Accting3500 | Choice Relating To Assessment Answers

1.If the cash flows are the same, consider the decision to record future lease payments as a liability , or record lease payments as expenses , or simply disclose in notes to the accounts.

Required :

(a) Drawing on capital markets research based on the Efficient Market Hypotheses (EMH) explain that the choice relating to accounting for leases as explained above should NOT matter to investors .

(b) Explain why behavioural theories in accounting/finance and capital markets research based on EMH result in different explanations for whether the choice relating to accounting for leases matters.

2.Australian Accounting Standards Board (AASB) released a staff paper in September 2018 expressing its views and providing
recommendations on companies providing climate-related disclosures.

The Staff paper states that “It has been observed that entities do not disclose climate-risk related information either because it is not quantitatively material or they have concluded that the entity is not affected by climate change.”

Required:

(a)Why do some companies voluntarily provide climate-related information when such information is not quantitatively or qualitatively material to investors? Explain using theories of voluntary corporate reporting.

(b)Explain why climate-risk related information would be important to investors, drawing on the efficient market hypotheses.

1.aIt needs to be discerned that in general the capital markets are efficient in fully reflecting the relevant information in terms of determining the security prices. Even in case the cash flows are same the consideration of the decision to record future lease payment is taken into account as a liability. “Efficient Market Hypothesis (EMH)” is depicted as an investment theory in which the share price is reflected as a information which is consistent with the alpha along with the risk adjusted returns. Therefore, it needs to be seen that neither technical nor fundamental analysis can be taken into consideration for the returns based on risk adjustments. As per the EMH stocks, the trade pertaining to fair value is always traded at a fair price as per the process of the stock exchanges thereby making it possible for the investors for purchasing undervalued stocks or selling of the stocks at an inflated price. It needs to be also seen that for a market it may not be possible to outperform the overall market with the expert stock selection or setting market timing which is considered as the only possible way to obtain higher returns for the purchase decisions in risky investments. Henceforth, even if the cash flows are considered to be same, the decision of recording the future lease payments in form of liability will not affect the investors. In order to provide an evidence to such an instance, it needs to be seen that the UK stock market is weak in terms of efficient with the consideration of the other studies related to the capital markets which are pointed in semi-strong form of efficiency. It was found by Firth that the shares prices were adjusted instantaneously which is regarded as per the strong form of efficiency (Hamid et al., 2017).

b.In the beginning of the twentieth century a new breed of economists had put an augmented focus on the psychological and behavioural element of the stock price and patterns of the stock Price. Moreover, the economists were also able to make a controversial claim towards the predictable patterns which enabled the investors to follow behavioural element of the stock price. So that they are able to earn an excess of the adjusted rates of the returns. This was the phase when the behavioural finance was popularised. The review of the previous literatures for explaining the rational for the theories in accounting and accounting/finance and capital markets has stated about the EMH resulting from a different explanation on the choices relating to lease accounting. The various types of the opinions from the previous papers has focused on the evaluating the inherent irrationality of the theory of efficient market and discuss about the potential rationale for the recent declines in the behavioural financing. Moreover, there are many studies which have highlighted for the declining financial structure and argued about the role of favouring the same with behavioural finance. Moreover, some of the other studies has highlighted on the theories associated with behaviour and psychological which became the theoretical framework for determining a successful and profitable investment (Rossi, 2015).

As per the Efficient Market Hypothesis, the investing markets are seen to be informationally efficient in terms of having access to the relevant information and in situations where the results cannot be exploited. The specific form of the theoretical model generated is based on two main concepts which relates to availability and access. The daily routine and lifestyle implications are seen in terms of time and methods available to access the information. It needs to be further seen that the rapidity of the available information has implication on the time and method of accessing information (Degutis & Novickyt?, 2014).

2.a.In general, the publishing of high quality of information is depicted to be critical in terms of making effective decision making. It needs to be further seen that the consideration of the various types of the mandated disclosure is stated in the voluntary corporate theory. These mandated disclosures are regarded to be inclusive of the regulatory filings, financial reports and information presented by the investors and along with the inclusion of the different types of the ad hoc information. Therefore, it needs to be considered that the depiction of the Corporate information publishing is not only important for the efficiency of the capital markets but also including a wider audience beyond the investors. These are depicted to be inclusive of stewardship and making the policy decision more robust in nature (Arthur, 2018).

Many preparers of financial reports are of the opinion that the individuals need to address the eve-expanding mandatory disclosures related to the investors driven demand and demands pertaining to higher voluntary transparency. Additionally, regulatory stress on the preparers of the financial reports has resulted in the perception of compliance of the documentation rather than its relevance to the accounting information. The companies are also obligated to produce climate related information on a quarterly basis which has led to the opinion that the equity markets are too much concentrated on the short term results and less effectiveness in the promotion related to the long term investments along with the focus on delivering short-term results along with the consideration of the various types of other result which are inclusive of the long term viability (Komariah, Mahbub & Sin, 2015).

The role of time horizon is also significant to identify whether risks are material to a specific company and other risks originating climate change and become significant in the long term. In 2016 a task force for climate related financial disclosure was formed. This task force provided relevant recommendations on voluntary climate-related financial disclosure pertaining to the financial implications opportunities related to the physical impacts of the climate change and transition to a low carbon global economy. In addition to this, the Task force on the climate change related financial disclosure has emphasized on establishment of a Financial Stability board without considering its effect on the disclosure of these risks and financial implications of the climate change related risks and correct pricing (Nadarajah & Chu, 2017).

b.As per the Efficient Market Hypothesis the significant decision of a financial investor is identified with the composition of an optimal portfolio. However, in case the market is not efficient in nature there may be other considerations which are needed to be made. There may be possibility of including gains from selling of an asset which are seen to be based on buying an under-priced asset. This is depicted to be important in form of identification of mispricing and detection of such assets which are related to the effect of the climate change (Kamal, 2014). In case of detection of any error pertaining to climate change the assumption of the factors such as overpricing of GHG emission needs to be taken into account. There are also assumption which relates to the other type of the factors which are seen to be based on the identification of the tests associated to EMH. Therefore, in most of the cases the companies are seen to be relevant with the maintaining of the considerations are per the compliance of the guidelines as stated under EMH. This concept is conducive in terms of instantly arriving at a new information relevant to the any issues in the pricing of the climate change factors (Altin, 2015).

References

Altin, H. (2015). Efficient market hypothesis, abnormal return and election periods. European Scientific Journal, ESJ, 11(34).

Arthur, W. B. (2018). Asset pricing under endogenous expectations in an artificial stock market. In The economy as an evolving complex system II (pp. 31-60). CRC Press.

Degutis, A., & Novickyt?, L. (2014). The efficient market hypothesis: a critical review of literature and methodology. Ekonomika, 93(2).

Hamid, K., Suleman, M. T., Ali Shah, S. Z., Akash, I., & Shahid, R. (2017). Testing the weak form of efficient market hypothesis: Empirical evidence from Asia-Pacific markets.

Kamal, M. (2014). Studying the validity of the Efficient Market Hypothesis (EMH) in the Egyptian exchange (EGX) after the 25th of January revolution.

Komariah, K. S., Mahbub, C., & Sin, B. K. (2015). Efficient Market Hypothesis Approach to Predict USD/IDR Trends using Twitter Sentiment Analysis. Database, 6, 12th.

Nadarajah, S., & Chu, J. (2017). On the inefficiency of Bitcoin. Economics Letters, 150, 6-9.

Rossi, M. (2015). The efficient market hypothesis and calendar anomalies: a literature review. International Journal of Managerial and Financial Accounting, 7(3-4), 285-296.