A Spectrum for Assessing Financial Reporting Quality
When financial reporting and earnings quality are combined, the overall quality of financial reports from a user’s perspective may be viewed as spanning a continuum from the highest to the lowest point. Understand financial reporting quality levels with AnalystPrep’s Free…
Measurement of Bonds
Bonds refer to the contractual promises made by a company to pay its lenders or bondholders cash in future in exchange for cash in the present. Generally speaking, bonds involve promises to make two types of future cash payments to…
The Effective Interest Method
Typically, companies maintain the historical cost (sales proceeds) of bonds after issuance, and any discount or premium is amortized over the life of the bonds. Some companies report the bonds at their current fair values. Under IFRS, bonds are reported…
The Role of Debt Covenants in Protecting Creditors
Debt covenants are restrictions included in bond indentures that protect creditors by restricting the activities of the borrower. They are beneficial to the borrowers to the extent that they lower the risk to the creditors and thereby reduce the cost…
Presentation and Disclosures Relating to Debt
Depending on the maturity structure of a company’s debt obligations, its debt (or portions of it) can be reported either in the non-current liabilities section or the current liability section of the balance sheet. Notes to the financial statements can…
Motivations for Leasing Assets
When a company wishes to obtain the use of an asset, it can either purchase or lease it. A lease is a contract between a lessor, the owner of an asset, and a lessee, the other party which is seeking…
Leases from a Lessor’s Perspective
If the lessor substantially transfers all the risks and rewards incidental to legal ownership, the lease is reported as a finance lease. Consequently, the lessor reports a lease receivable on its balance sheet and removes the leased asset from its…
Distinguish Between Conservative and Aggressive Accounting
Companies have a certain level of discretion concerning the methods they use to evaluate and report their financial performance. Investors are often concerned with whether the accounting method used is more aggressive or conservative as this will affect their ability…
Motivations to Issue Low-quality Financial Reports
Several reasons would lead a company’s management to issue low-quality financial reports. The prevalence of this practice is, however, mitigated by the existence of a robust regulatory regime that disciplines financial reporting quality. Management Motivations for Low-quality Financial Reporting< The…
Conditions to Low-quality Financial Reports
The decision to issue low-quality financial reports ultimately lies in the hands of individuals. For these individuals, namely managers, to succeed in doing this, the conditions must be convenient. Conducive Conditions for Issuing Low-quality Financial Reports The issuance of low-quality…
