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Micro Entities’ Financial Reporting Response to Exogenous Institutional Changes
Urska Kosi, University of Macedonia
Aljosa Valentincic, University of Ljubljana
ABSTRACT: We study the financial reporting response of micro entities to an exogenous change in tax legislation that removes an important economic incentive to form a particular type of accruals – asset write-offs. Existing studies show that if asset-write offs are a tax-recognised expense, more profitable (rather than less) companies are more likely to write-off and the magnitude of write-offs is greater, reflecting tax minimisation incentives and overriding accounting standards (Garrod et al., forthcoming). Conversely, if asset write-offs cease to be treated as a tax-deductible expense, this “anomalous” impact of profitability drops significantly and factors linked to impairment (operating) reasons increase after this change. We document the effect of this institutional change in a code-law setting with high alignment between financial and tax reporting and no agency incentives. This paper responds to calls for more research into micro entities’ financial reporting process (e.g., IFAC, 2006).
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