APB Opinion No. 14, Convertible securities, Convertible Bonds, EPS

Reviews the book "The Impact of Statement of Financial Accounting Standards No. 8 on the Foreign Exchange Risk Management Practices of American Multinationals: An Economic Impact Study," by Thomas G. Evans, William R. Folks and Michael Jilling.

Before attempting to draw any conclusions from the research let us review its major features. We adopted as a theoretical framework the Hicksian concept of periodic income or earnings as being the change in well-offness over the period, arguing that such a view is externally useful as a measure of overall firm performance. Within this framework, we adopted as our goal Irving Fisher's approach to measuring well-offness, although it was originally intended as a model for situations in which future events are known with certainty. We argue that the goal of earnings determination under conditions of uncertainty should be to reflect as closely as possible the conceptual accounting and economic models developed for situations in which uncertainty is not a factor. We modified Fisher's model in two significant ways. First, we dealt only with the tree inventory as the wealth or well- offness stock for the test firm. Although this is not the same thing as the overall wealth stock for an entity which Fisher envisioned, it does represent a more manageable first step away from the conventional accounting model for purposes of a preliminary study such as this. Also, for the particular test firm involved, the inventory wealth stock is a rather close surrogate for the overall wealth stock. Cash is not allowed to accumulate within the firm, all receipts by the firm are the result of inventory transactions, and nearly all expenditures are directly relatable to the inventory as variable costs.4° The second modification involves limiting the wealth stock to future flows attributable only to those trees currently standing, not considering as well the flows from anticipated future trees as would a pure Fisherian model. This restriction was adopted, first, because it is deemed to be much more operational and objective.

[This paper presents a replication and correction of a 1978 paper concerning the security market reaction to discretionary accounting changes (a switch to LIFO). The paper contains a flaw in the experimental design. Once the design is corrected, some of the conclusions reached in the original paper must be revised. However, the corrected results do not negate the finding that the security market reaction to a LIFO adoption is conditional on earnings.]

Reviews the book "Triple-Entry Bookkeeping and Income Momentum," by Yuji Ijiri.

This study is based on a survey of the annual reports from 1972 to 1975 for the population of publicly held companies with more than $15 million in assets (approximately 3400 companies). The authors present evidence which supports the following three hypotheses for this population. First, systematic security risk for a company is a useful surrogate for that aspect of "audit risk" which relates to the likelihood that the company will receive a qualified audit opinion. Second, this aspect of "audit risk" is not distributed uniformly across the major auditing firms. Third, when the differences in this aspect of "audit risk" are considered, comparability does exist across the Big Eight CPA firms in the incidence of qualified audit options.

This paper describes and illustrates an approach to teaching variance analysis which the authors have found to be very effective with their students. The approach is based on the dual ideas of profit impact as a unifying theme and a multi-level analysis in which complexity is added sequentially, one layer at a time. The analysis stops when additional complexity is not outweighed by additional "actionable" insights.

This article presents an analytic model of the "management succession" process which can be used to plan, control and account for an organization's affirmative action programs. The authors describe a field study of the management succession process in a large corporation and the development of a formal stochastic model based on the empirical findings. They then illustrate how that model can be used in conjunction with an interactive computer program to help evaluate the company's affirmative action plans and to monitor the success of the programs designed to achieve them. The field-based research project was initiated with four main objectives. The first was to determine if a flow analysis in the form of matrices of employee transition probabilities could be developed for an actual corporation. The second objective was to see if data presented in the form of transition or flow matrices provide useful information. The third objective was to ascertain if such information would possess the properties necessary for the development of a formal stochastic model of the process for use in management analysis, planning and control. Fourth, if such a model could be developed, the authors wanted to see how it might be of use to management.