Fair value accounting and gains from asset securitizations: A convenient earnings management tool with compensation side-benefits

Souza

2017

RBGN

Purpose -The aim of this study was to verify whether the credit unions affiliated to Brazilian Confederation of Central Cooperatives (UNICRED) manage their accounting results, in order to reduce the variability of the institution's returns and transmit a sense of solidity to its members. Findings -The analysis, carried out through non-discretionary results on credit operations in order to explain the changes in net expenses of provision on credit operations, indicated there was smoothing of results. Thus, we can infer that the credit unions affiliated to UNICRED make use of earnings management in the income smoothing modality.Originality/value -This study contributes to the issue of Accounting Results Management, and corroborates that there are indications that, in the occurrence of higher non-discretionary results, credit unions tend to maximize provisions. Similarly, in the occurrence of lower non-discretionary results, they tend to minimize provisions, making evident the search for smaller variability in results, thus signaling mitigation of risks.

Section: Empirical Studies On Earnings Management In Financial Institsupporting

confidence: 86%

Income smoothing: a study of the health sector’s credit unions

Souza

2017

RBGN

“…In addition to economic motivations, banks conduct securitization transactions for the purpose of accounting motivations, such as decreasing the capital ratio (Minton et al, 2004) and earnings management (Karaoglu, 2005;Dechow and Shakespeare, 2009;Dechow et al, 2010). Compared with secured borrowing accounting, sale accounting reduces reported debt and raises reported net income when a gain on sale is recognized.…”

Section: Statement Of Financial Accounting Standards (Sfas) 140 Accomentioning

confidence: 99%

Fair value accounting and procyclicality: accounting for securitization

Kusano¹

2013

COC

The recent financial crisis has lead to heated debates on the pros and cons of fair value accounting from the perspectives of illiquidity and procyclicality. Previous research investigates the relationship between fair value accounting and procyclicality and finds mixed evidence of this relationship during economic recessions.However, few studies examined the relationship between fair value accounting and the financial crisis during economic booms. The purpose of this study is to examine whether fair value accounting promotes procyclicality by focusing on securitization transactions during economic booms.We examine the relationship between securitization accounting and procyclicality by using a parsimonious model. The findings are as follows. When a gain on sale is recognized under certain conditions, sale accounting decreases the leverage ratio compared with that before the securitization transaction. Banks increase assets to maintain the target leverage ratio. Furthermore, if banks conduct securitization transactions and adopt sale accounting, the leverage ratio decreases; therefore, banks increase assets to maintain the leverage ratio. It is expected that both sale accounting and fair value accounting promote procyclicality during economic booms.This study makes two contributions to accounting literature and accounting standard settings. First, it proposes a new perspective on the relationship between fair value accounting and procyclicality. Second, this study suggests that accounting standard setters reconsider the movement of accounting for securitization.

“…Under this standard, a firm can account for a securitization transaction as (i) a sale, (ii) a financing, (iii) neither a sale nor financing, (iv) a partial sale, or (v) a partial sale/partial financing. In many instances, banks treated such transactions as a sale and recorded a corresponding gain in income (Dechow et al, 2010). Level 1 assets have observable market prices.…”

Section: Fasb Statement 140 Accounting For Transfers and Servicing Ofmentioning

confidence: 99%

The Role of Accounting in the Financial Crisis: Lessons for the Future

Kothari¹,

Lester²

2012

Accounting Horizons

ABSTRACT:The advent of the Great Recession in 2008 was the culmination of a perfect storm of lax regulation, a growing housing bubble, rising popularity of derivatives instruments, and questionable banking practices. In addition to these causes, management incentives, as well as certain US accounting standards, contributed to the financial crisis. We outline the significant effects of these incentive structures, and the role of fair value accounting standards during the crisis, and discuss implications and relevance of these rules to practitioners, standard-setters, and academics.