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

Abstract

An implicit assumption of aggregating accounting amounts for presentation and recognition in the financial statements is that there is no associated loss of information in doing so. From a valuation perspective, information loss can be measured by whether earnings forecasting or value relevance is affected by aggregation. For example, Barth et al. (1999 and2005) examines whether cash flow and accrual components of earnings have different implications for forecasting future abnormal earnings and for equity valuation. Relatedly, Landsman et al. (2005) examines whether components excluded from pro forma earnings have similar earnings forecasting and valuation properties as other components of earnings. Findings from these studies suggest that information is indeed lost by aggregation.Soonawalla (2006) also addresses aggregation issues. In particular, the study addresses three research questions: (1) Are income and equity book value components from equity investments incrementally informative for forecasting future earnings (forecasting relevant) and for explaining current equity market value (valuation relevant)? (2) Do joint venture and associate investment income and equity book value components have different implications for forecasting and value relevance? (3) Do joint venture revenue and expense income components have different implications for forecasting and value relevance (after taking into account differences in sign), and do joint venture revenues and other non-equity investment firm revenues have different implications for forecasting and value relevance?Data limitations arising from differences in reporting requirements in the US, Canada and the UK prohibit addressing the second and third questions in the US, but permit addressing all three questions in the three countries. In particular, US reporting rules do not require separate recognition or disclosure of the joint venture and associate income and equity book value components of equity