No abstract

The International Accounting Standards Board envisions the global acceptance of International Financial Reporting Standards (IFRS). This study exploits an occurrence in South Africa, where listed companies that previously accounted for operating leases with fixed inflationary-linked escalation clauses on an as-incurred basis, were required to straight-line those leases. Using the Ohlson (1995) valuation model this empirical study investigates the incremental value relevance of the straight-line basis over the as-incurred basis. Results show a significant change in the association between property-related operating lease expenses and market value indicators after the effect of straight-lining is introduced. This suggests that the straight-line basis provide investors with more value relevant information than when accounting for the expense as-incurred.Findings from this study prompt national accounting setters that allow for operating leases with fixed inflationary linked escalations to be accounted for on an as-incurred basis to consider first whether the straight-line basis do not provide more relevant information. Limiting the choice of accounting treatment may enhance comparability of financial statements.

The importance of non-GAAP earnings to users of financial reports is underscored by the assumption that, even in efficient markets, company management has superior inside information that can be decision-useful to users (Healy & Palepu 2001). However, because non-GAAP earnings are not defined in accounting standards, management decides how to label, define and calculate Orientation: The voluntary disclosure of non-Generally Accepted Accounting Principles (non-GAAP) earnings may lack decision-usefulness if not faithfully represented or comparable. Commonly accepted as being well defined, earnings before interest, tax, depreciation and amortisation (EBITDA) may be misleading if labelled, defined and calculated inconsistently.Research purpose: To assess the decision-usefulness of EBITDA disclosure by Johannesburg Stock Exchange (JSE)-listed companies.Motivation for the study: Prior research on voluntary disclosure largely excluded EBITDA from its focus, accepting it as standardised.Research approach/design and method: A quantitative content analysis was used to analyse the EBITDA disclosure in 220 Stock Exchange News Service (SENS) reports in which JSE-listed companies reported their annual results for the period 2014-2016.Main findings: Companies inconsistently labelled, defined and calculated EBITDA. Twentyfour per cent of the SENS reports labelled and defined EBITDA as earnings before interest, tax, depreciation and amortisation, but calculated it by adjusting for other items as well. Companies' definitions of EBITDA also differed widely, with 27 different definitions identified in 52 SENS reports that disclosed an unmodified EBITDA label.Practical/managerial implications: Existing JSE reporting requirements appear lacking in ensuring that companies disclose EBITDA that is faithfully represented and comparable. The identified diversity of definitions has implications where EBITDA is used for valuation and contracting purposes.