Earnings Quality

A commentary examines empirical measures used in academic research to assess earnings quality and relates these measures both to decision usefulness, from the FASB's Conceptual Framework, and to the economics-based definition of earnings developed by Hicks (1939). Hicksian income corresponds to...

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Bibliographic Details
Published in:Accounting horizons 2003-01, Vol.17 (s-1), p.97-110
Main Authors: Schipper, Katherine, Vincent, Linda
Format: Article
Language:English
Subjects:
Accounting
Analysis
Decision making
Earnings announcements
FASB statements
Financial reporting
Financial statements
Innovations
Profit
Quality standards
Studies
Valuation
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Summary:A commentary examines empirical measures used in academic research to assess earnings quality and relates these measures both to decision usefulness, from the FASB's Conceptual Framework, and to the economics-based definition of earnings developed by Hicks (1939). Hicksian income corresponds to the amount that can be consumed (paid out as dividends) during a period, while leaving the firm equally well off at the beginning and the end of the period. This measure of income corresponds to the change in net economic assets other than from transactions with owners. Speaking to implications of earnings quality assessments for standard setting, it is concluded that standard setters are unlikely to take the perspective that high-quality earnings are characterized by closeness-to-cash because there is no concept in the FASB's Conceptual Framework that supports this perspective. However, the Conceptual Framework does suggest that earnings quality might be assessed by some combination of persistence, predictive ability and variability.
ISSN:0888-7993
1558-7975
DOI:10.2308/acch.2003.17.s-1.97