The Effect of ASU 2014-08 on the Use of Discontinued Operations to Manage Earnings

Abstract

Accounting regulations require firms to separately disclose the profits and losses from discontinued operations. These discontinued operations are typically excluded from the definition of income used by investors, analysts, and other financial statement users. Barua, Lin, and Sbaraglia (2010) show that managers manipulate earnings by shifting core expenses into discontinued operations. In light of recent changes in the regulations pertaining to this item, we reexamine this finding. The new rules, which change the criteria for what can be considered discontinued and the associated disclosure requirements, substantially reduce any significant evidence of earnings management using discontinued operations. A decline in the manipulation of large negative discontinued operations drives this reduction. We also find that the new rules decrease the frequency and persistence of discontinued operations.