Discretionary Determination and Value Relevance of Accrual Expenses incurred by Nuclear Power Plant

This research focuses on the decommissioning cost and the recycle cost of used nuclear fuel, which are incurred by nuclear power plant. We examine what incentive factors affect the discretionary measurement of those expenses in the year and investigate whether the discretionary components are value relevant. First, the recycle expenses in the year is discretionally determined in order to smooth the uncertain fluctuations in operating profits, while the decommissioning expenses is not utilized for income smoothing. If some accruals were discretionally allocated inter-period for the purpose of income smoothing, the discretionary increase in those accruals (i.e. savings of earnings in current period) would communicate the manager's pessimistic forecasts on the performance to investors. Second, as consistent with the above hypothesis, the discretionary recycle expenses is value relevant and the coefficient on them is negative. Moreover, it is negatively related to the one-year ahead operating profits. These evidences imply that the value relevance of the recycle expenses is consistently estimated with the determinants and the predictive power of future performance. Third, both the decommissioning expenses and the recycle expenses do not deteriorate the quality of earnings. We cannot find the evidence supporting the repeated criticism that the opportunity to measure expenses based on managerial discretion must diminish the usefulness of accounting information.