ABSTRACT
Many have argued that financial statements created under an accounting model that measures financial instruments at fair value would not fairly represent a bank's business model. In this study we examine whether financial statements using fair values for financial instruments better describe banks' credit risk than less fair-value-based financial statements. Specifically, we assess the extent to which various leverage ratios, which are calculated using financial instruments measured along a fair value continuum, are associated with various measures of credit risk. Our leverage ratios include financial instruments measured at (1) fair value; (2) U.S. GAAP mixed-attribute values; and (3) Tier 1 regulatory capital values. The credit risk measures we consider are bond yield spreads and future bank failure. We find that leverage measured using the fair values of financial instruments explains significantly more variation in bond yield spreads and bank failure than the other less fair-value-based leverage ratios in both univariate and multivariate analyses. We also find that the fair value of loans and deposits appear to be the primary sources of incremental explanatory power.
Keywords : fair value accounting, credit risk, banking industry
Source : Elizabeth Blankespoor, Thomas J. Linsmeier, Kathy R. Petroni, and Catherine Shakespeare (2013) Fair Value Accounting for Financial Instruments: Does It Improve the Association between Bank Leverage and Credit Risk?. The Accounting Review: July 2013, Vol. 88, No. 4, pp. 1143-1177.
ABSTRACT
We provide evidence that disclosed items are not processed differently from recognized items when the disclosures are salient, not based on management estimates, and amenable to simple techniques for imputing as-if recognized amounts. For a sample of firms with both capital and operating leases, we find that as-if recognized amounts for leases are generally reliable and that both recognized lease obligations and disclosed lease obligations are associated with proxies for costs of debt and equity. The magnitudes of these associations are not statistically different across accounting treatments, suggesting that market participants impound as-if recognized operating lease obligations and recognized capital lease obligations similarly into costs of capital. Conditioning on the reliability of as-if recognized operating lease obligations, we find a difference in the association between recognized versus as-if recognized lease obligations and proxies for the costs of debt and equity when the operating lease disclosures are less reliable.
Keywords : recognition vs. disclosure, reliability, leases, costs of capital
Source : Brian Bratten, Preeti Choudhary, and Katherine Schipper (2013) Evidence that Market Participants Assess Recognized and Disclosed Items Similarly when Reliability is Not an Issue. The Accounting Review: July 2013, Vol. 88, No. 4, pp. 1179-1210.
ABSTRACT
This study empirically examines whether deferred taxes provide incremental information about future tax payments and explores whether the relationship is affected by whether and when the deferred tax accounts reverse. The analysis provides evidence that while deferred taxes do provide incremental information about future tax payments, the magnitude of the information is small. Further, consistent with theoretical predictions (Guenther and Sansing 2000, 2004; Dotan 2003) the analysis demonstrates there is an asymmetrical association between deferred taxes and future tax payments. For instance, deferred taxes associated with temporary differences that are included in GAAP income prior to taxable income are associated with future tax payments. In contrast, deferred taxes associated with temporary differences that are included in GAAP income after taxable income are not associated with future tax payments. Finally, the analysis provides evidence that growth in the deferred tax balances does not defer future tax payments.
Keywords : accounting for income taxes, deferred tax assets and liabilities, deferred taxes, ASC 740, SFAS 109
Source : Rick C. Laux (2013) The Association between Deferred Tax Assets and Liabilities and Future Tax Payments. The Accounting Review: July 2013, Vol. 88, No. 4, pp. 1357-1383.
