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Article
Publication date: 3 May 2016

Hyun-Ah Lee and Won-Wook Choi

This study aims to verify the circumstances under which managing the allowance for uncollectible accounts is used as a tool of earnings management.

Abstract

Purpose

This study aims to verify the circumstances under which managing the allowance for uncollectible accounts is used as a tool of earnings management.

Design/methodology/approach

The authors investigate whether bad debt expense, which is an income statement counterpart of allowance for uncollectible accounts, is adjusted downward when pre-managed earnings is slightly above zero earnings, prior year’s earnings or analysts’ forecasts.

Findings

The findings of this study show that firms manage bad debt expense downward to avoid losses, sustain the prior year’s earnings and meet or beat analysts’ forecasts. The authors also find that the understatement of bad debt expense to meet earnings benchmarks is pronounced for firms with high tax costs.

Social implications

Standard setters and auditors can gain a better understanding in detail of the practices and methods of managing earnings via the allowance for uncollectible accounts.

Originality/value

This study is the first to examine earnings management via the allowance for uncollectible accounts in non-financial Korean firms. In addition, the findings provide the evidence that firms prefer to use the allowance for uncollectible accounts as a strategic tool to meet benchmarks, especially when their tax costs are high.

Details

International Journal of Accounting & Information Management, vol. 24 no. 2
Type: Research Article
ISSN: 1834-7649

Keywords

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Article
Publication date: 1 February 1983

Margaret Wilkinson

Sex discrimination is embedded in the personal income tax system of the UK which favours married men and operates against married women. The view that women are men's…

Abstract

Sex discrimination is embedded in the personal income tax system of the UK which favours married men and operates against married women. The view that women are men's dependants, institutionalised in the tax system, offends very many women and should have no place in a society committed to equality between the sexes.

Details

Equal Opportunities International, vol. 2 no. 2
Type: Research Article
ISSN: 0261-0159

Keywords

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Article
Publication date: 1 February 2003

Tao Zeng

This paper explores the value relevant information of future income taxes under The Canadian Institute of Chartered Accountants (CICA) handbook section 3465. CICA handbook…

Abstract

This paper explores the value relevant information of future income taxes under The Canadian Institute of Chartered Accountants (CICA) handbook section 3465. CICA handbook section 3465 requires Canadian companies to use the asset and liability method to account for income taxes. Consistent with prior studies, this paper shows that future tax assets are positively associated with share prices, suggesting that they are valued as assets. Future tax liabilities are negatively associated with share prices, suggesting that they are valued as liabilities. Future tax value allowance, which is created for future tax assets, is negatively associated with share prices. This study also explores the value relevant information of future tax asset and liability categories. In addition, this paper explores what determines the valuation of future tax assets and liabilities. It is argued that future tax assets are more (less) valuable if (no) sufficient future income will be generated in the near future to utilize these tax assets; future tax liabilities will reduce share prices more (less), if there is a higher (lower) likelihood of reversal in the short run. The results support this argument. It is shown that (1) future tax assets are less valuable if the firm's value allowance is higher (i.e., the management does not expect the firm will generate sufficient taxable income in future years to utilize these tax assets), or the firm's leverage is higher (another proxy for no sufficient future taxable income), and (2) future tax liabilities reduce share prices less if the firm's investment in capital properties is increased.

Details

Review of Accounting and Finance, vol. 2 no. 2
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 January 2002

Christine C. Bauman and Mark P. Bauman

Extant research examining the determinants of deferred tax asset valuation allowances finds that the evidence provisions outlined in SFAS 109 explain a significant portion…

Abstract

Extant research examining the determinants of deferred tax asset valuation allowances finds that the evidence provisions outlined in SFAS 109 explain a significant portion of both levels of and changes in recorded valuation allowances. In addition, there is evidence of a stock price reaction around the time of announcements of valuation allowance information. The present study extends existing research in two ways. First, extant research on determinants of valuation allowance changes does not incorporate the asymmetry in the evidence provisions of SFAS 109. Accordingly, we separately examine the determinants of increases versus decreases in valuation allowances and find that the evidence provisions of SFAS 109 explain a much greater portion of valuation allowance increases than decreases. Second, we examine the association between annual stock returns and reported earnings resulting from valuation allowance changes. While the earnings effect of valuation allowance changes is found to be significant in the expected direction, the stock price reactions do not occur in the period the earnings effect is reported. This is consistent with low earnings “quality” under SFAS 109.

Details

Review of Accounting and Finance, vol. 1 no. 1
Type: Research Article
ISSN: 1475-7702

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Article
Publication date: 1 August 1978

Thomas D. Lynch

Preamble Taxation does not escape the effects of inflation. It too is distorted by the fall in value of the national currency. No problem would arise where a tax is…

Abstract

Preamble Taxation does not escape the effects of inflation. It too is distorted by the fall in value of the national currency. No problem would arise where a tax is applied to a simple base at a single rate, with no exemptions or allowances and without a significant time lag. This is however a rare case. Certainly so far as the British direct tax system is concerned there are usually multiple rates, thresholds and other allowances and, particularly in capital taxation, there may be significant gaps in time between the date of the imposition of the tax and the time when the tax becomes payable. For example the new rates of capital transfer tax announced on 26 October 1977 would apply to the estate of a person who dies in 1978, 1998 or in the next century or would do so but for the inevitable review which will be required mainly because of inflation arising between 1977 and the date of death. If this were not adjusted the heirs of the deceased would manifestly be required to pay more capital transfer tax than the Chancellor of the Exchequer in 1977 intended them to pay. A simple example will illustrate this.

Details

Management Decision, vol. 16 no. 8
Type: Research Article
ISSN: 0025-1747

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Article
Publication date: 1 January 1987

JON ROBINSON

One form of property development incentive is the provision of tax shelters by way of tax depreciation allowances for buildings and parts of buildings. Since a tax

Abstract

One form of property development incentive is the provision of tax shelters by way of tax depreciation allowances for buildings and parts of buildings. Since a tax depreciation allowance can only be claimed against income from the subject property, or from another source, in order to assess the effect of the allowance, some form of after tax analysis is required. After tax analysis for both capitalisation and cash flow techniques is described and illustrated. Furthermore, slices of equated yield attributable to the main components of return from real property are demonstrated.

Details

Journal of Valuation, vol. 5 no. 1
Type: Research Article
ISSN: 0263-7480

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Article
Publication date: 1 March 1975

G.E. Whitman

Industrial profitability in Britain has suffered badly in recent years—and is still suffering—from the effects of rapid inflation coupled with rigorous price controls…

Abstract

Industrial profitability in Britain has suffered badly in recent years—and is still suffering—from the effects of rapid inflation coupled with rigorous price controls. This in turn has led to widespread liquidity problems aggravated by increasing capital needs to meet the ever mounting costs of stock and plant replacement. The survival and growth of firms depend on the ability of management to adapt to the changing business environment. Under today's conditions an acquaintance with the various forms of assistance to industry offered by the Government, and their implications, is essential for those concerned with the financial aspect of management. Intelligently used, these incentives can increase the profitability, after tax, of investment in fixed assets, as well as reinforcing the cash flow needed to finance them. The available fiscal incentives fall into two main classes: those given by way of “capital allowances” on fixed assets in taxing profits; and the range of government grants and other help available to firms operating in, or moving into, the “areas for expansion”.

Details

Managerial Finance, vol. 1 no. 3
Type: Research Article
ISSN: 0307-4358

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Book part
Publication date: 19 October 2020

Emmanouil Platanakis and Charles Sutcliffe

Although tax relief on pensions is a controversial area of government expenditure, this is the first study of the tax effects for a real-world defined benefit pension…

Abstract

Although tax relief on pensions is a controversial area of government expenditure, this is the first study of the tax effects for a real-world defined benefit pension scheme. First, we estimate the tax and national insurance contribution (NIC) effects of the scheme's change from final salary to career average revalued earnings (CARE) in 2011 on the gross and net wealth of the sponsor, government, and 16 age cohorts of members, deferred pensioners, and pensioners. Second, we measure the size of the twelve income tax and NIC payments and reliefs for new members and the sponsor, before and after the rule changes. We find the total subsidy split is roughly 40% income tax subsidy and 60% NIC subsidy. If lower tax rates in retirement and the risk premium effect of the exempt-exempt-taxed (EET) system are not viewed as a tax subsidy, the tax subsidy to members largely disappears. Any remaining subsidy drops, as a proportion of pension benefits, for high earners, as does that for NICs.

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Book part
Publication date: 15 November 2018

Mark P. Bauman and Cathalene Rogers Bowler

This study examines the impact of FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes, on earnings management (EM) activity, by focusing on…

Abstract

This study examines the impact of FASB Interpretation No. 48 (FIN48), Accounting for Uncertainty in Income Taxes, on earnings management (EM) activity, by focusing on changes in the deferred tax asset valuation allowance (DTVA). FIN48 was adopted, in part, over concerns that firms were using the reserve for uncertain tax positions (cushion) to manage earnings. However, there are reasons to believe that the adoption of FIN48 may have impacted the extent to which firms utilize DTVA changes as a strategic accounting choice. As the provision for income taxes is one of the final accounts closed prior to an earnings announcement, income tax accounting is generally regarded as a final opportunity to strategically meet earnings goals. To the extent that FIN48 reduced cushion-based EM, firms may have increasingly used DTVA changes as a substitute. Alternatively, the attention that FIN48 brought to firms’ income tax footnotes may have curbed the strategic use of income tax accounting, in general. This study employs a sample of publicly traded US firms over the period of 2003–2010. A regression model and an analysis of the frequency of DTVA-based EM reveal no evidence of a systematic change in behavior attributable to FIN48. However, further analysis reveals that firms identified as managing earnings to meet analyst forecasts increasingly used discretionary DTVA changes relative to changes in tax cushion in the post-FIN48 period. The results have implications for existing research on income tax-based EM.

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Article
Publication date: 1 March 1987

J.A. Kennedy and K.F. Sugden

In recent decades a vast amount of academic ink has been spilled in theorising as to how companies should go about making capital investment decisions. Comparable effort…

Abstract

In recent decades a vast amount of academic ink has been spilled in theorising as to how companies should go about making capital investment decisions. Comparable effort has been expended in carrying out surveys to ascertain whether the academic prescriptions are being followed in practice. However, consideration of the theoretical and actual roles of taxation in the capital budgeting decision have formed a relatively small part of these deliberations. The purpose of this paper is to consider these roles.

Details

Managerial Finance, vol. 13 no. 3/4
Type: Research Article
ISSN: 0307-4358

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