Date of this Version
Contemporary Accounting Research
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.
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.
banks, deferred taxes, discretion, earnings management
Schrand, C. M., & Wong, M. (2003). Earnings Management Using the Valuation Allowance for Deferred Tax Assets Under SFAS No. 109. Contemporary Accounting Research, 20 (3), 579-611. http://dx.doi.org/10.1506/480D-098U-607R-5D9W
Date Posted: 27 November 2017
This document has been peer reviewed.