Abstract
ABSTRACT This paper aimed to evaluate the moderation by variables related to incentives for earnings management (indebtedness, profitability, and size) over the effect of the change in standards (accounting or tax) on the book-tax differences (BTD). The end of the Transitional Tax Regime (RTT) enables us to evaluate the symmetry between the divergence and reconvergence of the accounting and tax standards, helping to identify the moderating effect of characteristics such as size, leverage, and profitability over the use of the discretion allowed by the International Financial Reporting Standards (IFRS). Studying the effects of changes in the standards contributes to understanding how they affect accounting information quality, particularly when we observe symmetrical movements of divergence of the accounting and tax standards, such as IFRS adoption, and of reconvergence, with the end of the RTT. The analysis conducted enables us to separate effects of divergence between the tax and accounting standards from the innovations introduced by the IFRS. An understanding of the effect of the standard over accounting information quality contributes to the quality of the work of financial analysts, tax authorities, and regulators. Event studies are conducted to evaluate the effect of IFRS adoption, as well as the end of the RTT, over the BTD (a proxy for earnings management), in cross sections of companies. We use explanatory variables related to incentives to manage book and taxable income (indebtedness, profitability, and size), which could explain the ambiguity of the results in the literature. The article provides evidence that the indebtedness and size of companies influence the effect of IFRS adoption, as well as of the end of the RTT. We observed a negative relationship of indebtedness and size with the impact of changes in standards over differences between book and taxable income (BTD).
Highlights
Claudio Marcio Pereira da Cunha & Pedro Paulo Furbino Bretas BarrosThe adoption of the International Financial Reporting Standards (IFRS) significantly altered accounting practice in Brazil
There is no evident variation in the book-tax differences (BTD) between the periods before and after the event based on the descriptive statistics
Despite only being significant in the one-year window, this is consistent with bigger companies using the flexibility of the IFRS to reduce the BTD, in order to reduce the attention of the tax authorities
Summary
Claudio Marcio Pereira da Cunha & Pedro Paulo Furbino Bretas BarrosThe adoption of the International Financial Reporting Standards (IFRS) significantly altered accounting practice in Brazil. According to CPC 00 (Accounting Pronouncements Committee, 2008), entitled “Conceptual Structure for Elaborating and Disclosing AccountingFinancial Reports,” the aim of the IFRS is to provide useful economic information to different types of users for decision making. According to Barth et al (2008), in order to improve accounting information quality, the new standards should be based on defined principles to reflect the company’s performance and economic situation. There is a lack of consensus in the literature regarding whether IFRS adoption has improved or undermined accounting information quality. Bartov et al (2005), Hung and Subramanyam (2007), Barth et al (2008), and Horton et al (2013), for example, provide evidence of an improvement in accounting information quality with IFRS adoption. Has IFRS adoption contributed to an improvement in accounting information quality or has it enabled its deterioration? What could explain this divergence in the literature regarding the effects of the IFRS on accounting information quality?
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