This paper investigates accounting for interest by Australian real estate developers. It argues that management's choice of accounting technique is the result of ex ante contracting to prevent management opportunistic behavior, rather than a manifestation of opportunistic behavior per se. The argument provides a richer description of accounting choice and explains why, in Australia, leverage and the accounting method choice are correlated in the absence of bond covenants. The argument also explains why, inconsistent with political cost arguments, larger firms are more likely to capitalize than expense interest.

Financial ratios, Bankruptcy, Corporate failures, Loan officers

Policymakers have been concerned with whether financial leases should be capitalized and supported by supplementary footnote disclosure or be disclosed solely in notes to financial statements. Arguments in support of capitalization have included assertions regarding the effect of these accounting alternatives on creditors' evaluations and decisions. A field experiment was conducted to investigate the effect on lenders' decisions of alternative lease accounting and financing methods. Results suggest that lenders' credit evaluations and decisions are affected by "real" levels of leverage of loan applicants, but not by their method of accounting for financial leases or by whether the applicants' debt financing is by term loan or financial lease.

The Australian standard on investments in associated companies first took effect in 1984. It prohibited the use of equity accounting in the primary financial statements but required the provision of supplementary equity accounting disclosures. Prior to this, firms voluntarily adopted either of the alternative cost and equity methods in their primary financial statements. This paper contributes to the positive accounting literature by analyzing the accounting policy choice of listed Australian companies in the first year in which the standard took effect. Noncompliance with the standard took the form of either adopting the equity method in the primary financial statements or using the cost method without supplementary disclosures. We focus on the choice of noncompliance procedures. The results support the contractual efficiency but not the alternative opportunistic behavior perspective on accounting method choice. They indicate that the choice is associated with the proportion of listed associates, the materiality of investments in associates, and the existence of guarantees but not with the degree of ownership nor the number of associates. Résumé. La premiére norme australienne au sujet des participations dans des sociétés apparentées remonte à 1984. Cette norme proscrit le recours à la méthode de la comptabilisation à la valeur de consolidation dans les états financiers de base, tout en exigeant la présentation d'information complémentaire préparée selon cette méthode. Auparavant, la comptabilisation des participations à la valeur d'acquisition ou à la valeur de consolidation était laissée à la discrétion des entreprises dans leurs états financiers de base. Les auteurs ajoutent ici aux écrits portant sur la théorie comptable positive en analysant le choix des méthodes comptables effectué dans les sociétés australiennes dont les valeurs sont cotées, au cours de la première année d'existence de la norme. Le non‐respect de la norme se manifeste tantôt par l'adoption de la méthode de la comptabilisation à la valeur de consolidation dans les états financiers de et base tantôt par celle de la méthode de comptabilisation à la valeur d'acquisition sans information complémentaire. Les auteurs s'intéressent particulièrement au choix des avenues de non‐conformité. Les résultats obtenus confirment l'efficience du contrat mais non l'autre perspective, celle du comportement opportuniste en ce qui a trait au choix de la méthode comptable. Ils révèlent que le choix de la méthode est lié à la proportion de sociétés apparentées dont les valeurs sont cotées, à l'importance des participations dans les sociétés apparentées et à l'existence de garanties, mais qu'il n'est pas lié aux pourcentages de participation ou au nombre des sociétés apparentées.

As in other countries, Australian accounting for unincorporated joint ventures varies systematically between firms in different phases in the extractive industries (explorer vs. producer). We argue that these differences in accounting method can be explained by differences in the type of assets and the manner in which they are owned and financed. We hypothesize that when unincorporated joint ventures are financed on a with-recourse basis they will be proportionately consolidated; when they are financed on a non-recourse basis one-line reporting is expected. Empirical results are consistent with this hypothesis and appear to generalize to the real estate industry.

A sample of Australian companies entering financial distress is found to have significantly longer reporting delays than a control group of companies. Unfortunately the reporting lags, either alone or in conjunction with conventional bankruptcy prediction models, do not appear to add to our ability to predict distress.

Internal control systems, Individual judgement, Group judgment, Decision making