Amendment To Frs 3 Reporting Financial Performance

Author : Vasiliki E. Athanasakou
Publisher :
ISBN 13 :
Total Pages : 54 pages
Book Rating : 4.:/5 (129 download)

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Download or read book Classificatory Income Smoothing written by Vasiliki E. Athanasakou and published by . This book was released on 2007 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: 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.