TITLE

Earnings Management Using the Valuation Allowance for Deferred Tax Assets under SFAS No. 109

AUTHOR(S)
SCHRAND, CATHERINE M.; WONG, M. H. FRANCO
PUB. DATE
September 2003
SOURCE
Contemporary Accounting Research;Fall2003, Vol. 20 Issue 3, p579
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
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.
ACCESSION #
10901573

Tags: ACCOUNTING -- Standards;  VALUATION;  EARNINGS forecasting;  DEFERRED tax;  BANKING industry;  CORPORATE profits -- Management

 

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