Financial accounting figures have always been a result of a pragmaticcompromise between the income statement model (i.e., revenue/expenseapproach) and the balance sheet model (i.e., asset/liability approach)(Dichev, 2008). However, during the last decades, financial reportingstandards have been gradually moving from the former approach to the latter(Jinnai, 2005), describing the asset/liability view as the only logical andconceptually sound basis of accounting (Sprouse, 1966; Storey and Storey,1998; Bullen and Crook, 2005).In response to the clear position taken by regulators, national andinternational standard setters, several scholars have stressed theoretical andempirical drawbacks associated to the balance sheet model. Indeed, thealleged conceptual superiority of the balance sheet is unclear, while itcontrasts with how most businesses operate and create value (advancingexpense to generate revenue and earnings) (Dichev, 2008; Kvifte, 2008). Atthe same time, according to Dichev and Tang (2008), by worsening therevenue-expense matching process, the balance sheet model has lowered theearnings quality of US listed companies, causing a marked deterioration inthe forward-looking informativeness of earnings.Notwithstanding the still ongoing debate on the supposed conceptualprimacy of the balance sheet model over the income statement model and onthe actual implications exercised by the former over the usefulness ofearnings, the asset/liability approach has been increasing its influenceshaping the financial statements not only of listed companies but also of theprivate ones. Indeed, a balance sheet model clearly influences the IFRS forSMEs. Moreover, as a part of the Responsible Business package with its“Think Small First” principle, the European Commission has recentlyreplaced the IV and VII EU Directive with the new Accounting Directive2013/34/EU. This Directive, that applies its provisions from 1st January2016, seems to adopt a financial reporting model closer to the balance sheetone4.For this reason, our study aims to extend knowledge on the relationshipbetween financial reporting models and earnings quality (EQ) by comparingEQ indexes collected on Voluntary Italian IAS/IFRS Adopters (VIA) andItalian GAAP Firms (IGF). Indeed, the IASB standards are strongly rootedon an asset/liability approach (He & Shan, 2015), whereas the Italian GAAPsare traditionally based on a revenue/expense model.After controlling for several variables that affect the quality of earnings,we find that firms adopting a balance sheet approach (VIA firms) arecharacterized by earnings of lower quality than firms whose financialstatements refer to an income model (IGF).Our study contributes to the accounting literature in several ways. First,this paper collects new evidence on the relationship between the financialstatements models (revenue/expense vs. asset/liability approach) and thequality of earnings. Second, to the best of our knowledge, this is the firststudy to investigate on the effects of financial statements models on theearnings quality of private companies. Indeed, more research in the privatefirm setting is needed and this study – by improving our understanding aboutfactors affecting SMEs’ earnings quality –responds to those scholars asking for an improved research design forsmaller or private firms (e.g., Sellhorn and Gornik-Tomaszewski, 2006;Nobes, 2010; Brüggemann, Hitz and Sellhorn, 2013). Finally, we contributeto the international debate on the accounting harmonization process and itseffectiveness in achieving regulatory objectives. The paper is structured asfollows. In section 2, we show our literature analysis and we develop ourresearch hypothesis. The research methodology and the variables definitionswith the statistical analyses are illustrated respectively in sections 3 and 4.Finally, in section 5, we illustrate the findings of the empirical analysis and,in section 6, the concluding remarks and the limitations of our study.

From the Income Statement Model to the Balance Sheet Model: an Empirical Analysis on the Impact on SMEs’ Earnings Quality

La Rosa Fabio;
2016-01-01

Abstract

Financial accounting figures have always been a result of a pragmaticcompromise between the income statement model (i.e., revenue/expenseapproach) and the balance sheet model (i.e., asset/liability approach)(Dichev, 2008). However, during the last decades, financial reportingstandards have been gradually moving from the former approach to the latter(Jinnai, 2005), describing the asset/liability view as the only logical andconceptually sound basis of accounting (Sprouse, 1966; Storey and Storey,1998; Bullen and Crook, 2005).In response to the clear position taken by regulators, national andinternational standard setters, several scholars have stressed theoretical andempirical drawbacks associated to the balance sheet model. Indeed, thealleged conceptual superiority of the balance sheet is unclear, while itcontrasts with how most businesses operate and create value (advancingexpense to generate revenue and earnings) (Dichev, 2008; Kvifte, 2008). Atthe same time, according to Dichev and Tang (2008), by worsening therevenue-expense matching process, the balance sheet model has lowered theearnings quality of US listed companies, causing a marked deterioration inthe forward-looking informativeness of earnings.Notwithstanding the still ongoing debate on the supposed conceptualprimacy of the balance sheet model over the income statement model and onthe actual implications exercised by the former over the usefulness ofearnings, the asset/liability approach has been increasing its influenceshaping the financial statements not only of listed companies but also of theprivate ones. Indeed, a balance sheet model clearly influences the IFRS forSMEs. Moreover, as a part of the Responsible Business package with its“Think Small First” principle, the European Commission has recentlyreplaced the IV and VII EU Directive with the new Accounting Directive2013/34/EU. This Directive, that applies its provisions from 1st January2016, seems to adopt a financial reporting model closer to the balance sheetone4.For this reason, our study aims to extend knowledge on the relationshipbetween financial reporting models and earnings quality (EQ) by comparingEQ indexes collected on Voluntary Italian IAS/IFRS Adopters (VIA) andItalian GAAP Firms (IGF). Indeed, the IASB standards are strongly rootedon an asset/liability approach (He & Shan, 2015), whereas the Italian GAAPsare traditionally based on a revenue/expense model.After controlling for several variables that affect the quality of earnings,we find that firms adopting a balance sheet approach (VIA firms) arecharacterized by earnings of lower quality than firms whose financialstatements refer to an income model (IGF).Our study contributes to the accounting literature in several ways. First,this paper collects new evidence on the relationship between the financialstatements models (revenue/expense vs. asset/liability approach) and thequality of earnings. Second, to the best of our knowledge, this is the firststudy to investigate on the effects of financial statements models on theearnings quality of private companies. Indeed, more research in the privatefirm setting is needed and this study – by improving our understanding aboutfactors affecting SMEs’ earnings quality –responds to those scholars asking for an improved research design forsmaller or private firms (e.g., Sellhorn and Gornik-Tomaszewski, 2006;Nobes, 2010; Brüggemann, Hitz and Sellhorn, 2013). Finally, we contributeto the international debate on the accounting harmonization process and itseffectiveness in achieving regulatory objectives. The paper is structured asfollows. In section 2, we show our literature analysis and we develop ourresearch hypothesis. The research methodology and the variables definitionswith the statistical analyses are illustrated respectively in sections 3 and 4.Finally, in section 5, we illustrate the findings of the empirical analysis and,in section 6, the concluding remarks and the limitations of our study.
2016
9788891736604
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Utilizza questo identificativo per citare o creare un link a questo documento: https://hdl.handle.net/20.500.11769/489178
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