Ha3011 Afa T1 2015

Ha3011 Afa T1 2015

Read the following article and adopting a Positive Accounting Theory perspective, consider the following issues: 1. If a new accounting standard impacts on profits, should this impact on the value of the firm, and if so, why? 2. Will the imposition of a particular accounting method have implications for the efficiency of the organization?

Foster’s: less goodwill, higher earnings The challenges facing investors seeking a true picture of a company’s earnings during the impending profit reporting season were underlined again on Friday when Foster’s flagged it would report a $1.2 billion reduction in net assets under new accounting standards. The transition to international financial reporting standards (IFRS) means Foster’s net assets will fall from $4.6 billion to $3.37 billion based on its last reported balance sheet, mainly as a result of the internally generated goodwill on brand names not being recognized. The other major contributor to the reduction is the requirement to allow for deferred tax liabilities based on the difference between the carrying values of assets and their cost base.

Despite skepticism about the likely success of Foster’s recent $3 billion acquisition of winemaker Southcorp and Foster’s ability to extract sufficient merger synergies, the changes to the reported accounts do not relate to any issues with that acquisition. The brewing and winemaking group told analysts the balance sheet adjustments wouldn’t affect its cash flow or ability to pay dividends. But reported profits will be higher than they otherwise would be because of the removal of goodwill amortization charges. Under the standards, goodwill is instead subject to an annual “impairment test”, with the elimination of amortization expenses boosting reported profits. If the new standards were applied to Foster’s half-year accounts to December 31, 2004, the company would have made a net profit of $783.2 million versus the $757 million reported.

The reduced asset base reported by companies such as Foster’s will also mean they will report more favorable returns on these written-down asset values. The transition to new standards has raised concerns that companies will announce potentially misleading profit numbers and will be reluctant to predict future profits because of the uncertainty around some aspects of the standards. There is also concern about how credit ratings agencies will react to such wild swings in balance sheet values. But the adoption of the standards will make it easier for investment analysts to compare companies to their global peers. In Foster’s case, this means investment analysts will be able to better discern whether it is outperforming or underperforming global wine and brewing peers such as Diageo and Pernod Ricard.

ABN Amro Asset Management’s Mark Nathan said: “It differs by company and industry. There will be some concern over whether the new standard result in a less realistic portrayal of what’s happening than the current Australian standards, by and large its an improvement.” However, Goldman Sachs JBWere noted that given the shortened reporting period, the new standards “would only add to the data overload during the last two to three weeks of August.” Foster’s closed 2 cents higher at $5.46.

The question also discusses the impact of using vouchers in education, and the importance of considering biases in causal effect estimation, as well as evaluating programs like the UEP at Brown University through different methods, including regression-discontinuity design, and the effects of funding programs like Head Start on participation and spending.

Paper For Above instruction

Introduction

Accounting standards significantly influence how financial information is reported and interpreted, and their impact extends beyond mere numbers to overall firm valuation and organizational efficiency. From a Positive Accounting Theory (PAT) perspective, understanding whether changes in accounting standards affect firm value and organizational performance is crucial. This paper explores these issues by analyzing the implications of new accounting standards on firm valuation and organizational efficiency, with reference to the case of Foster’s, and discusses related methodological considerations in evaluating policy impacts and program effectiveness.

Impact of Accounting Standards on Firm Value

Whether a new accounting standard impacts the value of a firm hinges primarily on how it influences investor perceptions and decision-making. According to PAT, managers tend to adopt policies that align with shareholders’ interests, often influenced by how standards sway reported earnings and asset valuations (Watts & Zimmerman, 1986). When a standard affects profits—such as by altering goodwill recognition or amortization—it can change valuation metrics like Price-to-Earnings (P/E) ratios or enterprise value, which are central to investor decision-making (Dechow & Dichev, 2002). For example, the adoption of IFRS led Foster’s to write down goodwill, causing a significant reduction in reported net assets. This decrease potentially diminished perceived firm value, yet the removal of amortization increased reported profits, possibly misleading investors who focus on earnings figures (Barth et al., 2008).

From a theoretical standpoint, changes in accounting standards can influence firm value both directly and indirectly. Directly, through the alteration of asset and liability valuations that form the basis of equity calculations. Indirectly, through impacts on managerial incentives and stakeholder perceptions. When standards cause firms to report higher profits due to less expense recognition—such as by impairing goodwill instead of amortizing it—investors may perceive improved performance, though the underlying economic value may have declined (Healy & Palepu, 2001). Therefore, the valuation impact is context-dependent, influenced by market interpretation and the credibility of reported financials.

Implications for Organizational Efficiency

The imposition of particular accounting methods has profound implications for organizational efficiency. Efficient organizations aim to maximize value while minimizing resource wastage; accounting standards that distort or obscure economic realities can lead to resource misallocation (Myers, 2001). For example, when goodwill impairment testing replaces amortization, managers might lack clear incentives to evaluate asset quality consistently, potentially leading to overvaluation and reduced operational efficiency (Hirst & Hopkins, 1998). Conversely, standardization can improve efficiency by providing clearer information for decision-making and benchmarking.

Moreover, compliance and reporting burdens vary with standards, affecting organizational responsiveness. When standards impose complex valuation requirements, organizations might divert resources toward compliance rather than productive activities (Lev & Zarowin, 1999). In Foster’s case, transitioning to IFRS resulted in significant asset write-downs, which could influence managerial behavior—possibly causing managers to become risk-averse or alter investment strategies to optimize reported figures rather than economic performance (Watts & Zimmerman, 1986). Thus, accounting standards shape not only the external perception but also internal management practices, influencing overall organizational efficiency.

Case of Foster’s and Standard Changes

Foster’s case exemplifies how standard-based adjustments impact financials and perceptions. The $1.2 billion reduction in net assets following the adoption of IFRS was primarily due to non-recognition of internally generated goodwill and deferred tax liabilities adjustment. While these changes did not affect cash flows, they significantly altered reported profitability and asset value. The removal of goodwill amortization and impairment testing adjustments boosted profits, creating a perception of improved performance, despite the real economic assets declining.

This situation illustrates the PAT perspective that managers might exploit certain standards to present a more favorable image, which could mislead stakeholders about genuine firm performance. Additionally, the decreased asset base affects financial metrics, potentially biasing market valuations and credit ratings (Dechow & Dichev, 2002). These effects highlight the delicate balance standards must strike between transparency and managerial discretion, which directly influences firm valuation and operational efficiency.

Evaluation of Policy and Program Effects

Turning to educational policy impacts, such as the evaluation of voucher programs or Head Start funding, methodological rigor is crucial for valid inferences about effectiveness. Randomized experiments, like the Rhode Island small classes study, aim for internal validity through random assignment. However, threats such as non-compliance, measurement bias, and selection effects still exist and can bias causal estimates (Shadish, Cook, & Campbell, 2002).

In the voucher example, targeting only voucher users for outcome comparison neglects the non-randomness of participation, potentially leading to biased estimates due to unobserved characteristics influencing both voucher use and outcomes (Heckman, 1997). Alternatively, covariate adjustment or instrumental variable approaches can help control for such biases, improving internal validity and ensuring estimates accurately reflect the program’s impact (Angrist & Pischke, 2009).

In evaluating the Head Start program, discontinuity designs exploit the cutoff at a specific poverty rate, assuming near-random assignment around that threshold. Nonetheless, variables like local policy differences or measurement errors in poverty rates can threaten validity, biasing estimates either upwards or downwards depending on the nature of these influences. Recognizing and addressing these biases is vital for producing credible estimates.

Strategies for Program Evaluation

Two promising strategies to evaluate the UEP program at Brown include randomized controlled trials (RCTs) and quasi-experimental matching methods. An RCT involves randomly assigning participants to treatment and control groups, offering high internal validity by balancing observed and unobserved factors. Its main strength lies in causal inference clarity; however, practical challenges include ethical concerns, cost, and implementation complexity (Imbens & Rubin, 2015).

Alternatively, propensity score matching involves selecting control individuals similar to the treatment group based on observable characteristics, creating comparable groups without randomization. Its advantage is feasibility and lower cost, but potential weaknesses include bias from unobserved confounders and reliance on the assumption of selection on observables. Both approaches, used judiciously, can complement each other in providing a comprehensive evaluation of the program’s impact.

References

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• Dechow, P. M., & Dichev, I. D. (2002). The Persistence of Earnings and Cash Flows. The Journal of Accounting Research, 40(3), 283–312.
• Heckman, J. J. (1997). Instrumental Variables: A Study of Implicit Preferences. The Journal of Political Economy, 105(5), 973–1002.
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