The Association Between Classificatory and Inter-Temporal Smoothing: Evidence from the UK’s FRS 3

40 Pages Posted: 14 Oct 2007 Last revised: 13 Oct 2010

See all articles by Vasiliki E. Athanasakou

Vasiliki E. Athanasakou

Saint Mary's University, Canada - Sobey School of Business

Norman C. Strong

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Date Written: April 2010

Abstract

Financial Reporting Standard No3 (FRS 3): Reporting Financial Performance, which came into force in 1993, increased UK firms’ discretion in classifying exceptional items. We examine how this increased discretion affected their use of classificatory smoothing and inter-temporal smoothing through abnormal accruals to offset temporary shocks in performance and highlight sustainable profitability. Descriptive and multivariate analysis reveals a significant decline in income smoothing using abnormal accruals after FRS 3. The decline occurs in firms that used classificatory choices to a greater extent after FRS 3 to smooth income and is robust to controls for the effect of concurrent corporate governance regulation. Our results suggest that enhancing disclosure and discretion to classify non-recurring items within the income statement can reduce the costs to firms of achieving their income smoothing objectives.

Keywords: Income smoothing, accruals, classificatory choices, reporting discretion

JEL Classification: D21, G14, M41, M48

Suggested Citation

Athanasakou, Vasiliki E. and Strong, Norman Charles and Walker, Martin, The Association Between Classificatory and Inter-Temporal Smoothing: Evidence from the UK’s FRS 3 (April 2010). International Journal of Accounting, Vol. 45, Np. 2, 2010. Available at SSRN: https://ssrn.com/abstract=1019714

Vasiliki E. Athanasakou (Contact Author)

Saint Mary's University, Canada - Sobey School of Business ( email )

Sobey Building 311
923 Robie Street
Halifax, Nova Scotia B3H 3C3
Canada

Norman Charles Strong

University of Manchester - Alliance Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Martin Walker

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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