Knowledge that Transforms

Abstract Reviews the book "International Handbook of Corporate Communication," by William V. Ruch.

Abstract Reviews the book "Management Accounting: Evolution Not Revolution," by M. Bromwich and A. Bhimani.

Abstract Explains why some states in the United States have adopted relatively permissive licensing laws for public accountants. Use of hypotheses to test the power of interest groups, political systems and socioeconomic variables in explaining differences in licensing requirements; Role of the American Institute of Certified Public Accountants.

Abstract Reviews the book "Accountancy Comes of Age: The Development of an American Profession, 1886-1940," by Paul J. Miranti Jr.

Abstract Reviews the book "Cheating the Government: The Economics of Evasion," by Frank A. Cowell.

Abstract The article reports on the result of a study which examined the security market reaction to the issuance of SFAS No. 94 that required consolidation of finance subsidiaries in the United States. SFAS 94 (1987) requires consolidation of all majority-owned subsidiaries, including those of nonhomogeneous operations, large minority interests, or foreign locations. An effect of implementing the standard is that financial statements components other than net income and stockholders' equity will differ those that would have been reported as if the standard did not apply. The results indicate that the issuance of SFAS 94 was associated with significant negative excess stock returns. Of the hypotheses tested, this evidence is consistent with the prediction generated by the cash-flow effects hypothesis; but is inconsistent with the redistribution-effects hypothesis. In addition, no significant positive excess returns were obtained for nonconvertible debt securities of firms that did not consolidate prior to SEAS 94, which provides weak evidence of the dominance of the cash-flow effects of SEAS 94 over the redistribution effects.

Abstract Reviews the book "The Financial Impact of Corporate Events on Corporate Stakeholders," by Sharon H. Garrison.

Abstract Presents a linear aggregation model of valuation of assets to help understand how the minimum mean squared error valuation rule is affected by various parameters that characterize the economy and the circumstances under which historical-cost valuation rule yields a statistically more precise estimate of the unobserved economic value of firms' assets than the current valuation rule.

Abstract Reviews the book "Accounting and Reporting for Physical Assets by Government."

Abstract This study examines how transfer pricing, in the presence of differential taxation, affects the resource allocation and profitability of a decentralized multinational enterprise (MNE) that uses the same transfer price for tax and performance evaluation purposes. An analytical model is built in which a foreign manufacturing division transfers a single product to a U.S. distribution division, which, in turn; sells it in the marketplace as part of a final product. It is assumed that both divisions have complete information concerning at cost and revenue functions and that tax rates are higher in the United States than abroad. Given this assumption, it is shown that it is in the interest of both division to cooperate with each other, and a cooperative equilibrium is used throughout the analysis. When differential tax rates exist, but there are no transfer-pricing rules imposed by the taxing authorities, it is shown that the MNE's optimal. resource allocation is the same as in the absence of taxes; however, firm- wide profits are not maximized. When the resale-price method of computing transfer prices (Reg. §1.482-2(e)(3)) is used, the results differ, depending on the manufacturing division's bargaining power. At low levels of bargaining power, the distribution division will guarantee" a certain level of profit to the manufacturing division, and firm wide after-tax profits will be maximized. As the manufacturing division's bargaining power increases beyond a certain point, however, firm wide optimal profits will no longer be achieved. In addition, the final product and the most similar product (as defined by Reg. §1.482-2(e)(3)) will be produced beyond the firm wide after-tax optimum. When transfer prices are computed in accordance with the cost-plus method (Reg. §1.482-2(e)(4)), it is shown that production of the final product first decreases, then increases, and production of the most similar product increases as the distribution division's bargaining strength increases. In addition, there is no guarantee of profit to the manufacturing division. Accordingly, it is unlikely that firmwide after-tax profits will be maximized. Demonstration of these results is achieved with the use of numerical examples. The study concludes with a discussion of the tax policy implications of these results.