Internal Revenue Service access to tax accrual workpapers: a laboratory investigation

Article Abstract:

A 1984 Supreme Court decision gave the IRS the authority to examine the work papers of independent auditors that are relevant to tax collection. An IRS examination of the working papers may make a corporation's tax costs dependent on the disclosures made to auditors regarding sensitive tax matters, disclosures which would be documented in the tax accrual work papers of the corporation's auditors. Accounting researchers have argued that corporations would reduce disclosures to auditors if the IRS routinely audited auditors' work papers, thus reducing the accuracy of financial statements. The results of a series of four laboratory markets using 32 undergraduate students as subjects reveals that access may reduce client disclosures, but that a decrease in disclosure may not necessarily result in a decrease in the accuracy of financial statements. Research indicates that clients may reduce the number of arguable tax return positions they take to reduce the necessity for disclosure.

Cases, Investigations, Auditing, Corporations, Financial statements, United States. Supreme Court, United States. Internal Revenue Service

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Establishing the common stock equivalence of convertible bonds

Article Abstract:

It is necessary to identify common stock equivalents in order to calculate primary earnings per share. Rules of the Financial Accounting Standards Board (FASB) and the Accounting Principles Board (APB) on classification of convertible securities as common stock equivalents do not have a well-defined rationale. A periodic, market-based statistical exam to establish common stock equivalence for convertible bonds is described. The exam is consistent with APB's stated intent, and employs theoretical valuation of convertible bonds. The test is then compared with APB-FASB classification rules for common stock equivalents, utilizing a randomly chosen sample of convertible bonds. Little agreement is found between the convertible bonds classified as common stock equivalents under APB-FASB rules and those classified by the market-based exam described here.

Laws, regulations and rules, Financial Accounting Standards Board, Earnings per share, Accounting Principles Board

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Accounting for hybrid securities: the case of adjustable rate convertible notes

Article Abstract:

Accounting standards have not yet specified the accounting treatment of hybrid securities. Hybrid securities are financial instruments that have the characteristics of both debt and equity. Companies have had considerable latitude in how they report these instruments, and some hybrids have been designed with their financial reporting implications in mind. One example of this is the adjustable rate convertible note. An approach to accounting for ARCNs and other hybrid instruments is discussed.

Accounting, Securities

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