Revenue-expense versus asset-liability model: The impact on the earnings attributes of non-financial private firms

Purpose: This study analyses the impact of two different financial reporting models (revenue-expense vs. asset-liability) on several earnings attributes. Design/methodology/approach: The analysis compares the earnings attributes of non-financial private firms using the Italian Generally Accepted Accounting Principles (Italian GAAP, based on a revenue-expense model) with those of the Italian non-financial private firms voluntarily adopting the International Financial Reporting Standards (IFRS, based on the asset-liability model). To address major methodological concerns, our research design is based on a single-country analysis and on three different samples: i) firms voluntarily adopting IFRS; ii) a matched sample of Italian GAAP firms; iii) Italian-GAAP firms belonging to the Elite program and therefore comparable to the IFRS adopters in terms of incentives towards financial reporting transparency. Findings: Our results show that firms reporting under a revenue-expense model are characterized by a stronger revenue-expense matching degree, along with higher earnings’ persistence, earnings’ predictability, and conditional conservatism than firms adopting an asset-liability model. In addition, contrary to our expectations, Italian GAAP firms do not present smoother earnings and do not report greater abnormal accruals than IFRS adopters do. Overall, our findings suggest that the switch from a revenue-expense model to an asset-liability model negatively affects several earnings attributes of non-financial private companies. Originality/Value: This study addresses a theme characterized by sparse research efforts, adding new insights to the debate on the decline in the quality of earnings and on the drawbacks associated with the adoption of the IFRS accounting model.