Abstract
In the last decade, there has been a renewed interest in the fundamentals of accounting, highlighting a considerable downward trend in the effectiveness of the matching process. Therefore, this study analyses how changes to the financial reporting system (revenue/expense vs. asset/liability) affect the degree of matching and assesses the relationship between the latter and the quality of accounting numbers. Focusing on private firms in the Italian institutional settings, this paper highlights how the switch from a revenue/expense model (as proxied by the Italian GAAP) to an asset/liability approach (as proxied by the IAS/IFRS) has clearly worsened the level of matching between current revenue and expenses. Moreover, this study analyses if quality of the accounting numbers is systematically influenced by the degree of matching effectiveness through a direct correlation and highlights that the degree of matching is positively related to the predictability and persistence of earnings, while having a negative correlation with earnings volatility. This stresses the positive impact of such basic reporting processes on the quality of accounting numbers. These findings are particularly relevant for regulators, standard setters and academics, since they provide further insights for the debate on the accounting harmonisation process and represent an additional call for further research into this topic.
Highlights
Earnings are the primary product of accrual accounting and are used as a better measure of performance (Graham et al, 2005).the usefulness of earnings depends on their quality, which in turn depends on the quality of their components
This study focuses on the Italian institutional settings to compare the effectiveness of matching and its impact on the quality of accounting numbers for a group of private firms adopting an asset/liability approach versus firms reporting under a revenue/expense model
Because of the implementation of the IAS Regulation (1606/2002), since 2005 Italian private firms have been able to voluntarily opt to adopt the IAS/IFRS instead of the local GAAP. This is an important contingency since it allows for the simultaneous assessment of the effectiveness of the matching process in a context characterised by the coexistence of firms who have adopted the revenue/expense model (R/E) and those that follow the asset/liability approach (A/L)
Summary
Earnings are the primary product of accrual accounting and are used as a better measure of performance (Graham et al, 2005). Some previous studies have already analysed the impact of the IAS/IFRS on the matching process and other earnings attributes, none (except for a working paper from Moscariello et al, 2016) have explicitly considered the asset/liability nature of the international standards or examined their impact within an institutional setting traditionally characterised by a revenue/expense approach This is one of the first studies to investigate the effects of different financial reporting models on basic accounting rules (Dichev & Tang, 2008; Jin et al, 2015; Bushman et al, 2016; He & Shan, 2016).
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