Implications of FIN 46 for Accruals Quality

• In Event: Public Interest & Social Responsibility

Abstract

The Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities – An Interpretation of ARB No. 51, in January 2003 and revised it in December 2003, with the objective of improving the transparency of financial information. Under FIN 46, companies are required to consolidate variable interest entities (VIEs) on their financial statements, if they are the primary beneficiaries of the VIEs. This paper empirically examines whether the implementation of this accounting standard affects firms’ accruals. We compare a manually collected sample of firms affected by FIN 46 with a manually collected sample of firms disclosing no material impact from FIN 46. We find that firms affected by FIN 46 experience a decrease in accruals quality compared to firms reporting no material impact from FIN 46. Among the firms affected by FIN 46, we find lower accruals quality for firms consolidating their VIEs compared to firms terminating or restructuring their VIEs.

Authors

• Fang Zhao, Merrimack College

• Abhijit Barua, Florida International University

• Jonathan Andrew Milian, Florida International University