Structured Finance and Mark-to-Model Accounting: A Few Simple Illustrations

2011 ◽  
Vol 25 (3) ◽  
pp. 559-576 ◽  
Author(s):  
Anthony Meder ◽  
Steven T. Schwartz ◽  
Eric E. Spires ◽  
Richard A. Young
Keyword(s):  
Accounting Information ◽  
Accounting Standards ◽  
Cash Flows ◽  
Structured Finance ◽  
Numerical Examples ◽  
Current Accounting ◽  
Economic Fundamentals ◽  
Financial Products ◽  
Future Cash Flows ◽  
Structured Financial Products

SYNOPSIS We review the development of structured financial products, discuss their accounting treatment, and illustrate their valuation using simple numerical examples. The crucial element we incorporate is the possibility that the underlying assets in structured financial products have correlated returns. The benefit of structured finance is it uses diversification to protect the senior tranches' cash flows. However, when the underlying assets have correlated returns diversification is not as effective. Normally, structured financial products would be marked “to market,” obviating the need for analytical valuation techniques. Current accounting standards, however, have significant provisions for valuing structured financial products based on analytically derived expectations of future cash flows, especially when markets are illiquid. Therefore, it is important for both preparers and users of accounting information to understand how underlying economic fundamentals, such as the correlation in returns, affect expectations of future cash flows.

Structured Finance and the Social Contract: How Tranching Challenges Contractualist Approaches to Financial Risk

2018 ◽  
Vol 29 (1) ◽  
pp. 1-24 ◽  
Author(s):  
Tobey Scharding
Keyword(s):  
Financial Risk ◽  
Contract Theory ◽  
Third Parties ◽  
Individual Risk ◽  
Collateralized Debt Obligations ◽  
Structured Finance ◽  
Financial Products ◽  
Systemic Risks ◽  
Collateralized Debt ◽  
Structured Financial Products

ABSTRACT:Many ethicists argue that contract theory offers the most promising strategy for regulating risks. I challenge the adequacy of the contractualist approach for evaluating the complicated, novel risks associated with some structured financial products, particularly focusing on risks to third parties. Structured financial products like collateralized debt obligations (CDOs) divide a pool of financial assets into risk “tranches” organized from least to most risky. Investors purchase various tranches based on their individual risk-and-return preferences. Whereas contract theory holds that investment risks are ethically permitted (roughly) when everyone—including both parties directly involved in the investments and third parties—consents to them, structured financial products like CDOs show that even risks to which everyone consents are ethically problematic when they involve systemic risks of ruin.

scholarly journals The FASBs Concepts Statement On Cash Flows And Present Value

2011 ◽  
Vol 19 (4) ◽  
Author(s):  
Stanley Martens ◽  
Thomas Berry
Keyword(s):  
Cash Flow ◽  
Accounting Standards ◽  
Fair Value ◽  
Cash Flows ◽  
Financial Accounting ◽  
Financial Accounting Standards Board ◽  
Present Value ◽  
Numerical Examples ◽  
Flow Information

In February 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Concepts No. 7, Using Cash Flow Information and Present Value in Accounting Measurements.  In this document the FASB asserts without proof that a present value computation along its lines will provide a good estimate of the fair value of an asset or liability.  Using numerical examples provided by the FASB, we attempt to construct arguments in support of the FASB’s claim.  We find that such arguments require strong and not at all obvious assumptions about players in hypothetical markets.

Pension accounting reform and future cash flow predictability

2017 ◽  
Vol 9 (1) ◽  
pp. 86-108
Author(s):  
Michael T. Dugan ◽  
Elizabeth H. Turner ◽  
Clark M. Wheatley
Keyword(s):  
Financial Crisis ◽  
Design Methodology ◽  
Accounting Information ◽  
Empirical Support ◽  
Financial Statements ◽  
Cash Flows ◽  
Pension Accounting ◽  
Content Type ◽  
Independent Variables ◽  
Future Cash Flows

Purpose This paper aims to examine the association of accruals and disaggregated pension components with future cash flows and also to investigate whether investors distinguish between pension information that is recognized (SFAS 158) versus disclosed (SFAS 132). Design/methodology/approach Regression analysis is used with a proxy for expected future cash flows as the dependent variable, and the components of pension disclosures as well as controls for the 2008-2009 financial crisis as the independent variables. Findings The results reveal that incorporating disaggregated pension components increases the ability to predict future cash flows, and that investors attach different pricing multiples to the various components in the models. The authors also find that during the 2008-2009 financial crisis, the signs of the coefficients on these components changed. Finally, the results indicate that investors assign more significance to pension accounting information that is recognized, as opposed to disclosed, and that disclosure affects the allocation of pension assets. Originality/value The authors provide empirical support for the conjecture posited by Amir and Benartzi (1998) that the prediction of future cash flows will be enhanced by the incorporation of the components of pension assets and liabilities. Importantly from a standard setting perspective, the authors also find evidence that investors assign more significance to pension accounting information that is recognized in the financial statements than to pension information that is disclosed.

scholarly journals The Review of Literature on the Role of Earnings, Cash Flows and Accruals in Predicting of Future Cash Flow

2017 ◽  
Vol 6 (2) ◽  
pp. 59 ◽  
Author(s):  
Mwila Joseph Mulenga ◽  
Meena Bhatia
Keyword(s):  
Cash Flow ◽  
Capital Market ◽  
Accounting Information ◽  
Cash Flows ◽  
Financial Accounting ◽  
Accounting Standard ◽  
Future Cash Flow ◽  
Accounting Research ◽  
Future Cash Flows

AbstractResearch on the relative ability of accounting information aims in examining the ability of accounting information to predict future cash flow and earnings, based on the assertion given by Financial Accounting Standard Board (FASB) which states that the earnings and its components  have a better predictive power than cash flow itself (FASB,1978 para 44). Many studies have been conducted by various researchers but only few of these studies succeed to match with this assertion. This study aims to provide review on the study related to ability of earnings, cash flows from operations and accruals to predict future cash flows where methodology used in this line of research and presentation of empirical results are discussed. The review provides in depth discussion for the purpose of assisting the researchers to get familiarity with line of financial accounting research investigated capital market based accounting research and also as guidance for future researchers.Keywords: Cash flow from operations, Earnings, Accruals, Prediction, Capital Market Based Accounting Research.                                                              

scholarly journals THE PREDICTIVE ABILITY OF EARNINGS VERSUS CASH FLOW DATA TO PREDICT FUTURE CASH FLOWS: A FIRM-SPECIFIC ANALYSIS

2018 ◽  
Vol 1 (2) ◽  
pp. 113
Author(s):  
Supriyadi Supriyadi
Keyword(s):  
Cash Flow ◽  
Prediction Models ◽  
Value Relevance ◽  
Accounting Information ◽  
Cash Flows ◽  
Manufacturing Firms ◽  
Flow Data ◽  
Data Set ◽  
Flow Variables ◽  
Future Cash Flows

This study evaluated the value-relevance of accounting information (earnings and cash flows) in Indonesia to predict a firm’s future operating cash flows. The predictive usefulness of earnings and cash flows in association with future cash flows is of interest for three reasons. They include providing empirical evidence on the relevant accounting information to assess a firm’s future cash flows, information about the behavior and properties of Indonesian accounting information, and evidence of – or at least providing a basis for evaluating–the validity of the IndonesianAccounting Standards Committee (KPSAK) assertion on the usefulness of accounting information to assess future cash flows.The study evaluated three cash flow prediction models that employed cash flow, earnings, and a combination of earnings-cash flow variables. The models were applied on a firm-specific data set. The data used in this study were semi-annual data for the 61 sample firms (manufacturing firms)listed in the Jakarta Stock Exchange (JSX) spanning the years 1990-1997. The results of this study supported the proposed hypothesis that cash flow data provided better information to assess a firm’s future cash flows than earnings data. Since this study employed manufacturing firms only, future research is necessary to evaluate the robustness of the results to otherpopulations of firms and/or by using an alternative deflator of earnings and cash flows, such as consumer price index (CPI) or market value of the firms. Further extensions of this study include additional refinements of the prediction models on an industry-specific basis and disaggregating cash flow variables into operating, investing, and financing components in order to measure the value-relevance of the statement of cash flows.

scholarly journals Relative Ability of Earnings Data and Cash Flow in Predicting Future Cash Flows

2013 ◽  
Vol 3 (1) ◽  
pp. 214 ◽  
Author(s):  
Nasrollah Takhtaei ◽  
Hassan Karimi
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Accounting Standards ◽  
Cash Flows ◽  
Financial Accounting ◽  
Company Size ◽  
Financial Accounting Standards Board ◽  
Working Capital ◽  
Relative Ability ◽  
Future Cash Flows

The purpose of this study is to examine earnings relative ability, operational cash flow, and two traditional measures of cash flows namely net earnings plus depreciation and operational working capital in predicting future cash flows. Also, the effect of company size on ability of predictive measures mentioned is examined in this study. The population examined includes accepted companies in Tehran Stock Exchange during period from 2005 to 2009. The results indicate that net earnings have more ability than operational cash flows and its traditional proxies in predicting the cash flows future. These findings are consistent with Financial Accounting Standards Board (FASB) claim based on earnings in preference on cash flows in predicting future cash flows.

scholarly journals The relevance of the information about intangibles: Some determinants

2012 ◽  
Vol 2 (1) ◽  
pp. 219 ◽  
Author(s):  
Houneida Ben Brahim ◽  
Mounira Ben Arab
Keyword(s):  
Financial Constraints ◽  
Intangible Assets ◽  
Balance Sheet ◽  
Accounting Information ◽  
Cash Flows ◽  
Low Level ◽  
Other Information ◽  
Future Cash Flows

This study treats the issue of the relevance of the accounting information about intangibles (assets and expenditures). Our findings show that the relevance is found and determined by the introduction of other information. This information represents the financial constraints as motivation of manipulation and the implication degree of managers due to granted stocks options. Under low level of financial constraints, the investor judges that the value of intangibles assets recognized in the balance sheet is reliable but this information remains widely insufficient to modify its valuation. However, this low level transmit to the market a signal of the failure of the R&D projects because it is predicted that these projects will be unable to realize sufficient future cash flows to honor the financial commitments of the company. Besides, we found that the information about recognized intangible assets and R&D expenditures is well appreciated by the market for the firms which grant more stocks options. So, the granting of stocks options represents a signal to the market on the efficiency of the managers and their implication in the risk of the committed investments.

The Relative and Incremental Valuation Effects of Embedded Value Disclosure by Life Insurers: Evidence from Cross-Listed Firms in the U.S.

2014 ◽  
Vol 29 (2) ◽  
pp. 327-339 ◽  
Author(s):  
Samir M. El-Gazzar ◽  
Rudolph A. Jacob ◽  
Scott P. McGregor
Keyword(s):  
Empirical Studies ◽  
Explanatory Power ◽  
Accounting Standards ◽  
Cash Flows ◽  
Market Prices ◽  
Joint Project ◽  
Listed Firms ◽  
Valuation Effects ◽  
Life Insurers ◽  
Embedded Value

SYNOPSIS European life insurers began disclosing embedded value information (EV) over a decade ago due to concerns with traditional local accounting standards. EV is an estimate of the present value of future net cash flows from in-force life insurance business. However, U.S.-based life insurers have yet to adopt this disclosure, although several surveys and empirical studies suggest that EV disclosure provides valuable information in assessing life insurers' performance. This paper examines the incremental valuation effects of EV disclosure in the presence of U.S. GAAP. We utilize a sample of cross-listed life insurers as surrogates to assess the valuation effects of EV disclosures for U.S. life insurers. Our empirical results show a higher association between EV and stock market prices than those of traditional accounting metrics such as earnings or book value. The results also show that EV has incremental explanatory power beyond those of traditional U.S. GAAP accounting measures. Our findings provide vital input to FASB and IASB as they currently engage in a joint project to develop uniform globally acceptable, comparable accounting standards for life insurers.

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