Abstract

This study examines whether earnings management motives affect the association between asset write-offs and discretionary accruals for firms adopting Statement of Financial Accounting Standards No. 35 early versus late. The results document that early adopters (i.e., firms elected implementation of the pronouncement in 2004) with greater demands for earnings management (taking a "big bath") tend to engage in earnings manipulation by the magnitude of asset write-offs and discretionary accruals. Conversely, on-time adopters (i.e., firms adopting the provisions in 2005) have a higher propensity to reduce reported income by recording a greater magnitude of asset write-offs as well as a smaller amount of discretionary accruals, regardless of the degree of demands for earning management. Taken together, the results suggest that discretionary accruals are taken concurrently with asset write-offs to manage earnings downward, and that their magnitudes are determined jointly.