The impact and valuation of off-balance-sheet activities concealed by equity method accounting.

Accounting Horizons, December, 2003 by Mark P. Bauman

SYNOPSIS: This paper reports the results of a study of the financial reporting effects of off-balance-sheet activities concealed by the equity method of accounting. The study examines footnote disclosures relating to equity method investees, offers suggestions for improving the usefulness of those disclosures, and estimates the valuation effects of information in the disclosures. An important empirical finding is that the market places significant negative values on investor-guaranteed off-balance-sheet obligations.

INTRODUCTION

Financial analysts have long been concerned with the effect of off-balance-sheet activities on a firm's financial condition. The financial statement analysis literature emphasizes the importance of examining footnote disclosures for...