Executive bonus plans and accounting trade-offs: the case of the oil and gas industry, 1985-86

Article Abstract:

A study is conducted to examine the issues of accounting changes and asset write-downs as a joint decision in financial reporting. It focuses on the rush of accounting changes and write-downs in the oil and gas industry in 1985 and 1986. During this two-year period, when oil prices were falling dramatically, oil and gas firms scurried to shift from the full cost (FC) accounting method to the successful efforts (SE) method. A sample of companies that made accounting changes and a sample of those that took a write-down are compared to study the trade-off between asset write-down and the FC-to-SE switch. Results show that more write-down firms reported a loss than switch firms, that the bonuses of the executives of write-down firms protected them from the effects of the write-down, and that the switch firms were more diffused in oil and gas exploration than the write-down group.

Research, Accounting and auditing, Accounting, Petroleum industry, Gas industry

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A perspective on accounting-based covenant violations

Article Abstract:

Analysis of technical defaults leads to an illumination of the lending process. Examination shows that technical default usually results from a weakening of corporate performance and that it always involves affirmative covenants. Moreover, it is shown that a large percentage of the defaults is related to the breach of multiple restrictions and that default can be expected to occur more in private debt issues than public debt issues. For lenders faced with technical default, the choice of action range from awarding a permanent waiver without modifying the contract to speeding up debt maturity and compelling the borrower to find financing somewhere else. For borrowers, possible response to technical default may necessitate adjustment to accounting, financing, payout and investment policies. Recommendations for further research on the subject are provided.

Default (Finance)

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Creditors' decisions to waive violations of accounting-based debt covenants

Article Abstract:

The determinants of the waiver decisions of creditors were identified in order to assess the response of these creditors to accounting debt covenant violations. A total of 128 firms that violated accounting-based debt covenants were studied. It was discovered that a waiver is more likely to be accorded to a firm with a lesser estimated probability of bankruptcy and a lower leverage ratio. Moreover, secured or small debt issues have greater chances of being granted violation waivers than unsecured or larger-sized issues. These findings can be of value to the three principal users of accounting information, namely, commercial lending officers, managers of violating firms and auditors.

Waiver (Civil procedure)

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