Depreciation Capital as a Source of Financing of Mining Companies Activities

The issue discussed in the paper is highly relevant and topical in economic practice because of changes in the recognition of certain assets and their depreciation. The author’s research established that depreciation write-off in financial terms constitute capital comprising two components: depreciation and the tax shield effect. The non-tax shield is more important relative to other tax shields because the vast majority of entities in the raw materials industry own assets which are depreciated for the purposes of balance sheet accounting and tax accounting. As a cost depreciation, on the one hand, reduces the financial result and on the other, generates additional operating cash flows. Depreciable assets account for a large portion of coal companies’ assets. In addition, due to the implementation of IFRS 16 on leasing their share increased as did the amount of depreciation. Hence, its share in operating cash flows in Polish coal companies is slightly higher than in global companies. An overwhelming part of the additional depreciation arising from the inclusion in the assets reported in the balance sheet of assets used based on contracts of lease, lending or rental does not reduce the tax basis and does not constitute a tax shield. Consequently, it creates a disparity between the gross profit/loss and taxable income, thereby increasing the effective tax rate. An increase in the depreciation level in coal companies facilitates maintenance of liquidity and provides financing for investment projects and improves debt servicing, especially in times of declining financial result when coal prices are low.

PENGARUH LABA AKUNTANSI & ARUS KAS OPERASI TERHADAP KEPUTUSAN INVESTASI (RETURN SAHAM)

This study aimed to examine the market reaction to the publication of accounting information in the form of profits and operating cash flows associated with investment decisions. As a proxy of investment decisions is stock returns in banking companies at the time of publication of financial statements. The technique applied in this research is purposive sampling, obtained as many as 114 data (from 38 companies for 3 years). Using the SPSS tool. The method used in this research is non-linear regression test. The results of the study show that accounting earnings have an effect on investment decisions (stock returns), meanwhile operating cash flows doesn’t have any effect on investment decisions (stock returns). Therefore, it is recommended for investors to pay more attention to accounting income statements than operating cash flows to sort out stocks itself. keywords: accounting income, operating cash flow, stock returns, investment decisions.

An evaluation of the predictive value of bank fair values

<p>This thesis examines whether the net asset fair values of banks possess predictive ability for the banks’ future cash flows and earnings. This is an important issue considering the arguments for and against the wider use of fair value accounting for banks’ financial instruments and the claim by some that fair values during economic recessions (where markets may be illiquid) are irrelevant and largely unreliable. A number of studies have found that the explanatory power of bank fair values when compared to traditional historical cost are more value-relevant based on capital market reactions. However, there is a very limited literature on how bank fair values are related to the future performance (e.g. earnings and cash flow) of banks. This study fills this gap by providing empirical evidence on the relationship between U.S. bank fair value disclosures and banks’ future performance as measured by operating cash flows and earnings over a three-period future horizon. Furthermore, the thesis provides evidence on the relationship between bank fair values, in terms of the levels classification introduced during the 2008 global financial crisis, and the future performance of banks, thus showing whether market illiquidity affected the underlying relationships. The study examines two distinct periods. The first study period, 1996-2005, was based on annual data of banks with minimum total assets of $US150 million as of year 1996. The second study period from 2008-2010 (this period encompassed the global financial crisis period and also the levels classification of bank fair values according to SFAS 157), was based on quarterly data of banks with minimum total assets of $US150 million as of the first quarter of 2008. The thesis provides strong evidence that there is a predictive relationship between bank fair values and future bank performance. The evidence is strong during the first study period from 1996 to 2005 where the current net asset fair values of on-balance sheet financial instruments of banks were significantly associated with future operating cash flows and operating earnings of such banks over a three-year future time horizon. However, the predictive relationship between net asset bank fair values and operating cash flows is stronger than the predictive relationship between net asset bank fair values and operating earnings. In the second study period, from 2008 until 2010 the empirical results show strong evidence that there is a predictive relationship between level 1 and level 2 bank fair values and future operating cash flows. The findings from the empirical results were that the current quarter’s level 1 and level 2 net asset fair values of banks were significantly associated with the future quarters’ operating cash flows of such banks. The level 3 net asset fair values of such banks in most cases were not significantly associated with the banks’ future quarterly operating cash flows. The corresponding relationships for operating earnings were that the current quarter’s level 1 net asset fair values of banks were positively associated with the future quarters’ operating earnings of such banks. However, the level 2 net asset fair values of banks were negatively associated with the future quarters’ earnings of such banks. This result is in contrast to the results obtained when the predictive relationship between level 2 bank fair values and future operating cash flows was evaluated, where it is found that both level 1 and level 2 net asset bank fair values are positively related to future quarterly bank cash flows. Further empirical analysis showed that a possible reason behind this disparity was that there was a structural change in the relationship between bank operating cash flows and operating earnings over the course of the first and second study periods, where, in particular, for the second study period (which includes the period of the global financial crisis) there was a systematic downward bias in operating earnings relative to the operating cash flows of the sampled banks. This in turn makes operating earnings a poor proxy for operating cash flows during the second study period. The findings from this study provide confirmation that net asset fair values have predictive ability as argued by Ball (2008); Barth (2006b) and Tweedie (2008). The study findings that net asset fair values have predictive ability is consistent with the FASB’s view that the asset values shown in firm financial statements should communicate information about the potential future financial performance of the affected firms (FASB 2010:17). Furthermore, the study also confirms that objectively determined bank fair values based on market prices rather than model based bank fair values provide greater predictive value in relation to future performance as measured by operating cash flows. Lastly, this thesis showed that during the first study period (where there was no financial crisis) that bank size, capital adequacy and growth prospects, had little impact on the results obtained, while for the second study period, there were cases where bank size and bank capital ratios did have a significant impact on the predictive relationship between bank fair values and future cash flows. The study contributes to the fair value accounting and accounting standard-setting literature and highlights that fair values have predictive ability, especially with respect to future operating cash flows of banks, both during and outside of periods of financial crisis.</p>

An evaluation of the predictive value of bank fair values

<p>This thesis examines whether the net asset fair values of banks possess predictive ability for the banks’ future cash flows and earnings. This is an important issue considering the arguments for and against the wider use of fair value accounting for banks’ financial instruments and the claim by some that fair values during economic recessions (where markets may be illiquid) are irrelevant and largely unreliable. A number of studies have found that the explanatory power of bank fair values when compared to traditional historical cost are more value-relevant based on capital market reactions. However, there is a very limited literature on how bank fair values are related to the future performance (e.g. earnings and cash flow) of banks. This study fills this gap by providing empirical evidence on the relationship between U.S. bank fair value disclosures and banks’ future performance as measured by operating cash flows and earnings over a three-period future horizon. Furthermore, the thesis provides evidence on the relationship between bank fair values, in terms of the levels classification introduced during the 2008 global financial crisis, and the future performance of banks, thus showing whether market illiquidity affected the underlying relationships. The study examines two distinct periods. The first study period, 1996-2005, was based on annual data of banks with minimum total assets of $US150 million as of year 1996. The second study period from 2008-2010 (this period encompassed the global financial crisis period and also the levels classification of bank fair values according to SFAS 157), was based on quarterly data of banks with minimum total assets of $US150 million as of the first quarter of 2008. The thesis provides strong evidence that there is a predictive relationship between bank fair values and future bank performance. The evidence is strong during the first study period from 1996 to 2005 where the current net asset fair values of on-balance sheet financial instruments of banks were significantly associated with future operating cash flows and operating earnings of such banks over a three-year future time horizon. However, the predictive relationship between net asset bank fair values and operating cash flows is stronger than the predictive relationship between net asset bank fair values and operating earnings. In the second study period, from 2008 until 2010 the empirical results show strong evidence that there is a predictive relationship between level 1 and level 2 bank fair values and future operating cash flows. The findings from the empirical results were that the current quarter’s level 1 and level 2 net asset fair values of banks were significantly associated with the future quarters’ operating cash flows of such banks. The level 3 net asset fair values of such banks in most cases were not significantly associated with the banks’ future quarterly operating cash flows. The corresponding relationships for operating earnings were that the current quarter’s level 1 net asset fair values of banks were positively associated with the future quarters’ operating earnings of such banks. However, the level 2 net asset fair values of banks were negatively associated with the future quarters’ earnings of such banks. This result is in contrast to the results obtained when the predictive relationship between level 2 bank fair values and future operating cash flows was evaluated, where it is found that both level 1 and level 2 net asset bank fair values are positively related to future quarterly bank cash flows. Further empirical analysis showed that a possible reason behind this disparity was that there was a structural change in the relationship between bank operating cash flows and operating earnings over the course of the first and second study periods, where, in particular, for the second study period (which includes the period of the global financial crisis) there was a systematic downward bias in operating earnings relative to the operating cash flows of the sampled banks. This in turn makes operating earnings a poor proxy for operating cash flows during the second study period. The findings from this study provide confirmation that net asset fair values have predictive ability as argued by Ball (2008); Barth (2006b) and Tweedie (2008). The study findings that net asset fair values have predictive ability is consistent with the FASB’s view that the asset values shown in firm financial statements should communicate information about the potential future financial performance of the affected firms (FASB 2010:17). Furthermore, the study also confirms that objectively determined bank fair values based on market prices rather than model based bank fair values provide greater predictive value in relation to future performance as measured by operating cash flows. Lastly, this thesis showed that during the first study period (where there was no financial crisis) that bank size, capital adequacy and growth prospects, had little impact on the results obtained, while for the second study period, there were cases where bank size and bank capital ratios did have a significant impact on the predictive relationship between bank fair values and future cash flows. The study contributes to the fair value accounting and accounting standard-setting literature and highlights that fair values have predictive ability, especially with respect to future operating cash flows of banks, both during and outside of periods of financial crisis.</p>

Identifying the Roles of Accounting Accruals in Corporate Financial Reporting

Research in corporate financial reporting identifies two important roles of accounting accruals. First, accruals smooth fluctuations in operating cash flows. Second, accruals allow recognition of losses in an asymmetric timely manner. While these two roles imply different relations between individual accrual components and operating cash flow news, prior research often focuses on the properties of aggregate accruals. We investigate the role of individual accrual components and identify asymmetry in the relation of investment with operating cash flow news as a confounding factor. We show that this investment factor operates through depreciation and amortization accruals, which typically account for the bulk of aggregate accruals. Overall, our article demonstrates the importance of adopting a granular approach to identifying the different roles of individual accrual components.

Does the fundamental indexation portfolio perform better? An Indian investigation

Purpose This study aims to compare the fundamental indexation (FI) portfolio vis-à-vis the cap-weighted index (CWI). It also explored the return-generating attributes of the FI portfolios. Design/methodology/approach This study extracted relevant data from the Centre for Monitoring Indian Economy’s Prowess database from March 1996 to March 2017 from a sample of National Stock Exchange (NSE) 500 companies. The FI portfolios were constructed with First_50 and Next_50 stocks using the latest and five years of trailing average aggregations. Further, the regression technique was used to identify the return-generating attributes of FI portfolios. Findings It was found that the FI portfolios based on First_50 and Next_50 stocks outperformed the CWI (i.e. NSE_First_50 and NSE_Next_50) in the Indian capital market, and between the two, the FI portfolios based on Next_50 stocks were superior to the FI portfolios based on First_50 stocks. The cross-sectional superiority of FI portfolios is obvious if they are sorted according to four fundamentals, namely, total income, sales, operating cash flows and profit before depreciation interest tax and amortisation. The return-generating process of FI portfolios is well-explained by market premium followed by value premium and investment premium. Practical implications This study may enable portfolio managers and investors to measure FI portfolios’ superiority in the Indian capital market and identify the return-generating attributes of FI portfolios so that the loadings can be switched amongst different priced factors for higher yield. Further, this study extends the FI literature, providing evidence from one of the world’s fastest-growing economies. Originality/value To the best of the knowledge, this is amongst the first few studies to explore the performance of FI portfolios vis-à-vis CWIs in India, and to use Fama and French (2015) asset pricing models to understand the return-generating attributes of FI portfolios. It is also novel in the sense that it considers the FI portfolios for a longer duration, predating 1997 and coinciding with the inception of CWIs, namely, NSE_First_50 (inception: 1995) and NSE_Next_50 (inception: 1996), reducing the apprehensions of data-snooping biases.

The Effect of Accrual Quality and Operating Cash Flows on Future Cash Flows in the Basic Industry and Chemical Sectors

This study aims to analyze the effect of accrual quality and operating cash flow on future cash flows. Accrual quality in this study is measured by the accruals-working capital approach, referring to Dechow and Dichev [1] and Francis et al. [2], cash flow is measured by the ratio of operating cash flows to assets. The population of this research is the Basic Industry and Chemical sector companies listed on the Indonesia Stock Exchange for the period 2014-2018. The samples were determined using purposive sampling which resulted in 144 firms year came from 32 companies. The results of this study showed that there is a significant positive effect the accrual quality and operating cash flow on future cash flows. Management should manage the company's operating cash flow efficiently, and simultaneously improve the quality of the company's accruals which will be a positive signal for investors creditors.

Negative operating cash flows and investment inefficiency

PurposeThe purpose of this paper is to identify whether negative operating cash flows are related to investment inefficiency, and specifically whether they are related to subsequent overinvestment and if this relationship is driven by agency problems within the firm.Design/methodology/approachThe study conducts fixed effect regressions, testing the relationship between negative operating cash flows and the firm’s subsequent investment inefficiency. The relationship is further examined for all firms based on size, corporate governance and cash holdings – all of which are related to agency problems.FindingsThe proportion of firms reporting negative operating cash flows has been increasing over time and is positively related to subsequent investment inefficiency. This increase is explained not only by the rise in investment of intangible assets. The positive relationship is not explained by the firm size or corporate governance, but is related to cash holdings. These results are consistent across four different measures of firm investment.Practical implicationsThe percentage of publicly traded firms with negative operating cash flows has never been higher. This paper is one of the first to identify factors that may be contributing to this rise.Originality/valueThis study extends prior findings by identifying previously unexplored factors related to the rise in firms with negative operating cash flows. The rise in investment of intangible assets does not explain the increase alone. High cash holdings also influence the rise in negative operating cash flows.

Operating Cash Flows and Earnings Target Revision: Evidence from Annual Cash Bonus Plans for CEOs

We empirically examine the impact of operating cash flows on future earnings targets in CEOs' annual cash bonus plans. Using target and actual compensation earnings-per-share (EPS) disclosed in proxy statements of large U.S. public firms, we find that operating cash flows have no significant incremental effects on the revision of future earnings targets in the presence of current earnings. We also observe a positive association between future target achievability and current operating cash flows, indicating that firms with higher operating cash flows set significantly easier future earnings targets for their CEOs. These findings suggest that the higher persistence of operating cash flows in predicting future earnings is not fully incorporated into target setting. Further analyses reveal that the positive association between future target achievability and current operating cash flows is attributable to both expectation bias and contractual considerations to reward CEOs who deliver greater cash flows and to limit activities that sacrifice cash flows.