Jilnaught Wong

Economic incentives for the voluntary disclosure of current cost financial statements

Abstract This study examines why some New Zealand listed companies voluntarily present current cost financial statements. The results suggest that tax and political cost considerations are influential in the voluntary disclosure of current cost information.

Political costs and an intraperiod accounting choice for export tax credits

Abstract This study examines the effects of political and debt contracting costs on an intraperiod accounting choice. Export tax credits that New Zealand companies receive may be credited to sales ot to income tax expense. Compared to the credit to sales method, the tax reduction method reduces a companys reported tax rate and interest coverage ratio, both of which could have adverse economic consequences. The results indicate the credit to sales method is preferred by large companies that attract political scrutiny because of their low tax rates. The level of a firms interest coverage is also related to that accounting choice.

Efficient contracting and accounting

This paper examines the role of accounting in an efficient contracting perspective of the firm. The firm is an alternative to the market when the costs of using the market become excessive. When a firm replaces the market, authority substitutes for the price mechanism in determining how decisions are made. This paper examines accountings role in controlling the firm to ensure resources are put to their highest-value use. Accounting, together with employment contracts, compensation arrangements, debt contracts, internal and external auditors, and the board of directors including its audit and compensation committees comprise a package of mechanisms that have evolved to govern the firm. These institutional devices become the firms efficient contracting technology. As accounting is part of that contracting technology, the accounting controls and systems that evolve and get implemented are efficient and the accounting methods that are used in calculating the numbers that form part of the firms contractual arrangements are, likewise, efficient. Copyright (c) AFAANZ, 2003.

Voluntary disclosure of operating income

This study investigates whether New Zealand firms’ voluntary disclosure of operating income, which is also known as earnings before interest and tax, in the income statement is related to the investment opportunity set. New Zealand provides an ideal setting to examine this because New Zealand generally accepted accounting principles do not require the disclosure of operating income as an intermediate income number in arriving at net income (earnings) in the income statement. We hypothesize and find evidence that firms with high assets-in-place and high leverage are more likely to voluntarily disclose operating income/earnings before interest and tax. However, the assets-in-place finding is sensitive to alternative measures of the investment opportunity set.

Comprehensive versus partial deferred tax liabilities and equity market values

This study investigates the value relevance of the deferred tax liability recognized using comprehensive versus partial allocation. Our research examines New Zealand firms who, prior to the introduction of International Financial Reporting Standards, were free to choose between comprehensive and partial allocation. We test the joint hypothesis that the partial, as opposed to comprehensive, deferred tax liability is relevant for equity valuation and is sufficiently reliable to be reflected in investors’ valuation assessments. Our results are consistent with this prediction.

The Impact of Not Amortizing Intangible Assets on Valuation Multiples

Intangible assets comprise goodwill and identifiable intangible assets with finite and indefinite lives. Current New Zealand GAAP amortizes intangible assets on a systematic basis over their useful lives, with the proviso that the amortization period for goodwill cannot exceed 20 years. International Financial Reporting Standards (IFRS) do not permit the periodic amortization of goodwill and identifiable intangible assets with indefinite lives. Instead, these intangibles are subject to a periodic impairment test with any impairment recognised in profit or loss. In the absence of an impairment loss, the IFRS rule would increase earnings before interest and tax (EBIT) and earnings (E), but this impact should not affect the value of the enterprise (EV) and the value of the firm’s equity (P). Hence, valuation heuristics for EV/EBIT (enterprise value to EBIT) and PE (price to earnings) multiples, which are commonly used for valuations and which have evolved under the amortization rule, need to be revised downw...