Income smoothing and market perception of accounting numbers : an empirical investigation of extraordinary items / Wan Adibah Wan Ismail, Khairul Anuar Kamarudin and Muhd Kamil Ibrahim

This paper examines issues related to the reporting of extraordinary items in
the financial statements of Malaysian companies. The first issue concerns the
change of accounting standards on extraordinary items, which has limited the
scope of extraordinary items. It is found that there are significant changes on
the incidence of reported extraordinary items during the period after the adoption
of the new standard. The findings supported the argument that the new
standards on extraordinary items had consequently reduce significantly these
items from financial statements. This paper hypothesizes that extraordinary
items classification choice is a means used by companies to smooth income.
Two types of statistical tests performed have confirmed the proposition that the
disclosure of extraordinary items is subject to this type of manipulation during
the period before the adoption of the new standard. Although it is proved that
the broad definition of extraordinary items allows companies to manipulate
income, evidence gathered from multivariate regressions demonstrates that
extraordinary items are of value-relevance for investors in valuing a firm's equity.
Thus, investors take into account the extraordinary items even though it is
disclosed 'below the line'.