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Classificatory income smoothing: the impact of a change in regime of reporting financial performance

Athanasakou, Vasiliki E., Strong, Norman C and Walker, Martin (2007) Classificatory income smoothing: the impact of a change in regime of reporting financial performance. Journal of Accounting and Public Policy, 26 (4). pp. 387-435. ISSN 0278-4254

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Identification Number: 10.1016/j.jaccpubpol.2007.05.002


Financial Reporting Standard No. 3 (FRS3) regulated the reporting of financial performance by UK firms from 1993 until the adoption of International Financial Reporting Standards in 2005. FRS3 outlawed extraordinary items, but allowed a clearer distinction between recurring and transitory income by giving firms discretion over the classifications of unusual (i.e. exceptional) items and the option to disclose alternative EPS. Through these provisions FRS3 increased the scope for classificatory choices as a means to highlight persistent profitability. We examine the impact of FRS3 on classificatory smoothing by UK firms and document a significant rise in this practice post-FRS3. We find that this increase is due mainly to deviations of net income from expected earnings inducing a significantly higher level of classificatory smoothing post-FRS3. Additional analysis shows that earnings are substantially more persistent at the pre-exceptional level post-FRS3. Overall, our results suggest greater use of classificatory choices to highlight sustainable profitability after the change in performance reporting regime

Item Type: Article
Official URL:
Additional Information: © 2013 Elsevier B.V
Divisions: Accounting
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
Date Deposited: 23 Jul 2013 15:47
Last Modified: 20 Feb 2021 04:07

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