Events Calendar

Join us to hear from Fábio Moraes da Costa from the Tippie College of Business, University of Iowa & Fucape Business School - Vitória, Brazil, who will present "The effects of decoupling financial and tax reporting on earnings quality."

Abstract: A subset of E.U. countries that switched to IFRS for financial reporting in 2005 retained Local GAAP for the parent’s books which serves as the starting point for tax reporting, effectively decoupling financial and tax reporting. We find that for financial reporting now under IFRS, earnings quality increased incrementally for firms in countries that decoupled relative to firms in countries where financial and tax reporting were independent both before and after adoption. Our results persist across both high- and low-book-tax conformity (BTC) industries, suggesting the effects of decoupling extend beyond the reduction in BTC. With the reporting incentives of the parent’s books in decoupled countries now tied to tax reporting rather than financial reporting, we find earnings quality for the parent’s books decreased post adoption. Together, our results are indicative that both financial reporting (following IFRS) and tax reporting (following Local GAAP) move in the direction of the reporting incentives.