The effect of ASU 2014–08 on the use of discontinued operations to manage earnings

Yuan Ji (), James Potepa () and Oded Rozenbaum ()
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Yuan Ji: Montana State University
James Potepa: The George Washington University
Oded Rozenbaum: The George Washington University

Review of Accounting Studies, 2020, vol. 25, issue 4, No 1, 1229 pages

Abstract: Abstract Accounting regulations require firms to separately disclose the profits and losses from discontinued operations. These discontinued operations are typically excluded from the definition of income used by investors, analysts, and others. Barua, Lin, and Sbaraglia (2010) show that managers manipulate earnings by shifting core expenses into discontinued operations. In light of recent changes in the regulations pertaining to this item, we reexamine this finding. The new rules, which change the criteria for what can be considered discontinued and the associated disclosure requirements, substantially reduce any significant evidence of earnings management using discontinued operations. A decline in the manipulation of large negative discontinued operations drives this reduction. We also find that the new rules decrease the frequency and persistence of discontinued operations.

Keywords: Discontinued operations; ASU 2014–08; Earnings manipulation; Classification shifting; M40; M41; M48 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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DOI: 10.1007/s11142-020-09535-y

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