. Designing and Implementing a Destination-Based Corporate Tax By Michael Devereux; Rita de la Feria
  4. Impuesto Diferido bajo NIIF: Impacto en empresas intensivas en propiedades, planta y equipos By Raúl A. Cardona Montoya; Marisol Gil Henao; Jhon W. Ochoa Flórez
  5. Performance Measurement: An Investor's Perspective By Lee, Charles M. C.
  6. Delegated Bidding and the Allocative Effects of Alternative Accounting Rules By Marinovic, Ivan
  7. Do multinational firms invest more? On the impact of internal debt financing on capital accumulation By Martin Simmler
  8. Does Fair Value Accounting Contribute to Procyclical Leverage? By Amel-Zadeh, Amir; Barth, Mary E.; Landsman, Wayne R.
  9. Capital Investments and Financial Ratios By Nezlobin, Alexander; Rajan, Madhav V.; Reichelstein, Stefan
  10. Blueprint for reform of VAT rates in Europe By Rita de la Feria
  11. Supplier Evasion of a Buyer's Audit: Implications for Motivating Compliance with Labor and Environmental Standards By Plambeck, Erica L.; Taylor, Terry A.
  12. Accounting for total work By Andrea Brandolini; Eliana Viviano

  1. By: Ellul, Andrew; Jotikasthira, Chotibhak; Lundblad, Christian T; Wang, Yihui
    Abstract: We provide new empirical evidence concerning the contentious debate over the use of historical cost (HCA) versus mark-to-market (MTM) accounting in regulating financial institutions. These accounting rules, through their interactions with capital regulations, alter financial institutions’ trading behavior. The insurance industry provides a natural laboratory to explore these interactions since significant differences exist in regulatory accounting rules: (1) life insurers have greater flexibility to hold speculative-grade assets under HCA than property and casualty insurers, which are required to use MTM, and (2) the degree to which life insurers have to recognize market value through impairment differs across U.S. states. In the context of the sizeable downgrades of asset-backed securities (ABS) during the 2007-2009 financial crisis, we show that insurers facing MTM are more likely to sell the downgraded ABS than insurers holding these assets under HCA. To improve their capital positions, insurers facing HCA disproportionately resort to gains trading, selectively selling their corporate and government bond holdings with the highest unrealized gains. This trading behavior transmits shocks across otherwise unrelated markets.
    Keywords: asset-backed securities (ABS); corporate bonds; fire sales; gains trading; historical cost accounting; insurance companies; mark to market; regulation
    JEL: G11 G12 G14 G18 G22
    Date: 2015–03
  2. By: Wiedemann, Verena; Finke, Katharina
    Abstract: This paper investigates the taxation of investments in the Asia-Pacific region. Our analysis is based on the methodology of Devereux and Griffith (1999, 2003) for determining effective average tax rates. This approach allows us to account for important national and international tax regulations. Our results show that the overall dispersion of effective tax burdens in Asia-Pacific ranges from 10.6% in Hong Kong to 40.4% in India for domestic investments (overall average of 23.4%). In 8 out of 19 jurisdictions covered, investments are, however, effectively taxed at a rate between 20% and 25%. If the investment is made by a foreign investor, cross-border taxation has a significant impact on the overall tax burden. In any of the Asia-Pacific jurisdictions, foreign direct investments by a Singaporean or a German parent company are on average taxed at 29.2% and at 32.8% in case of a US investor. Meanwhile, tax incentives for the stimulation of private investment reduce the effective average tax rate by 8.6 percentage points on average. Fiscal incentives targeted at investments in the high technology sector or the development of specific geographic areas result in the lowest effective tax burdens.
    Keywords: Corporate Taxation,Effective Average Tax Rate,Tax Incentives,Asia
    Date: 2015
  3. By: Michael Devereux (Oxford University Centre for Business Taxation); Rita de la Feria (Durham University)
    Abstract: The current international tax system based upon the principles of source and residence is no longer suited to a globalised world economy, and the fundamentals of the international tax system need to be re-examined. An R+F based cash-flow tax based on the principle of destination has been proposed as a suitable alternative to taxing corporations in an international setting. The aim of this paper is to discuss the legal and practical issues which would arise in the implementation of such a tax, namely how a destination-based tax could be effectively designed and implemented. For this purpose we draw on experiences with designing VAT systems worldwide. It is proposed that the destination principle should be implemented through use of the customers’ location as the main legal proxy. We argue that the country where the customer is located has both the substantive jurisdiction to tax, i.e. the legitimacy to impose tax, and enforcement jurisdiction to tax, i.e. the effective legal and implementing means of collecting the proposed tax. As regards enforcement jurisdiction to tax, we propose that a one-stop-shop system similar to that being experimented in VAT as the most effective means of collecting tax. Other potential implementing issues are addressed, namely deductibility of expenses and tax credits, susceptibility to avoidance and fraud, treatment of financial transactions, and treatment of small businesses. We conclude that, if it were applied in an international cooperation setting, it would indeed be legitimate and administratively possible to implement a destination-based corporate tax.
    Date: 2014
  4. By: Raúl A. Cardona Montoya; Marisol Gil Henao; Jhon W. Ochoa Flórez
    Abstract: In Colombia has been infrequent of registration in the financial statements of deferred tax, despite the obligation as a mechanism for allocation and recognition of tax, established in decrees 2649 and 2650 of 1993 and affects the results, actual allocation of profits and future cash flows; however, this is expected to change from the adoption of International Financial Reporting Standards. The aim of the study is to determine the impact it will have on the organizations implementing the international standard IAS 12 Income Taxes, originated in the category of property, plant and equipment. To achieve this, it starts with an identification of the current accounting model under Colombian norm Deferred tax is compared with standard or international standard, seeking to determine the conceptual and measurement differences; two real cases are taken and the tax calculation under the guidelines of IAS 12 is performed. One of the main expected and was validated in this analysis by the adoption of IFRS in intensive companies in fixed assets, effects is the negative impact on shareholders' equity for the determination of deferred taxes, which arises from applying the tax on temporary differences of assets and liabilities measured for accounting and tax purposes rates. ****** En Colombia ha sido poco frecuente el registro en los estados financieros del impuesto diferido, a pesar de la obligatoriedad como mecanismo de asignación y reconocimiento de impuestos, establecida en los decretos 2649 y 2650 de 1993 y que incide en los resultados, asignación real de utilidades y flujos de caja futuros; sin embargo, se espera que esto cambie a partir de la adopción de las Normas Internacionales de Información Financiera. El objetivo del trabajo es determinar el impacto que tendrá en las organizaciones la aplicación de la norma internacional NIC 12 en lo referente al impuesto a las ganancias e impuesto diferido, originado en el rubro de propiedades, planta y equipo. Para lograrlo, se inicia con una identificación del modelo contable actual bajo norma colombiana, se compara con el estándar o norma internacional, y se determinan las diferencias conceptuales y de medición y se analizan dos casos reales, para calcular impactos del impuesto bajo los lineamientos de la NIC 12 y otros resultados. Uno de los principales efectos esperados y que fue validado en el presente análisis por la adopción de las NIIF, en las compañías intensivas en activos fijos, es el impacto negativo al patrimonio de los accionistas por la determinación del impuesto diferido, el cual surge de aplicar las tasas impositivas a las diferencias temporales de los activos y pasivos medidos para fines contables y tributarios.
    Keywords: NIIF plenas; Impuesto Diferido-ID; Valor razonable; Diferencia Temporaria; Impuesto a las Ganancias
    JEL: M4 M41
    Date: 2014–01–31
  5. By: Lee, Charles M. C. (Stanford University)
    Abstract: This article discusses the role of GAAP accounting from an investor's perspective. For all its flaws, a historical-based system of accounting is vital to the investment community, and I believe moves toward fair value accounting should proceed with great caution. Framing the discussion in terms of valuation theory, I argue that investors are typically more interested in assessing the present value of residual income than the value of assets-in-place. I also provide examples of how historical accounting numbers can be (and are being) used by professional investors. A simple residual income framework succinctly captures the essence of value investing. In fact, what academics have learned about fundamental investing in recent years dovetails nicely with the strategies used by such legendary investors as Ben Graham, Warren Buffett, and Joel Greenblatt.
    Date: 2014–03
  6. By: Marinovic, Ivan (Stanford University)
    Abstract: I study the efficiency of three prominent accounting rules in a delegated bidding setting where bidders' incentives are tied to both accounting income and economic surplus. Trade efficiency is maximized (minimized) by the value-in-use method (historical cost method). The exit-value method generates an accounting based winner's curse that results in fire-sale-like valuations. Yet, in the limit, as the number of bidders grows large, the efficiency of the exit-value method converges to that of the value-in-use method.
    Date: 2014–10
  7. By: Martin Simmler (University of Oxford)
    Abstract: This study provides evidence on the causal impact of debt shiftingactivities of multinational companies (MNC) on their capital accumulation. The identification strategy exploits the corporate tax rate cut of 10%-points in Germany 2008 as a quasi-natural experiment. This reform reduced substantially the incentive of multinational firmsto engage in debt shifting. Using a difference-in-diverences matching strategy (DiD), the results suggest firstly that MNC decrease their fraction of internal borrowing and thus reduced or even stopped shifting profits abroad. Secondly they decreased their capital stock compared to purely domestic firms. Combined, the results suggest that if MNC shift pro ts abroad, their capital accumulation is less depressed by the national tax rate and thus benefits less from a tax ratereduction. The DiD results are confirmed by a structural approach, which focus on the tax incentive to shift profits to the headquarter for the identification. The ndings are particularly strong for firms with a low ratio of profits before interest to their capital stock which suggests that only debt shifting but not transfer pricing fosters capital accumulation. Moreover, it is shown that more generous depreciation allowances decrease the difference in capital accumulation between domestic and multinational firms.
    Keywords: internal debt shifting, capital accumulation, corporate income taxation, depreciation allowances
    JEL: H25 F23 G31 G32
    Date: 2014
  8. By: Amel-Zadeh, Amir (?); Barth, Mary E. (Stanford University); Landsman, Wayne R. (?)
    Abstract: We describe analytically commercial bank behavior focusing on actions banks take in response to economic gains and losses on their assets to meet regulatory leverage requirements. Our analysis shows that absent differences in regulatory risk weights across assets, leverage cannot be procyclical. We test the analytical description's predictions using a sample of US commercial banks, during economic upturns and downturns, including the recent financial crisis. Although we find a significantly positive relation between change in leverage and change in assets, this procyclical relation evaporates when change in each bank's weighted average regulatory risk weight is included in the estimating equation. We also find that all changes in equity, including those arising from fair value accounting, are significantly negatively related to change in leverage, which is inconsistent with fair value accounting contributing to procyclical leverage. In addition, we find no evidence of a relation between change in leverage and the interaction between change in assets arising from fair value accounting and other changes in assets. Taken together, the empirical evidence indicates that fair value accounting is not a source of procyclical leverage. The key conclusion we draw is that bank regulatory requirements, particularly regulatory leverage determined using regulatory risk-weighted assets, explain why banks' leverage can be procyclical, and that fair value accounting does not.
    Date: 2014–03
  9. By: Nezlobin, Alexander (University of CA, Berkeley); Rajan, Madhav V. (Stanford University); Reichelstein, Stefan (Stanford University)
    Abstract: We examine a firm's price-to-earnings (P/E) and price-to-book (P/B) ratios in a model of sequential capacity investments. Our analysis focuses on several key variables, including past and anticipated future investment growth, economic profitability and accounting conservatism, which jointly shape the magnitude and behavior of the two ratios. We obtain a benchmark result under the hypothesis that firms use replacement cost accounting to value their operating assets. The P/B ratio then coincides with Tobin's q and the firm's P/E ratio can be expressed as a convex combination of the P/E ratios suggested respectively by the permanent earnings model and the Gordon growth model. The relative weight to be placed on these two endpoints is captured entirely by Tobin's q. Relative to this benchmark result, we analyze the behavior of both ratios when the applicable accounting rules are more conservative than replacement cost accounting.
    Date: 2014–04
  10. By: Rita de la Feria (Durham University)
    Abstract: Within Europe differentiated rates structures date back to the introduction of VAT itself. Evidence as regards the negative consequences of applying multiple rates has been apparent for some decades. In this context, since the late 1980s, there have been several attempts to amend European rates structures under the political guidance of the European Commission. However, the most recent agreed upon amendments to the rates structure have increased the level of differentiation, rather than decreased it, with more goods and services being subject to reduced rates in Europe today than even as recently as ten years ago. This reality seems to be changing in the last few years. Since 2008 a staggering twenty-two of the twenty-eight EU Member State countries have increased their VAT rates, resulting in a broad convergence of VAT standard rates across the EU around the 21% mark. Furthermore, there has also been a decrease in levels of differentiation with a reduction in number of VAT rates applicable in many Member States, as well as various base broadening measures. The latest developments seem to indicate that conditions may be present which allow the reversal of the status quo bias, creating the opportunity for base broadening tax reform. This raises the possibility that European countries might engage in an involuntary process of convergence of VAT bases, fuelled by domestic necessities. A politically achievable blueprint for reform of VAT rate structures in European is presented, which would result in a broader-based, and thus more efficient and neutral, VAT. Moreover, application of this blueprint across EU Member States would have the additional advantage of resulting in further convergence of VAT rate structures in Europe, to replace the long-sought, but so far unattainable, EU harmonisation.
    Date: 2014
  11. By: Plambeck, Erica L. (Stanford University); Taylor, Terry A. (University of CA, Berkeley)
    Abstract: Deadly factory fires. Illegal pollution. Injured workers. Many brands have recently been tarnished by publicity of suppliers' labor and environmental violations. This paper provides guidance to buyers as to how they can motivate their suppliers to comply with labor and environmental standards. Obvious approaches (increasing auditing, making it more difficult for the supplier to deceive an auditor, publicizing negative audit reports) can be counterproductive. Less obvious approaches (squeezing the supplier's margin by reducing the price paid to the supplier or increasing wages for workers, precommitment to a low level of auditing) might better motivate supplier compliance effort. Even if the buyer ensures that the supplier's facility is compliant (e.g., through direct investment in the facility), the supplier may outsource some production of the buyer's order to unauthorized subcontractors, exposing the buyer to risk of brand damage. The results in the paper also apply to mitigation of unauthorized subcontracting.
    Date: 2014–03
  12. By: Andrea Brandolini (Bank of Italy); Eliana Viviano (Bank of Italy)
    Abstract: We analyse how accounting for household production could affect labour market statistics. This topic has grown in importance since the release of the new System of National Accounts in 2008. Because the traditional headcount ratios focussing on the number of people carrying out some home and some market production may not be very informative, we propose a general class of indices based on the time spent on each type of work that encompasses headcount indicators. We apply these indices to selected configurations of the parameters to make cross-country comparisons.
    Keywords: home production, work intensity, employment rate.
    JEL: J22 J21
    Date: 2014–11

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