Operating lease accounting and the market's assessment of equity risk

Article Abstract:

A study is conducted to establish whether or not investors classify operating leases as property rights. Ascertaining the perception of investors of a lease is important because this determines if the accounting treatment of the lease should be footnote disclosure or balance sheet recognition. Bowman's (1979) model is used to test whether the treatment of an operating lease as an asset and a liability is reflected by equity risk. This model links equity risk to debt-equity ratio and the return on assets, two measures usually adjusted by investors to add operating leases. Findings support the proposition that investors perceive operating leases as property rights. Equity risk is found to be significantly related to the debt-equity adjustment for operating leases. The results also show that the relationship between equity risk and asset risk is influenced by return on assets adjustments.

Risk assessment, Leases

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The use of financial accounting choice to support aggressive tax positions: public and private firms

Article Abstract:

A survey of corporate financial managers of large and middle-sized private and public manufacturing companies was undertaken to compare their financial accounting choices after aggressive tax positions were presumably made. In cases when an aggressive tax position was adopted, management is advised to opt for financial methods that shall conform to the tax choice to make it more probable for the IRS to allow the tax treatment. The public firm respondents, which were largely viewed by their managers as more capable of handling their debt obligations than private companies, were more susceptible to IRS audit due to their higher tax payments. Results showed that managers try to reap tax savings by conforming to aggressive tax positions. However, public-firm managers are found to be less likely to choose conformity than managers of private firms.

Tax planning, Private companies, Surveys, Chief financial officers, Tax policy, Government business enterprises, Public enterprises

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Disclosure quality in governmental financial reports: an assessment of the appropriateness of a compound measure

Article Abstract:

The determinants of disclosure quality in municipal agencies' annual reports is studied in terms of both the importance of the data disclosed and the extent of the disclosure itself. This single measure of both importance and extent is known as the 'compound measure.' The study surveyed 200 municipal bond analysts as to the significance of 27 disclosure items. Seventy-seven useful responses indicated that: the compound measure of disclosure items correlated with the previously defined simple measure variables, and the same independent variables affect dependent variables relative to disclosure items' significance, regardless of whether simple or compound disclosure measures are used.

Reports, Auditing, Cities and towns, Financial statements, Disclosure statements (Accounting), Administrative agencies, Government agencies, Local finance

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