Title: The recognition of an accounting practice and its timing as signalling tools
Authors: Gaeremynck, Ann
Van de Gucht, Linda
Issue Date: 1999
Publisher: K.U.Leuven - Departement toegepaste economische wetenschappen
Series Title: DTEW Research Report 9920 pages:1-25
Abstract: This paper extends the literature on the signalling function of accounting and financial information by investigating the information content of the adoption of a certain accounting practice, namely the recognition of deferred taxes in the financial statements. Specifically, we examine whether (1) the decision to recognise a certain accounting practice, and (2) the timing of the recognition supplement one another as signalling devices. The new accounting law on deferred taxes (Royal Decree of December 30, 1991) requires all Belgian firms to recognise deferred taxes for all grants on the balance sheet as of 30/12/91. The results show that the recognition and the timing of the recognition supplement one another as signalling tools. The immediate recognition of positive deferred taxes signals good news: firms that report positive deferred taxes typically perform better at the time of adoption and in the near future thereafter. Within the class of recognisers, early recognisers perform better than late recognisers. However, this second signal, the timing of the recognition is only used as a second signal for the class of tax-paying firms. Our findings also indicate that the impact on the balance sheet is a significant determinant of the decision to report deferred taxes. Firms where the adoption of deferred taxes would lead to a high increase in the debt/equity ratio are less likely to adopt, or, if they do report deferred taxes, do so later. These results suggest that firms decide not to recognise positive deferred taxes in order to limit the decrease in their solvency position. Indeed, firms that have already experienced a decline in their solvency position are more likely to postpone the recognition of deferred taxes.
Publication status: published
KU Leuven publication type: IR
Appears in Collections:Research Center Accountancy, Leuven
Research Center Finance, Leuven

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