[The choice of the appropriate actuarial cost method was an important issue considered at the different stages of the process that led to the promulgation of the SFAS No. 87, "Employers' Accounting for Pensions." Actuarial cost methods have been used by firms for accruing periodic pension expenses and determining the funding of defined-benefit pension plans. These methods have been classified by actuaries into cost-allocation methods and benefit-allocation methods. This study identifies and evaluates some possible determinants of the switch from a cost-allocation actuarial cost method to a benefit-allocation actuarial cost method. The primary effects of this switch are a decrease in pension expense and in the amount funded to the pension plan. The decreases in pension expense and funding arise because benefit-allocation methods have lower pension liabilities than do cost-allocation methods. This study hypothesizes that the primary reasons for the switch in actuarial cost methods are: a reduction in contracting costs, a decline in the taxpaying status and the earnings performance, and a preference for internal over external sources of funds for financing investment outlays. In addition, the study examines whether an actuarial alignment of pension assets to the reported present value of the accumulated plan benefits motivates the switch in actuarial cost methods and controls for the effect of differing interest rates in the computation of the accumulated plan benefits. The hypotheses are tested by comparing switch firms to industry-matched nonswitch firms and using proxy measures to operationalize the theoretical concepts. The comparisons are performed in the year prior to the switch, the year of the switch, and the year following the switch by relying on multivariate logit models. The primary advantage of logit models is the presence of consistent coefficient estimates whenever choice-based sampling is involved. Univariate matched-pairs t-tests and Wilcoxon sign-rank tests are also performed in the year of the switch. The empirical findings suggest that financial statement considerations and reduction in pension funding appear to be the primary reasons associated with the switch in actuarial cost methods. The reduction in pension funding is first accomplished by the use of higher interest rates, which decrease pension liabilities, and then by the switch into a benefit-allocation method, which provides an additional decrease in the pension liabilities. The last step is used if firms have limited freedom to make further increases in interest rates as unreasonably high interest rates are not permissible under ERISA. Empirical evidence based on multivariate logit models reveals a lower current assets to current liabilities ratio, a slower rate of investing into new projects, and a higher long-term debt to total tangible assets ratio for switch firms in comparison to their nonswitch counterparts for the year of the switch. To the extent that these relationships reflect a higher probability of technical default for switch firms, the findings are consistent with both the pension funding literature (Francis and Reiter 1987) and the accounting method choice literature (Holthausen and Leftwich 1983). In addition, this study points out the importance of an interactive effect between working capital ratio and rate of undertaking new investments in that increasing levels of working capital are needed to sustain higher rates of new investments.]

Abstract Identifies and evaluates potential determinants of the switch from cost-allocation actuarial method to a benefit-allocation actuarial cost method. Effects of the switch; Causes of the decrease in pension expense and funding; Reasons for the switch in actuarial cost methods.

Abstract. Our research confirms that book values possess significant ability to explain the acquisition values of oil and gas firms. It also indicates that RRA information provides incremental information over book values in determining acquisition values. However, when analyst information is more current than competing information, analysts' appraisals provide a significant incremental contribution beyond the explanatory ability of book values and reserve recognition data. Current analysts' information provides a stronger basis for predicting acquisition values than any model supplementing analysts' appraisals with additional information. This implies that current analysts' information captures all information sources and is consistent with the findings of “analysts superiority” in the extensive literature on earnings forecasts. Résumé. Les travaux des auteurs confirment que les valeurs comptables peuvent assez bien expliquer les valeurs d'acquisition des entreprises pétrolierès et gazières. Ils révèlent également que les renseignements livrés par la méthode de la capitalisation des gisements fournissent de l'information marginale par rapport aux valeurs comptables dans la détermination des valeurs d'acquisition. Toutefois, lorsque l'information des analystes financiers est plus récente que l'information concurrente, les évaluations des analystes apportent une contribution marginale importante au‐delà de la capacité explicative des valeurs comptables et de données relatives à la capitalisation des gisements. L'information récente des analystes offre une base plus solide pour la prévision des valeurs d'acquisition que tout modèle qui sert de complément aux évaluations des analystes. Cela suppose que l'information récente des analystes recouvre toutes les sources d'information et vient confirmer la conclusion reconnaissant la «supériorité des analystes » à laquelle se range une abondante documentation sur les prévisions de résultats.

Abstract. Managerial preference for accounting methods is examined with respect to the effects of the chosen methods on executives' annual compensation (salary and bonus). Two propositions are considered: (a) the bonus‐hypothesis, and (b) the rationality of compensation schemes. While the former asserts a tie between compensation and accounting income, the latter stipulates a connection between the real (cash flow) consequences of the choice of accounting methods and executives' compensation. Two accounting method changes were used: (a) the change in pension costing and funding (which increases both income and operating cash flows), and (b) the change in inventory valuation method to LIFO (which decreases income and increases cash flows). Unexpected compensations in the switch‐year were correlated with the effects of each accounting change on income. The results suggest that top executives' salary and bonus payments increased in the switch‐year beyond levels predicted by the pre‐switch compensation parameters. Several validation checks were also performed using comparison samples. Furthermore, the effects of these two accounting changes on income were found to correlate with unexpected compensation in the directions predicted by the hypothesis of rationality of compensation schemes. Résumé. Les préférences de la direction quant aux méthodes comptables sont examinées relativement aux effets des méthodes retenues sur la rémunération annuelle des dirigeants (salaries et gratifications). Deux propositions sont envisagées: (a) l'hypothèse de gratification, et (b) la rationalité des systèmes de rémunération. Alors que la première proposition affirme l'existence d'un lien entre la rémunération et le bénéfice comptable, la seconde est à l'effet qu'il existe une relation entre les conséquences réelles (flux de trésorerie) de la méthode comptable choisie et a rémunération des dirigeants. Deux types de changement de méthode comptable furent considérés: (a) le changement dans la comptabilisation des coûts et la capitalisation des régimes de retraite (augmentant à la fois le bénéfice comptable et le flux monétaire d'exploitation), et (b) le changement de méthode d'évaluation des stocks pour DEPS (diminuant e bénéfice comptable et augmentant les flux de trésorerie). Les rémunérations imprévues versées dans l'année où il y eut changement ont été corrélées aux effets de chaque modification comptable sur le bénéfice.

Abstract A borrowing base is a line of credit set by the lender and secured by petroleum assets. Borrowers can draw on the borrowing base only to the extent that their investment opportunities justify the related interest expenses. This measure of the firm's capacity to obtain secured loans is footnoted in the long-term debt section of the annual reports. In this paper we examine how lenders use accounting information to set the borrowing base of oil and gas firms. Determination of the borrowing base is a vital decision because it represents the lenders' exposure in the event that the borrower defaults. We find evidence on lenders' use of accounting information by examining actual lending agreements as well as through tests of association. Our sample consists of smaller petroleum firms that have a higher probability of default if unfavorable contingencies occur. The primary finding is that the value of firm's oil and gas reserves explain a large proportion of the variation in the firms' borrowing base and total outstanding debt. Unlike prior studies, we find that reserve recognition accounting (RRA) has a higher explanatory power than book values. Although major fluctuations in oil prices during the period of the study, 1984-1987, suggest that historical costs may be relatively poor indicators of changes in asset values, we observe that RRA information is used in setting the borrowing base for 21 of the 23 firms for which such agreements were available. The evidence reported in this article complements prior research (Harris and Ohison 1987, 1990; Ghicas and Pastena 1989) and enhances the regulators' implication that their mandated RRA information is useful to users of financial statements.

[A borrowing base is a line of credit set by the lender and secured by petroleum assets. Borrowers can draw on the borrowing base only to the extent that their investment opportunities justify the related interest expenses. This measure of the firm's capacity to obtain secured loans is footnoted in the long-term debt section of the annual reports. In this paper we examine how lenders use accounting information to set the borrowing base of oil and gas firms. Determination of the borrowing base is a vital decision because it represents the lenders' exposure in the event that the borrower defaults.1 We find evidence on lenders' use of accounting information by examining actual lending agreements as well as through tests of association. Our sample consists of smaller petroleum firms that have a higher probability of default if unfavorable contingencies occur. The primary finding is that the value of firm's oil and gas reserves explain a large proportion of the variation in the firms' borrowing base and total outstanding debt. Unlike prior studies, we find that reserve recognition accounting (RRA) has a higher explanatory power than book values. Although major fluctuations in oil prices during the period of the study, 1984-1987, suggest that historical costs may be relatively poor indicators of changes in asset values, we observe that RRA information is used in setting the borrowing base for 21 of the 23 firms for which such agreements were available. The evidence reported in this article complements prior research (Harris and Ohlson 1987, 1990; Ghicas and Pastena 1989)2 and enhances the regulators' implication that their mandated RRA information is useful to users of financial statements.]