nep-acc New Economics Papers
on Accounting and Auditing
Issue of 2018‒02‒26
five papers chosen by

  1. Risks and challenges of complex financial isntruments: an analysis of SSM banks By Rosario Roca; Francesco Potente; Luca Giulio Ciavoliello; Alessandro Conciarelli; Giovanni Diprizio; Lanfranco Lodi; Roberto Mosca; Tommaso Perez; Jacopo Raponi; Emiliano Sabatini; Antonio Schifino
  2. Predicting earnings and cash flows: The information content of losses and tax loss carryforwards By Dreher, Sandra; Eichfelder, Sebastian; Noth, Felix
  3. Tax-Free Savings Accounts: Who uses them and how? By Adam M. Lavecchia
  4. Locally Optimal Three-Bracket Piecewise Linear Income Taxation By Alan Krause
  5. Loss carryover provisions: Measuring effects on tax symmetry and automatic stabilisation By Tibor Hanappi

  1. By: Rosario Roca (Bank of Italy); Francesco Potente (Bank of Italy); Luca Giulio Ciavoliello (Bank of Italy); Alessandro Conciarelli (Bank of Italy); Giovanni Diprizio (Bank of Italy); Lanfranco Lodi (Bank of Italy); Roberto Mosca (Bank of Italy); Tommaso Perez (Bank of Italy); Jacopo Raponi (Bank of Italy); Emiliano Sabatini (Bank of Italy); Antonio Schifino (Bank of Italy)
    Abstract: We investigate the valuation risk affecting financial instruments classified as L2 and L3 for accounting purposes. These are instruments that are not directly traded in active markets and are often relatively complex, opaque and illiquid. There is a huge volume of L2 and L3 instruments in the balance sheets of SSM banks (around €6.8 trillion worth, considering both assets and liabilities). We argue that the complexity and opacity of these instruments create substantial room for discretionary accounting and prudential choices by financial intermediaries, which have incentives to use this discretion to their advantage. The current regulatory reporting standard is not sufficient to make a comprehensive assessment of the overall risks stemming from L2 and L3 instruments. We highlight that these instruments share some characteristics with NPLs (illiquidity, opacity), and argue that the risk they pose might also be comparable.
    Keywords: fair value accounting, level 2 instruments, L3 instruments, prudential regulation
    JEL: G21 G28 G32 M41
    Date: 2017–12
  2. By: Dreher, Sandra; Eichfelder, Sebastian; Noth, Felix
    Abstract: We analyse the relevance of losses, accounting information on tax loss carryforwards, and deferred taxes for the prediction of earnings and cash flows up to four years ahead. We use a unique hand-collected panel of German listed firms encompassing detailed information on tax loss carryforwards and deferred taxes from the tax footnote. Our out-of-sample predictions show that considering accounting information on tax loss carryforwards and deferred taxes does not enhance the accuracy of performance forecasts and can even worsen performance predictions. We find that common forecasting approaches that treat positive and negative performances equally or that use a dummy variable for negative performance can lead to biased performance forecasts, and we provide a simple empirical specification to account for that issue.
    Keywords: performance forecast,in-sample prediction,out-of-sample prediction,loss persistence,deferred taxes,tax loss carryforwards
    JEL: C53 M40 M41
    Date: 2017
  3. By: Adam M. Lavecchia (Department of Economics, University of Ottawa, Ottawa, ON)
    Abstract: This paper studies the savings effect of Canadian Tax-Free Savings Account (TFSAs) using microdata from the 2012 Survey of Financial Security. TFSA contributions are made with after-tax income, balances accumulate tax-free and withdrawals do not increase taxable income. The paper makes two important contributions. First, I characterize the profiles of TFSA owners, documenting new patterns in account ownership and balances. The age profile of TFSA ownership is U-shaped and balances are positively correlated with educational attainment and saving in other retirement accounts. Second, I develop a new instrumental variables strategy to estimate whether TFSA balances crowd-out saving in taxable financial assets and saving in traditional tax-deferred plans. The results suggest that TFSA balances crowd-out saving in taxable fixed income assets and have no statistically significant effect on balances in tax-deferred accounts.
    Keywords: Tax-preferred savings accounts; pre-paid versus post-paid; Tax-Free Savings Account;crowd-out
    JEL: H2 H31
    Date: 2018
  4. By: Alan Krause
    Abstract: The aim of this paper is to examine the setting of income tax policy from the perspective faced by governments. The government takes the current income tax schedule as the starting point, and seeks to implement a small change in the tax schedule that is both feasible and desirable. If no such change is possible, the current income tax schedule is said to be locally optimal, because it cannot be improved upon via a small reform. We assume that the current income tax schedule is piecewise linear with three tax brackets, which approximates most real-world income tax schedules. The characteristics of locally-optimal piecewise linear income tax schedules are then derived, with particular attention paid to the extent to which they depart from linearity.
    Keywords: piecewise linear income taxation, tax reform
    JEL: H21 H24
    Date: 2018–02
  5. By: Tibor Hanappi
    Abstract: Loss carryover provisions are an essential part of corporate tax systems. Economic theory suggests that perfect intertemporal loss offsets are a necessary condition for the neutrality of corporate taxation across investment projects with different risk profiles. However, in practice the tax treatment of losses does often not reach this standard, e.g., due to lack of inflation indexation or tax offset restrictions. Using detailed country-level information, this paper presents two tax policy indices capturing the effects of carryover provisions on tax symmetry and stabilisation across a total of 34 OECD and non-OECD countries. The tax symmetry index captures the effectiveness of carryover provisions, including carry-forwards and carry-backs, relative to full symmetry, while the stabilisation index captures the proportion of an adverse revenue shock on loss-making firms which is absorbed by the corporate tax system. The results show that only 18 countries provide unlimited carry-forwards and most countries do not index tax losses to inflation; only 9 countries provide carry-backs while 8 countries limit the amount of tax losses which can be offset in any given year. Cross-country comparison of the two indices suggests that these restrictions have significant impacts on tax symmetry and stabilisation. Perfect tax symmetry is not achieved by the majority of the included corporate tax systems thus implying possible tax-induced distortions towards less risky projects.
    JEL: G11 H21 H25
    Date: 2018–02–22

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