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Discussion of “Implications of the integral approach and earnings management for alternative annual reporting periods”


The paper by Gunny, Jacob, and Jorgensen (Rev Account Stud, 2013) provides evidence on whether the earnings volatility induced by year-end adjusting entries results from the integral method of accounting or from purposeful earnings management. The authors find that the variance and negative skewness of annual fiscal-year earnings is greater than the corresponding attributes of alternative annual earnings ending in the first three quarters and interpret these findings as evidence consistent with earnings management rather than settling up annual earnings under the integral method of accounting. While it is difficult to assess the usefulness of their conclusion due to problematic assumptions inherent in the research design, Gunny et al. (2013) reinforce the importance of assessing earnings performance using rolling annual windows. Specifically, they find that the quality of earnings for the alternative annual earnings is greater than that of fiscal-year earnings, highlighting that financial statement users may benefit from using alternative annual earnings to assess current and future performance.

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  1. 1.

    The alternative of the integral approach, is the discrete approach which treats each quarterly period as a separate reporting period, applying the same rules to adjacent quarters as to adjacent fiscal years (e.g., Rangan and Sloan 1998).

  2. 2.

    The foregoing notion of unbiased adjusting entries is in line with Schipper’s (1989) well-accepted definition of non-discretionary accruals as those arising from the neutral operation of GAAP.

  3. 3.

    ASC 350-20-35-28 was superseded on December 15, 2011, as impairment testing of goodwill and indefinite-lived intangibles is no longer required on an annual basis but rather when it is more likely than not that their fair values are materially less than their carrying amounts.

  4. 4.

    As mentioned in Sect. 2, larger fiscal-year adjusting entries will likely come under the scrutiny of the external auditor, and hence it is difficult to make large entries that are inconsistent with an unbiased application of GAAP, so if anything, the opposite would be expected in practice.


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I am grateful for the comments from Peter Easton, James Ryans, and Richard Sloan.

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Correspondence to Alastair Lawrence.

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Lawrence, A. Discussion of “Implications of the integral approach and earnings management for alternative annual reporting periods”. Rev Account Stud 18, 892–898 (2013).

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  • Integral method of accounting
  • Earnings management
  • Unbiased application of GAAP
  • Earnings quality
  • Alternative annual earnings
  • Write-downs

JEL Classification

  • G12
  • M41