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Accounting losses and earnings conservatism: evidence from Australian Generally Accepted Accounting Principles

Accounting losses and earnings conservatism: evidence from Australian Generally Accepted... We provide evidence on three important aspects of Australian financial reporting; namely, the characteristics of losses, the extent to which Australian firms’ earnings are conditionally conservative (i.e. bad news is reflected in earnings more quickly than good news) and the extent to which losses reflect incrementally greater conditional conservatism. We find evidence that loss incidence in Australia is frequent, with around 40 per cent of the sample firm‐years from 1993 to 2003 being losses. Losses are also surprisingly persistent, and the probability of loss reversal declines monotonically as the history of losses extends. Although conditional conservatism is also shown to be a pervasive aspect of Australian Generally Accepted Accounting Principles, we demonstrate that it is more evident among loss observations. This result is robust across different methods of capturing conditional conservatism, and supports the conclusion that the relatively high frequency of losses is, at least in part, a reflection of conservative reporting. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Accounting & Finance Wiley

Accounting losses and earnings conservatism: evidence from Australian Generally Accepted Accounting Principles

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References (23)

Publisher
Wiley
Copyright
Copyright © 2007 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0810-5391
eISSN
1467-629X
DOI
10.1111/j.1467-629X.2007.00218.x
Publisher site
See Article on Publisher Site

Abstract

We provide evidence on three important aspects of Australian financial reporting; namely, the characteristics of losses, the extent to which Australian firms’ earnings are conditionally conservative (i.e. bad news is reflected in earnings more quickly than good news) and the extent to which losses reflect incrementally greater conditional conservatism. We find evidence that loss incidence in Australia is frequent, with around 40 per cent of the sample firm‐years from 1993 to 2003 being losses. Losses are also surprisingly persistent, and the probability of loss reversal declines monotonically as the history of losses extends. Although conditional conservatism is also shown to be a pervasive aspect of Australian Generally Accepted Accounting Principles, we demonstrate that it is more evident among loss observations. This result is robust across different methods of capturing conditional conservatism, and supports the conclusion that the relatively high frequency of losses is, at least in part, a reflection of conservative reporting.

Journal

Accounting & FinanceWiley

Published: Sep 1, 2007

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