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Were regulatory changes in reporting “abnormal items”justified?

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Purpose – Managers generally have discretion in determining how components of earnings are
presented in financial statements in distinguishing between “normal” earnings and items classified as
unusual, special, significant, exceptional or abnormal. Prior research has found that such intra-period
classificatory choice is used as a form of earnings management. Prior to 2001, Australian accounting
standards mandated that unusually large items of revenue and expense be classified as “abnormal
items” for financial reporting, but this classification was removed from accounting standards from
2001. This move by the regulators was partly in response to concerns that the abnormal classification
was being used opportunistically to manage reported pre-abnormal earnings. The purpose of this
paper is to extend the earnings management literature by examining the reporting of abnormal items
for evidence of intra-period classificatory earnings management in the unique Australian setting.
Design/methodology/approach – This study investigates associations between reporting of
abnormal items and incentives in the form of analyst following and the earnings benchmarks of
analysts’ forecasts, earnings levels, and earnings changes, for a sample of Australian, top-500 firms,
for the seven-year period from 1994 to 2000.
Findings – The findings suggest there are systematic differences between firms reporting abnormal
items and those with no abnormal items. Results show evidence that, on average, firms shifted expense
items from pre-abnormal earnings to bottom line net income through reclassification as abnormal losses.
Originality/value – The paper’s findings suggest that the standard setters were justified in removing
the “abnormal” classification from the accounting standard. However, it cannot be assumed that all
firms acted opportunistically in the classification of items as abnormal. With the removal of the
standardised classification of items outside normal operations as “abnormal”, firms lost the opportunity
to use such disclosures as a signalling device, with the consequential effect of limiting the scope of
effectively communicating information about the nature of items presented in financial reports.

Keywords Australia, Financial reporting, Accounting standards, Earnings management,Abnormal items, Special items

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Informasi Detail

Judul Seri

Journal of Accounting & Organizational Change

No. Panggil

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Penerbit

: Emerald Group., 2012

Deskripsi Fisik

Journal of Accounting & Organizational Change Vol. 8 No. 2, 2012 pp. 160-185

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

AKUNTANSI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

Versi lain/terkait

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