Abstract
<p>Purpose. This paper aims to identify the association between comprehensive income reporting and earnings management. More specifically, this study examines whether the implementation of comprehensive income reporting regulations, namely SFAS 130 and ASU 2011-05 is associated with a decrease in earnings management.<br />Design/ methodology. Data for all variables is retrieved from Compustat Global for a nine-year sample of 7962 US firms reporting under International Financial Reporting Standards (IFRS) that provide all the necessary data to conduct the study. The Modified Jones Model is used as a proxy to measure earnings management. Comprehensive income figures are retrieved from Compustat. Recalculated (as-if) numbers are used for firm years prior to the implementation of SFAS 130. While as-reported amounts are used for the years where SFAS 130 has been implemented and also the years during the implementation of ASU 2011-05.<br />Findings. Comprehensive income is found to be significantly negatively associated with earnings management through discretionary accruals. Furthermore, the interaction effects indicate that, after the implementation of SFAS 130 and ASU 2011-05, comprehensive income becomesmore negatively associated with discretionary accruals.<br />Relevance. Other than contributing to the growing literature regarding the usefulness of comprehensive income reporting, this research has implications for the FASB in assessing whether they achieved the target of better comprehensive income reporting.</p><p><br />Key words: Comprehensive Income, Earnings management, Interaction effect, Reporting Regulations, SFAS 130, ASU 2011-05.</p>
Highlights
In June 1997, the US Financial Accounting Standards Board (FASB) releasedStatement of Financial Accounting Standard (SFAS 130) which requires comprehensive income and components of comprehensive income be reported in a prominent financialstatement
The regression results reveal that there is a negative association between comprehensive income and discretionary accruals, the results are statistically insignificant.The coefficient for D1 is significantly positive, indicating that average discretionary accruals is higher for the Pre-SFAS 130 period compared to the other two periods
The statistically significant relationship between comprehensive income and discretionary accruals suggests that thereis an association between the two variables.Under the fixed effects model the findings indicate a negative association
Summary
Statement of Financial Accounting Standard (SFAS 130) which requires comprehensive income and components of comprehensive income be reported in a prominent financialstatement. The issuance of SFAS 130 was partly in response to users groups, namely the Association for Investment Management and Research (AIMR), requesting for clearer Comprehensive Income reporting. SFAS 130 allows firms to choose between three formats of reporting, two of which in the statement of performance using either the one statement approach or the two statement approach. The third format allows comprehensive income to be reported in the statement of stockholders’ equity. The FASB later issued Accounting Standards Update (ASU) 2011-05 which no longer allows the reporting of comprehensive income in the statement of stockholders’ equity
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