Earnings management using revenue classification shifting – evidence from the IFRS adoption period

Abstract

Purpose This paper aims to provide evidence of an unintended observable consequence of International Financial Reporting Standards (IFRS) adoption by examining opportunistic use of earnings management through revenue as well as expense items classification shifting in the year of transition. Design/methodology/approach To document classification shifting, the authors take advantage of the Korean mandatory IFRS adoption in 2011, when broad discretion was given to publicly traded companies’ managers to present operating profits. Findings It is found that companies strategically use both revenues and expenses to manage core earnings at the time of transition by shifting other income as a common tactic to improve their operating performance and special expenses just to meet or beat earnings targets. Originality/value Given the concerns of the Securities and Exchange Commission (SEC) about classification shifting behavior and the debate over whether the SEC should mandate the use of IFRS for US companies, the findings of this study are timely and contribute to authors’ understanding of the unintended consequences of mandatory IFRS adoption.

Classification Shifting in the Income-Decreasing Discretionary Accrual Firms

“…Prior literature has investigated classification shifting of core expenses as income decreasing special items (McVay 2006;Fan et al 2010), classification shifting of core expenses as discontinued operations , classification shifting of operating expenses as non-operating expenses (Noh et al 2014). Their findings support the hypothesis that managers deliberately misclassify line items in the income statement to affect the perceptions of financial statement users.…”

“…It is defined by McVay (2006) as the deliberate misclassification of items within the income statement. Some studies examined the misclassification of core expenses as income decreasing special items (McVay 2006;Fan, Barua, Cready & Thomas 2010), some as discontinued operations (Barua, Lin, & Sbaraglia, 2010), and some as non-operating expenses (Noh, Moon, Guiral, & Esteban 2014). Literature also provides extensive evidence for other two general earnings management tools: accrual management (Healy 1985;DeAngelo 1986;McNichols & Wilson, 1988;Jones 1991;DeFond & Jiambalvo 1994;Dechow, Sloan, & Sweeney 1995;Kothari, Leone, & Wasley, 2005) and real activities management (Roychowdhury 2006;Cohen & Zarowin 2010;Gunny 2010;Zang, 2011).…”

أثر ممارسات إدارة الأرباح من خلال إدارة عرض بنود قائمة الدخل على جودة الأرباح المحاسبیة مع دراسة تطبیقیة على الشرکات المساهمة المصریة

“…(Athanasakou, et al, 2011;Zalata and Roberts, 2016) ‫نيا‬ ‫اس‬ ‫نرق‬ ‫ش‬ ‫ني‬ ‫ف‬ ‫نت‬ ‫يم‬ ‫اليي‬ ‫اسات‬ ‫الدر‬ ‫يجت‬ ‫اسي‬ ‫كما‬ . (Haw, et al, 2011) ‫ناد‬ ‫ب‬ ‫نب‬ ‫يباي‬ ‫نال‬ ‫س‬ ‫الد‬ ‫في‬ ‫المبالغة‬ ‫بغية‬ ‫الدالل‬ ‫قائمة‬ ‫نى‬ ‫عم‬ ‫نرافات‬ ‫المص‬ ‫نن‬ ‫م‬ ‫نغيمية‬ ‫اليش‬ ‫ناد‬ ‫الب‬ ‫نب‬ ‫يباي‬ ‫نبلل‬ ‫ال‬ ‫نن‬ ‫م‬ ‫اليشغيمي‬ ‫الل‬ ‫اسة‬ ‫در‬ ‫يائج‬ ‫اييعق‬ ‫يشغيمية.‬ ‫يير‬ ‫اد‬ ‫ب‬ ‫ها‬ ‫أ‬ (Noh, et al, 2014 (Haw, et al, 2011;Desai and Nagar, 2016 (Ertimur, et al, 2003;Marquardt and Wiedman, 2004 (McVay, 2006, Cohen et al, 2009, Zalata and Roberts, 2017, Fan, et al, 2010, Fan, et al, 2017…”

Earnings Management versus Capital Structure: What Are the Chances of Companies Occurring Within the Discretionary Limit?

“…The earnings management can also occur through revenue recognition, managers can use revenues strategically to improve operational performance and this can occur because the managers want to achieve or even exceed targets (Noh, Moon, & Parte, 2017). And as an aggravating factor, some sectors may be more likely to earnings results than others (Rasmussen, 2012).…”