Impairment or amortization of goodwill? An analysis of CFO perceptions of goodwill accounting

Given the ongoing controversy around the accounting treatment of goodwill and the search by the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB) for improvements to goodwill accounting, this study surveys a global sample of 352 chief financial officers (CFOs) to understand their perceptions of adopting a goodwill impairment-only approach compared to an amortization model. More than half of the respondents agree that alternative accounting treatments of impairment testing might provide more useful information. However, almost two thirds still prefer goodwill impairment testing to the amortization process. Theoretically, the study shows that the impairment-only model preference is associated with characteristics on an individual, firm and country level. The results indicate that more expert CFOs and overall CFO perceptions of firms’ economic conditions and the role of external auditors affect preference for the goodwill accounting model. Further, there is evidence that dominant ownership structures and accounting culture affect CFO preferences. The study investigates several areas in which regulators and standard setters can intervene, thereby contributing to the debate on whether to reintroduce the amortization of goodwill.     

A cost model for deferred state life test plans with replacement

This paper presents a cost model for the deferred state life test plan, which is one of the lot-by-lot acceptance sampling plans by attributes. In most sampling plans, the decision to accept or reject a submitted lot depends only on the sampling test results of the lot concerned; other information will not be considered. Deferred state life test plan is a sampling plan which uses information about subsequent lots for making decisions to accept or reject the current lot. The objective of this paper is to evaluate the total test cost of using the deferred state life test plan to see whether the use of this life test plan can reduce the total cost of the sampling test. In order to calculate the expected total test cost of the deferred state life test plan, a cost model is developed for the deferred state life test plan with replacement. Also, a cost comparison is made between a deferred state life test plan and a comparable military standard sampling plan which offers the same level of producer's and consumer's protection. The results show that the deferred state life test plan consistently reduces the overall cost of sampling tests over a variety of test conditions.     

JEEA‐FBBVA Lecture 2012: USE AND ABUSE OF AUTHORITY: A BEHAVIORAL FOUNDATION OF THE EMPLOYMENT RELATION

Employment contracts give a principal the authority to decide flexibly which task his agent should execute. However, there is a tradeoff, first pointed out by Simon (1951, Econometrica, 19, 293–302), between flexibility and employer moral hazard. An employment contract allows the principal to adjust the task quickly to the realization of the state of the world, but he may also abuse this flexibility to exploit the agent. We capture this tradeoff in an experimental design and show that principals exhibit a strong preference for the employment contract. However, selfish principals exploit agents in one‐shot interactions, inducing the latter to resist entering into employment contracts. This resistance to employment contracts vanishes if fairness preferences in combination with reputation opportunities keep principals from abusing their power, leading to the widespread, endogenous formation of efficient long‐run employment relations. Our results inform the theory of the firm by showing how behavioral forces shape an important transaction cost of integration—the abuse of authority—and by providing an empirical basis for assessing differences between the Marxian and the Coasian view of the firm, as well as Alchian and Demsetz's (1972, American Economic Review, 62, 777–795) critique of the Coasian approach.     

THE RELEVANCE OF STATE-UNIVERSITY RETIREMENT PLANS IN JOB SELECTION

Documents provided newly hired faculty members were requested from the major statesupported university in each of the fifty states. Those documents revealed two basic types of retirement plans: (1) state-controlled, defined-benefit plans in which retirement benefits are a function of a formula rather than the contributions by the employee and employer, if any; and (2) third-party, defined-contribution, input-based plans in which the funds are controlled by a third party and the benefits depend upon the amount of contributions and the return earned by them. The analysis focused upon the defined-benefit formula plans and a standard was developed to facilitate analysis. The simulations undertaken reveal significant, decision-relevant biases—especially against faculty who elect to change employers as infrequently as once every ten years when different pension plans are involved! The risks attendant to each type of plan and possible career strategies are discussed.     

Equitable Taxation and the Provision of Health Insurance Subsidies

Current U.S. income tax laws allow many taxpayers to exclude from taxable income part or all of the cost of acquiring health insurance through an employer‐sponsored benefit plan. This favorable tax treatment generally applies regardless of whether the employer or employee actually pays the health insurance premiums. We describe the effects of this tax policy on the U.S. tax system's horizontal and vertical equity. We also explain how taxpayers covered by employer‐sponsored plans are significantly subsidized by the government in acquiring health insurance, whereas taxpayers who acquire health insurance by other means or who are not covered by health insurance at all receive no such government assistance. We conclude that any prospective health‐care policy initiatives, including modifications to the 2010 health‐care reforms, should contemplate both the horizontal and vertical equity of the tax treatment of health insurance premiums.     

A generic accounting model to support operations management decisions

Information systems are generally unable to generate information about the financial consequences of operations management decisions. This is because the procedures for determining the relevant accounting information for decision support are not formalised in ways that can be implemented in information systems. This paper describes a formalised procedure, which is based on the following theoretical propositions: (i) cost behaviour is described on the basis of a company's contracts for purchasing and selling resources, and (ii) hierarchical relationships between decisions are recognised, because some decisions have to be made earlier than others. Earlier decisions determine the feasible alternatives for later decisions (e.g. through constraints in available production capacity or components), and the plans that supported the earlier decisions serve as instructions for later decisions. The procedure can be implemented in information systems to provide accounting information in case later decisions deviate from these instruc tions (within the limits of the real-world constraints) because new information becomes available.     

Overstated Quarterly Earnings and Analysts' Earnings Forecast Revisions*

A primary purpose of accounting is to provide information for decision makers. Accounting misstatements may have a detrimental effect on decision making. The Securities and Exchange Commission (SEC) identifies earnings overstatements as being particularly troublesome to users, as indicated by SEC Accounting and Auditing Enforcement Releases' emphasis on earnings' overstatement errors. This research investigates how security analysts' forecast revisions are affected by accounting earnings overstatement errors, which become known only after the analysts released their revised annual earnings forecasts. The paper investigates the clarifying role that additional information plays in analysts' revisions. The results show that analysts draw significantly different conclusions from earnings containing (unknown) overstatement errors than from accurately reported earnings. In essence, the analysts identify some of the overstatement, at least on average, by making an adjustment that effectively ignores 21 percent of the overstatement error.     

Will the Dismantlement of Early Retirement Schemes Increase Older Unemployment? A Competing‐risk Analysis for Belgium

On the basis of administrative data for Belgium, we estimate a competing‐risk model on transitions from employees aged 50 and older into unemployment, early and old‐age retirement while accounting for forward‐looking work disincentives. Our estimates are used to simulate a cut in early retirement benefits. Although this would enhance the financial sustainability of the social security system, our simulations predict a strong increase in unemployment among older blue‐collar workers in traditional industries. Members of private saving plans or occupational pension schemes and highly educated workers are predicted to move into the old‐age pension system.     

A Contingent Claims Model of Corporate Pension Obligations*

This study develops a contingent claims model for valuing the implicit market value of the pension claim associated with defined benefit pension plans. In this model, the firm issues pension, debt, and equity claims. These claims have joint access to two underlying portfolios: corporate and pension. The changes in the market values of these two portfolios are assumed to follow a joint lognormal diffusion process. By imposing terminal boundary conditions implied by Employment Retirement Income Security Act (ERISA) rules and the pension insurance provisions of the Pension Benefit Guaranty Corporation (PBGC) on the partial differential equation, a solution for the pension value is obtained. This quasi-market measure of the value of the pension claim may be represented by a portfolio consisting of four components: (1) a risk-free discount bond with face value equal to promised pension benefits; (2) a short put on pension assets with exercise price equal to pension benefits; (3) a long call on 30 percent of corporate assets with exercise price equal to the face value of secured corporate debt; and (4) a short call on 30 percent of corporate assets with a stochastic exercise price which depends on the terminal value of the pension fund. A numerical example using 1992 and 1993 financial statement data from six major U.S. corporations is provided. This example illustrates the usefulness of the model's prediction and the potential effect of theoretical pension values on corporate debt-equity ratios.     

Corporate risk management and pension investment policy

In this paper, we study whether firms manage their pension risk exposures within an integrated corporate risk management framework or they manage their pension and firm risk exposures independently following the adoption of fair value pension reporting regulation (IAS 19). Controlling for known factors affecting the risk-taking in pension plan investments, we document a robust negative association both at the cross-section and over time between pension risk and firm systematic risk and operating asset risk during the post-IAS 19 adoption period. The findings suggest that firms manage pension risk as an integral part of firm risk, consistent with a coordinated risk management explanation. Overall, our evidence highlights that pension investment strategy is a dynamic process that is ultimately determined by sponsoring firms' strategic corporate risk management considerations and the important role that changing pension reporting regulation plays in shaping these dynamics. Our conclusions have potential wider implications for ongoing reforms in financial reporting and disclosure policy settings.     

Managerial Use of Debt to Fund Municipal Government Risks*

In recent years, managers of municipalities have been forced to reevaluate the cost-effectiveness of their risk management strategy. In many cases, individual or groups of municipalities (pools) finance a self-insurance plan through the issuance of debt. However, no decision-making methodology for cost-effectively structuring the debt issue presently exists. Utilizing a math programming model, we examine a self-insurance alternative to conventional insurance that uses tax-exempt debt supplemented by taxable borrowing to finance a municipality's or pool's liability exposure. We implement our optimization model with actuarial and financial data from an intergovernmental risk pool (IRP) in the state of California, and simulate the effect of the trade-offs important to sound managerial decision making. We find that significant savings are realized by using a self-insurance plan rather than purchasing conventional insurance. We also find that managerial goals and risk preferences impact the decision when revenue flows are insufficient by themselves to reasonably fund expected losses.     

Selecting a Portfolio of Technologies: An Application of Decision Analysis

The Department of Energy is faced with the critical and complex decision of selecting technologies for waste site remediation. This research focuses on developing a decision support tool which assists the decision maker to find an optimal portfolio. A portfolio consists of selecting the appropriate processes for a remediation site and, subsequently, selecting a technology for each process so that the decision maker's objectives are achieved. The measures supporting the objectives are risk, life-cycle cost, and time required for remediation. The model uses exponential attribute utility functions with an additive objective function. The model provides the decision maker with estimates of the cost and time distributions, and their associated utility. Cumulative frequency distributions illustrate the dominance of technology choices and the variance in the results. The model permits sensitivity analysis in the form of rainbow and tornado diagrams to display the effects of changes in the values of the input variables. Overall, the model provides a generic technology selection tool that can be used to make better informed decisions and may be easily manipulated to reflect changes in the remediation process.     

Fleet Replacement,Technology Choice,and the Option to Breach a Leasing Contract

We analyze the option to breach a leasing contract when replacing a fleet of ICVs (internal combustion engine vehicles) and EVs (electric vehicles) subject to cost uncertainty. We derive the optimal policy for technology choice and breaching ICV contracts. The decision to breach is shown to offer both cost savings resulting from reduced ICV operating costs and preemptive acquisition, but incurs additional costs arising from the need to compensate for breached vehicles and in the form of opportunity costs. We also demonstrate that the effects of breaching a leasing contract have a ripple effect across the decision horizon, thus amplifying the impact of a single breach. A numerical study based on data from La Poste, the French postal service, shows that breaching a leasing contract in this context offers measurable cost benefits.     

The Impact of Ethical Tools on Aggressiveness in Financial Reporting

The proposed adoption of International Financial Reporting Standards (IFRS) in the United States has ignited a debate as to whether the principles‐based nature of these standards better serves the interests of investors. While it is argued that these principled‐based standards will encourage more transparent financial reporting than the current rules‐based U.S. standards, critics argue that IFRS will invite more aggressive financial reporting through the liberal exercising of professional judgment. This empirical study aims to understand what individual and organizational factors may affect aggressiveness when making accounting judgments. In particular, we examine the influence that prior ethics training, codes of ethics and an individual's predominant moral reasoning schema have on adherence to company policy in an accounting‐related (depreciation) judgment. Results of the study show that respondents with prior ethics training are more likely to adhere to company accounting policy than those who have not had formal ethics education. Respondents presented with a company ethics code also were less aggressive in their accounting judgments than those who were not presented with a code prior to reading the scenario. Finally, decision aggressiveness was moderated by individuals who used conventional moral reasoning schemas.     

Coordinated Contract Decisions in a Make‐to‐Order Manufacturing Supply Chain: A Stochastic Programming Approach

One of the important objectives of supply chain S&OP (Sales and Operations Planning) is the profitable alignment of customer demand with supply chain capabilities through the coordinated planning of sales, production, distribution, and procurement. In the make‐to‐order manufacturing context considered in this paper, sales plans cover both contract and spot sales, and procurement plans require the selection of supplier contracts. S&OP decisions also involve the allocation of capacity to support sales plans. This article studies the coordinated contract selection and capacity allocation problem, in a three‐tier manufacturing supply chain, with the objective to maximize the manufacturer's profitability. Using a modeling approach based on stochastic programming with recourse, we show how these S&OP decisions can be made taking into account economic, market, supply, and system uncertainties. The research is based on a real business case in the Oriented Strand Board (OSB) industry. The computational results show that the proposed approach provides realistic and robust solutions. For the case considered, the planning method elaborated yields significant performance improvements over the solutions obtained from the mixed integer programming model previously suggested for S&OP.     

Get more for less? Experimental evidence on repeated decision making under non-monotone incentives

Summary  This paper presents experimental results of a benchmark study to analyze the incentive effects of non-monotone pay schemes. An incentive compatible contract that does not award the highest pay to the highest possible output combination was tested in a neutral, framing, and two framing-with-principal settings, respectively. The results confirm the model in a statistically significant way. Principals select the non-monotone contract over a monotone contract that would give them ex ante a lower expected surplus. Agents predominantly select the income-maximizing strategy, i.e. select the effort level that should be implemented by the contract. Given the widespread view that non-monotone output-contingent incentives are not plausible labor contracts, it seems worthwile to extend the experimental study to include aspects which are common in labor relations, such as an option to quit for the employee and repeated interaction between employer and employee. This would help answer the question whether theoretically optimal non-monotone contracts may be used as labor contracts. The author acknowledges insightful comments by Jeannette Brosig, Alexis Kunz, Thomas Riechmann, Dirk Sliwka, Joachim Weimann and two anonymous referees. Financial support by MaxLab is gratefully acknowledged. Any remaining errors are my own.     

DISTANCE TO RETIREMENT AND OLDER WORKERS‘ EMPLOYMENT: THE CASE FOR DELAYING THE RETIREMENT AGE

This paper presents empirical evidence and a theoretical foundation in favor of the view that the retirement age decision affects older workers' employment prior to retirement. To the extent that there are search frictions on the labor market, the return on jobs is determined by their expected duration: The time to retirement is then key to understanding older workers' employment. Countries with a retirement age of 60 are indeed characterized by lower employment rates for workers aged 55–59. Based on the French Labor Force Survey, we show that the likelihood of employment is significantly affected by the distance to retirement, in addition to age and other relevant variables. We then extend McCall's job search model by explicitly integrating life‐cycle features with the retirement decision. Using simulations, we show that the distance effect in interaction with the generosity of unemployment benefits and the depressed demand for older workers explains the low rate of employment just before the eligibility age for the Social Security pension. Finally, we show that implementing actuarially fair schemes not only extends the retirement age, but also encourages a more intensive job search by older unemployed workers. (JEL: J22, J26, H55)     

Does accounting regulation enhance corporate governance? Evidence from the disclosure of share-based remuneration

Accounting for stock options and share-based remuneration is a controversial issue. The purpose of this study is to explore the impact of the mandatory adoption of IFRS 2 on accounting for share-based remuneration by Italian listed companies. The requirements under this standard could have relevant implications for corporate governance as IFRS 2 is expected to reduce the information asymmetry that may exist between corporate insiders and outsiders regarding such remuneration. Empirical evidence confirms that overall disclosure in annual reports concerning the costs of remuneration plans has increased following the adoption of IFRS 2, although some cases of lack of disclosure have also been found. We find that this change in accounting regulation has contributed towards revealing the ‘true’ cost of share-based remuneration to minority shareholders and other investors, together with some evidence of creative accounting surrounding the substance over form principle.     

The Italian Pension System: Development and Effects on Income Distribution and Poverty

Abstract. The study defines the role that supplementary funded pension plans could play in the Italian pension system. It also outlines the redistributive effects of pension benefits drawing on a survey of households' income. Finally it provides a brief assessment of the main problems of the Italian pension system.     

产品召回供应链中线性保险合约与订货决策

考虑一个由单供应商和单制造商组成的二级供应链,在不确定市场需求情形下考虑产品召回,站在制造商角度研究供应链线性保险合约下的最优订货决策以及最优线性保险合约决策。研究表明,最优的订货决策与产品召回概率以及线性保险系数相关,存在唯一的最优订货量来最大化制造商的利润。对于密度函数倒数的导数较大的一般需求分布函数,最优的线性保险系数与线性保险合约的固定费用以及产品召回概率有关。当产品召回概率和线性保险合约的固定费用均较小时或者产品召回概率较大但线性保险合约的固定费用适中时,制造商通过选择线性保险合约可以改善自己的利润。