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Author: Gregory S. Miller
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
A long-standing issue in the accounting literature is whether corporate managers exercise their accounting discretion to influence reported earnings. This paper extends this research by investigating whether managers manipulate the 'valuation allowance' for deferred tax assets. This account has several features that recommend it as a good place to look for earnings management. First, since this account is fairly 'new' (1992), there are no well-established formulae, or even any clear guidelines, for deciding on the appropriate level for this allowance. Second, the appropriate level of the allowance depends on managers' expectations about future earnings. For both of these reasons managers must exercise an unusual amount of discretion in choosing the appropriate level for this account. Finally, for many firms this provision is large enough to effect material adjustments to accounting earnings. We find that there is a good deal of variation across firms in the level of the valuation allowance. Part of this variation is explained by factors that appropriately reflect managers' expectations about whether their firms' deferred tax assets will be realized. In addition, after controlling for these factors, we find support for two earnings-management hypotheses: both the debt/equity hypothesis and income-smoothing have empirical support.
Author: Gregory S. Miller
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
A long-standing issue in the accounting literature is whether corporate managers exercise their accounting discretion to influence reported earnings. This paper extends this research by investigating whether managers manipulate the 'valuation allowance' for deferred tax assets. This account has several features that recommend it as a good place to look for earnings management. First, since this account is fairly 'new' (1992), there are no well-established formulae, or even any clear guidelines, for deciding on the appropriate level for this allowance. Second, the appropriate level of the allowance depends on managers' expectations about future earnings. For both of these reasons managers must exercise an unusual amount of discretion in choosing the appropriate level for this account. Finally, for many firms this provision is large enough to effect material adjustments to accounting earnings. We find that there is a good deal of variation across firms in the level of the valuation allowance. Part of this variation is explained by factors that appropriately reflect managers' expectations about whether their firms' deferred tax assets will be realized. In addition, after controlling for these factors, we find support for two earnings-management hypotheses: both the debt/equity hypothesis and income-smoothing have empirical support.
Author: John D. Phillips
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
We examine the usefulness of deferred tax expense as compared to various accrual measures employed in prior research in detecting earnings management in three settings where earnings management likely occurs. The motivation for using deferred tax expense to detect earnings management is that there is typically more discretion under generally accepted accounting principles than under tax rules, and we assume that managers exploit such discretion to manage income upwards primarily in ways that do not affect current taxable income. Thus, we expect that decisions to manage earnings upwards will generate book-tax differences that increase deferred tax expense. Our results provide evidence of the incremental usefulness of deferred tax expense in detecting earnings management activities vis-a-vis total accruals and abnormal accruals derived from two versions of the Jones model. Deferred tax expense is generally incrementally useful beyond all three accruals-based measures with regard to detecting earnings management to avoid an earnings decline and with regard to detecting earnings management to avoid a loss. With regard to meeting analysts' earnings forecasts, only total accruals is incrementally useful in detecting earnings management. We also find that deferred tax expense is significantly more accurate than any of the accrual measures in classifying firm-years as successfully avoiding a loss, whereas no one measure is relatively more accurate than the others in classifying firm-years as successfully avoiding an earnings decline or meeting analysts' forecasts.
Author: John R. Graham
Publisher: Now Pub
ISBN: 9781601986122
Category : Business & Economics
Languages : en
Pages : 176
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Book Description
Accounting for Income Taxes is the most comprehensive review of AFIT research. It is designed both to introduce new scholars to this field and to encourage active researchers to expand frontiers related to accounting for income taxes. Accounting for Income Taxes includes both a primer about the rules governing AFIT (Sections 3-4) and a review of the scholarly studies in the field (Sections 5-8). The primer uses accessible examples and clear language to express essential AFIT rules and institutional features. Section 3 reviews the basic rules and institutional details governing AFIT. Section 4 discusses ways that researchers, policymakers, and other interested parties can use the tax information in financial statements to better approximate information in the tax return. The second half of the monograph reviews the extant scholarly studies by splitting the research literature into four topics: earnings management, the association between book-tax differences and earnings characteristics, the equity market pricing of information in the tax accounts, and book-tax conformity. Section 5 focuses on the use of the tax accounts to manage earnings through the valuation allowance, the income tax contingency, and permanently reinvested foreign earnings. Section 6 discusses the association between book-tax differences and earnings characteristics, namely earnings growth and earnings persistence. Section 7 explores how tax information is reflected in share prices. Section 8 reviews the increased alignment of accounting for book purposes and tax purposes. The remainder of the paper focuses on topics of general interest in the economics and econometric literatures. Section 9 highlights some issues of general importance including a theoretical framework to interpret and guide empirical AFIT studies, the disaggregated components of book-tax differences and research opportunities as the U.S. moves toward International Financial Reporting Standards (IFRS). Section 10 discusses econometric weaknesses that are common in AFIT research and proposes ways to mitigate their deleterious effects.
Author: Abdul Rafay
Publisher:
ISBN:
Category :
Languages : en
Pages : 19
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Book Description
This study examines earnings management through deferred taxes calculated under the IAS 12 and its impact on firm valuation. The literature finds that book-tax nonconformity leads to better earning quality and a greater association between earnings and future expected cash flows. Given that Pakistan is a pioneering implementer of the International Financial Reporting Standards, our hypothesis is that the components of deferred tax disclosed under the IAS 12 provide value-relevant information to equity investors. We divide deferred tax components into three categories: those arising from (i) operational activities, (ii) investing activities, and (iii) financing activities. These are subdivided to ensure that no value-relevant component is aggregated with a non value-relevant component, which might otherwise lead to an information slack. Our sample includes data on shariah-compliant companies listed on the Karachi Meezan Index (KMI-30). We find that deferred tax line items in firms' balance sheets are reflected in market prices. Investors also tend to treat deferred tax line items (arising from operating, financing, and investing activities) differently. Furthermore, the value relevance is dissimilar for different components of deferred tax. Investors are wary of deferred tax assets and liabilities when pricing and are likely to penalize firms with a higher deferred tax position.
Author: David Hay
Publisher: Routledge
ISBN: 1136210350
Category : Business & Economics
Languages : en
Pages : 387
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Book Description
Auditing has been a subject of some controversy, and there have been repeated attempts at reforming its practice globally. This comprehensive companion surveys the state of the discipline, including emerging and cutting-edge trends. It covers the most important and controversial issues, including auditing ethics, auditor independence, social and environmental accounting as well as the future of the field. This handbook is vital reading for legislators, regulators, professionals, commentators, students and researchers involved with auditing and accounting. The collection will also prove an ideal starting place for researchers from other fields looking to break into this vital subject.
Author: John D. Phillips
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper provides evidence on the types of accounts that reveal earnings management activities. We build on Burgstahler and Dichev's (1997) evidence of earnings management to avoid an earnings decline and Phillips et al.'s (2003) findings that deferred tax expense can be used to detect such earnings management. In particular, we investigate the relation between changes in annual earnings and changes in deferred tax asset and liability components using firms' income tax footnote disclosures. We establish the incremental usefulness of the change in net deferred tax liabilities (DTLs) in detecting earnings management to avoid an earnings decline, and then decompose the total change in net DTLs into eight components to determine which types of accounts are associated with earnings management activities. Our evidence indicates that firms use revenue and expense accruals and reserves and other asset valuation accruals to manage earnings upwards. In addition, we build on Joos et al.'s (2003) results and partition our sample into firm-years with positive and negative changes in net DTLs and repeat our analyses. We find that both sub-samples manage revenue and expense accruals and reserves to report earnings increases; however, only firm-years with a positive change in net DTL also reflect the use of the deferred tax asset valuation allowance account to manage earnings upward, and only firm-years with a negative change in net DTL also manage earnings upward using other asset valuation accruals.
Author: Catherine M. Schrand
Publisher:
ISBN:
Category :
Languages : en
Pages : 35
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Book Description
SFAS 109, Accounting for income taxes, was criticized for allowing firms to set arbitrarily high valuation allowances against deferred tax assets at adoption as quot;hidden reservesquot; that firms could use in future periods to manage earnings. Consistent with these claims, bank managers make discretionary decreases in the valuation allowance, which represents an increase in earnings, when earnings before adjustment are below the consensus analyst forecast. The magnitude of the discretionary adjustment increases in the deviation from forecast. Abnormal returns around the 10-K filing date suggest that the market attributes value to these discretionary earnings even though they presumably have no direct cash flow implications. However, additional tests indicate that the association between returns and discretionary changes in the valuation allowance are related to reductions in earnings volatility which provide indirect, but real, cash flow benefits in the regulated banking industry.
Author: Malek El Diri
Publisher: Springer
ISBN: 3319626868
Category : Business & Economics
Languages : en
Pages : 120
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Book Description
This book provides researchers and scholars with a comprehensive and up-to-date analysis of earnings management theory and literature. While it raises new questions for future research, the book can be also helpful to other parties who rely on financial reporting in making decisions like regulators, policy makers, shareholders, investors, and gatekeepers e.g., auditors and analysts. The book summarizes the existing literature and provides insight into new areas of research such as the differences between earnings management, fraud, earnings quality, impression management, and expectation management; the trade-off between earnings management activities; the special measures of earnings management; and the classification of earnings management motives based on a comprehensive theoretical framework.
Author: Do-Jin Jung
Publisher:
ISBN:
Category :
Languages : en
Pages : 204
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Book Description
Author: Myron S. Scholes
Publisher:
ISBN: 9781292065571
Category :
Languages : en
Pages : 528
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Book Description
For MBA students and graduates embarking on careers in investment banking, corporate finance, strategy consulting, money management, or venture capital Through integration with traditional MBA topics, Taxes and Business Strategy, Fifth Edition provides a framework for understanding how taxes affect decision-making, asset prices, equilibrium returns, and the financial and operational structure of firms. Teaching and Learning Experience This program presents a better teaching and learning experience-for you and your students: *Use a text from an active author team: All 5 authors actively teach the tax and business strategy course and provide students with relevant examples from both classroom and real-world consulting experience. *Teach students the practical uses for business strategy: Students learn important concepts that can be applied to their own lives. *Reinforce learning by using in-depth analysis: Analysis and explanatory material help students understand, think about, and retain information.
