Biased choices result in financial reports that do not faithfully represent the economic substance of what is being reported. The problem with bias in financial reporting, as with other deficiencies in reporting quality, is that it impedes an investor’s ability to correctly assess a company’s past performance, to accurately forecast future performance, and thus to…
“GAAP, decision-useful, sustainable, and adequate returns,” are high-quality reports that provide useful information about high-quality earnings. The Conceptual Framework also enumerates enhancing characteristics of useful information: comparability, verifiability, timeliness, and understandability. High-quality information results when these and other trade-offs are made in an unbiased, skillful manner. GAAP, Decision-Useful, but Sustainable? “GAAP, decision-useful, but sustainable?” refers to circumstances…
Ideally, analysts would always have access to financial reports that are based on sound financial reporting standards, such as those from the International Accounting Standards Board (IASB) and the Financial Accounting Standards Board (FASB), and that are free from manipulation. But, in practice, the quality of financial reports can vary greatly. High-quality financial reporting provides…
Differences in tax rates can be an important driver of value. Generally, three types of tax rates are relevant to analysts: Differences between the statutory tax rate and the effective tax rate can arise for many reasons. Tax credits, withholding tax on dividends, adjustments to previous years, and expenses not deductible for tax purposes are…
Deferred tax assets and liabilities arise from temporary differences in accounting profit and taxable income. Deferred tax assets represent taxes that have been paid (or often the carrying forward of losses from previous periods) but have not yet been recognised on the income statement. Deferred tax liabilities occur when financial accounting income tax expense is…
A company’s accounting profit is reported on its income statement in accordance with prevailing accounting standards. Accounting profit (also referred to as income before taxes or pretax income) does not include a provision for income tax expense. A company’s taxable income is its income subject to income taxes under the tax laws of the relevant jurisdiction. A company’s…
Employee Compensation Employee compensation packages are structured to achieve various objectives, including satisfying employees’ needs for liquidity, retaining employees, and motivating employees. Common components of employee compensation are salary, bonuses, health and life insurance premiums, defined contribution and benefit pension plans, and share-based compensation. The amount of compensation and its composition are determined in labour…
The party who uses the asset and pays the consideration is the lessee. The party who owns the asset, grants the right to use the asset, and receives consideration is the lessor. Leasing is a way to obtain the benefits of the asset without purchasing it outright. From the perspective of a lessee, it is…
Ratios used in analysing fixed assets include the fixed asset turnover ratio and several asset age ratios. The fixed asset turnover ratio (total revenue divided by average net fixed assets) reflects the relationship between total revenues and investment in PPE (property, plant, & equipment). The higher this ratio, the higher the amount of sales a…
Under IFRS, for each class of property, plant, and equipment, a company must disclose the measurement basis, the depreciation method, the useful life (or, equivalently, the depreciation rate) used, the gross carrying amount, and the accumulated depreciation at the beginning and end of the period, and a reconciliation of the carrying amount at the beginning…