Fang Zhao
The Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities-An Interpretation of ARB No. 51, in January 2003 and revised it in December 2003, with the objective of improving the transparency of financial information. Under FIN 46, companies are required to consolidate Variable Interest Entities (VIEs) on their financial statements if they are the primary beneficiaries of the VIEs. This paper empirically examines the change in accruals quality around the implementation of FIN 46. In this research the author compares a manually collected sample of firms affected by FIN 46 with a manually collected sample of firms disclosing no material impact from FIN 46. As a result the author finds that firms affected by FIN 46 experience a decrease in accruals quality compared to firms reporting no material impact from FIN 46. Additional analysis shows that among firms affected by FIN 46, firms consolidating VIEs experience a decrease in accruals quality compared to firms restructuring or terminating VIEs.