he Effect of Depreciation Methods and Periods on the Earnings Management
Asian Tax Journal Vol. 11 No. 2 (2010), pp. 45-66
Abstract
This empirical research examines the manager's earnings management behaviors in case of different depreciation methods. Depreciation is the settlement adjustment items for tax－deduction. The use of accelerated depreciation methods will reduce(enlarge) net income in the initial period(in the ending period) relative to what would have been reported if straight－line depreciation had been used. Therefore, this research studies whether accelerated depreciation triggers earnings smoothing as time passing or increases earnings through earnings management in the ending period of depreciation. The samples taken from Korean Exchange contain December settlement manufacturing companies from the fiscal year 2004 to 2008. The empirical test results that the fluctuation of depreciation expense exaggerate by accelerated depreciation method compared with straight－line depreciation method. Also, we find that there are no significant earnings management in the initial accelerated depreciation period, but earnings management increases with the purpose of increasing earnings in the ending period. It partially reflect the manager’s intention of showing the rational investment decision by reporting more earnings in the ending period of tangible asset which is accelerated depreciated. Thus, it can be explained as upwards earnings management in the ending depreciation period rather than income smoothing. Our research differs from previous study in respect of examining earnings management behaviors in conjunction with depreciation expense fluctuation in the period of the equipment investment and equipment life cycle. Furthermore, unlike previous studies focused on the choice of different depreciation methods, our research focus on earnings management motivation of different depreciation periods due to the choice of depreciation methods. And this result can serve as a evidence of the effect of the Settlement Adjustment enacted by the Corporate Tax Law on the Corporate Accounting.
Keywords
- Depreciation Method
- Settlement Adjustment
- Earnings Management
- Income Smoothing
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