Accounting Papers

Document Type

Journal Article

Date of this Version

2003

Publication Source

Contemporary Accounting Research

Volume

20

Issue

3

Start Page

579

Last Page

611

DOI

10.1506/480D-098U-607R-5D9W

Abstract

Statement of Financial Accounting Standards No. 109 (SFAS No. 109) allows firms to use their discretion to set arbitrarily high valuation allowances against deferred tax assets. Firms can then later use these "hidden reserves" to manage earnings. Our evidence indicates that most banks do not record a valuation allowance to manage earnings, but rather to follow the guidelines of SFAS No. 109. However, if the bank is sufficiently well capitalized to absorb the current-period impact on capital, then the amount of the valuation allowance increases with a bank's capital. In later years, bank managers adjust the valuation allowance to smooth earnings. The magnitude of the discretionary adjustment increases with the deviation of unadjusted earnings from the forecast or historical earnings.

Copyright/Permission Statement

This is the peer reviewed version of the following article: Schrand, C. M. and Wong, M. H. F. (2003), Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109. Contemporary Accounting Research, 20: 579–611., which has been published in final form at http://dx.doi....98U-607R-5D9W. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms.

Keywords

banks, deferred taxes, discretion, earnings management

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Date Posted: 27 November 2017

This document has been peer reviewed.