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The Change of Consolidation Rules and Its Impact on Earnings Management

Author

Listed:
  • Yan-Jie Yang

    (Yuan Ze University)

  • Chi-Hua Li

    (Fu Jen Catholic University)

  • Ruey-Ching Lin

    (Fu Jen Catholic University)

  • Hong-Da Wang

    (National Kaohsiung First University of Science and Technolog)

Abstract

Boundaries of consolidated reporting entities vary between International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP). Based on the rules-oriented conceptual framework, U.S. GAAP adopts ownership-based consolidation approach (ARB 51), while IFRS adopts control-based approach that is more principle-oriented (IAS 27). Exploiting a unique setting which took place in Taiwan that switched from U.S. GAAP to IFRS in consolidation rules in 2005, this study finds that parent firms conducting more related party transactions with their subsidiaries are inclined to hide them from consolidation under ownership-based consolidation. This intention to avoid consolidation, however, is substantially restrained when switching to the control-based consolidation approach. In addition, firms employ real earnings management to substitute for earnings management via related party transactions after control-based consolidation approach is adopted, consistent with prior studies (e.g., Zang, 2012) that find relative costliness drives the earnings management decision.

Suggested Citation

  • Yan-Jie Yang & Chi-Hua Li & Ruey-Ching Lin & Hong-Da Wang, 2017. "The Change of Consolidation Rules and Its Impact on Earnings Management," Proceedings of Business and Management Conferences 5607918, International Institute of Social and Economic Sciences.
    • Handle: RePEc:sek:ibmpro:5607918
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    File URL: https://iises.net/proceedings/6th-business-management-conference-geneva-56/table-of-content/detail?cid=56&iid=018&rid=7918
    File Function: First version, 2017
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    More about this item

    Keywords

    Consolidated rules; Business group; Earnings management; Related party transactions;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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