Accounting for Joint Ventures and Associates in Canada, UK, and US: Do US Rules Hide Information?

Abstract

Unlike US GAAP, accounting principles in Canada and the UK require disclosure of disaggregated components of joint ventures and associates. Using comparative analysis of Canadian, UK and US data, this study investigates the potential loss of forecasting and valuation relevant information from aggregating joint venture and associate accounting amounts. Findings show that aggregating joint venture and associate investment numbers, and aggregating joint venture revenues and expenses, each leads to loss of forecasting and valuation relevant information. Thus, current US accounting principles likely mask information that financial statement users could use to predict future earnings and explain share prices. Copyright Blackwell Publishers Ltd, 2006.

Discussion of Accounting for Joint Ventures and Associates in Canada, UK, and US: Do US Rules Hide Information?

“…Turning to the second question addressed by Soonawalla (2006), the evidence presented in Table 4 is mixed in that tests fail to reject the null of equivalence of forecasting and value relevance of joint venture and associate income components in three of four cases, but tests do reject the null of equivalence of forecasting and value relevance of joint venture and associate equity book value components. Not surprisingly given the second finding, additional tests reveal that models permitting different coefficients for the income and equity book value components of equity investment income and equity book value increases model explanatory power statistically if not economically.…”

“…investments. In broad terms, findings from Soonawalla (2006) suggest a loss of information from aggregation of income and equity book values relating to the inter-corporate investments investigated in the study. The key question for readers of the paper is whether the findings have implications for the paper's direct policy question concerning whether US rules requiring aggregation of joint venture and associate income and equity book value components 'hide' information.…”

“…First, establishing similarity of equity investment income and equity book value forecasting and valuation properties in the US, Canada and the UK is a necessary but not a sufficient condition for being able to suggest that findings relating to aggregation of joint venture and associate accounting amounts in Canada and the UK possibly apply to the US. As Soonawalla (2006) notes, there likely are substantial differences in the composition of joint venture and associate investment activities across the three countries. For example, mining firms, whose investments are largely joint ventures, comprise a substantial proportion of sample firms in Canada but not in the UK or the US.…”

“…However, the evidence is mixed in Canada and the UK, wherein equity investment income is incrementally value relevant but not forecasting relevant, with the opposite being true for equity investment book value of equity. Soonawalla (2006) interprets the findings in Table 3 as suggestive of some comparability across the samples. The subtlety in this suggestion is that if one can construe Table 3 as establishing the forecasting and valuation characteristics of equity investment income and equity book value components being similar across the three countries, then finding aggregation of joint venture and associate accounting amounts in Canada and the UK results in a loss of information can lead one to infer that the same could be true in the US as well.…”

“…Turning lastly to the third question addressed by Soonawalla (2006), the evidence presented in Table 5 is perhaps the most compelling of the study. In particular, tests reject the null of equivalence of joint venture revenue and expense components' forecasting and value relevance coefficients, and also reject the null of equivalence of joint venture revenue and other non-equity investment revenue forecasting and value relevance coefficients.…”