The Effect of ASU 2014-08 on the Use of Discontinued Operations to Manage Earnings

44 Pages Posted: 16 Mar 2018 Last revised: 19 Jun 2019

See all articles by Yuan Ji

Yuan Ji

The Hong Kong Polytechnic University

James Potepa

American University - Accounting; The George Washington University

Oded Rozenbaum

George Washington University - School of Business

Date Written: June 13, 2019

Abstract

Accounting regulations require firms to separately disclose the profits and losses from
discontinued operations. These discontinued operations are typically excluded from the
definition of income used by investors, analysts, and other financial statement users. Barua, Lin,
and Sbaraglia (2010) show that managers manipulate earnings by shifting core expenses into
discontinued operations. In light of recent changes in the regulations pertaining to this item, we
reexamine this finding. The new rules, which change the criteria for what can be considered
discontinued and the associated disclosure requirements, substantially reduce any significant
evidence of earnings management using discontinued operations. A decline in the manipulation
of large negative discontinued operations drives this reduction. We also find that the new rules
decrease the frequency and persistence of discontinued operations.

Keywords: ASU 2014-08, Discontinued Operations, Earnings Management

Suggested Citation

Ji, Yuan and Potepa, James and Rozenbaum, Oded, The Effect of ASU 2014-08 on the Use of Discontinued Operations to Manage Earnings (June 13, 2019). Available at SSRN: https://ssrn.com/abstract=3141713 or http://dx.doi.org/10.2139/ssrn.3141713

Yuan Ji

The Hong Kong Polytechnic University ( email )

Hung Hom
Kowloon, Hong Kong
Hong Kong

James Potepa (Contact Author)

American University - Accounting ( email )

United States

The George Washington University ( email )

Washington, DC 20052
United States

Oded Rozenbaum

George Washington University - School of Business ( email )

Washington, DC 20052
United States
202-994-5992 (Phone)

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