Accounting changes and earnings predictability

Article Abstract:

Prior research has documented a correlation between the forecast errors of securities analysts and the effect of changes in accounting methods on current year earnings. New research utilizing a sample of diverse accounting changes analyzed and compared bias and dispersion of forecasts in non-change and change years. The research considered voluntary and involuntary changes, prior disclosure of information of the change, and the nature of forecast revisions in the year of the change. Research reveals that forecast errors and forecast dispersion is greater in years of accounting changes. Analysts do not revise fully their forecasts for the affect of accounting method changes on current year earnings. Research indicates that the observation that the motivation behind management's adoption of accounting changes is to smooth income is valid.

Securities, Forecasting

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The evaluation by the financial markets of changes in bank loan loss reserve levels

Article Abstract:

This article evaluates the information content of announcements in 1987 by Citicorp and other banks regarding loan loss reserve increases, as well as the succeeding write-off announcement by Bank of Boston Corp. Announcements of increases in provisions of loan loss resulted in pronounced increases in stock-prices for banks with the most exposure to loans involving lesser developed countries (LDCs). On the other hand, Bank of Boston Corp.'s write-off announcement resulted in the greatest decreases in stock prices for these banks with the most exposure to LDC debt and the largest reserves. The weak and uncertain nature of systematic information transfer systems is confirmed by the findings on bank loan disclosures in relation to financial announcements.

Commercial Banks, Banking industry, Economic aspects, Developing countries, Citicorp, Foreign loans, Loan loss reserves, BankBoston Corp.

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Safe harbor or muddy waters

Article Abstract:

The 'safe harbor' provisions of the Economic Recovery Tax Act of 1981 permitted companies to sell unneeded tax depreciation deductions to other firms. The Financial Accounting Standards Board (FASB) did not implement reporting or disclosure requirements for firms participating in safe harbor transactions during the provision's effective life. The lack of reporting and disclosure requirements led to different policies being followed, and affected the comparability and interpretability of financial statements from firms involved in safe harbor leasing. Examples of problems the FASB might face in analyzing changes under the Tax Reform Act of 1986 are provided.

Analysis, Usage, Laws, regulations and rules, Safe harbor (Taxation), Financial Accounting Standards Board, Tax credits, Financial disclosure

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