The effectiveness of the matching principle in different financial reporting systems and its impact on the quality of earnings

Abstract

In the last decade, there has been a renewed interest in the fundamentals of accounting, highlighting a considerable downward trend in the effectiveness of the matching process. Therefore, this study analyses how changes to the financial reporting system (revenue/expense vs. asset/liability) affect the degree of matching and assesses the relationship between the latter and the quality of accounting numbers. Focusing on private firms in the Italian institutional settings, this paper highlights how the switch from a revenue/expense model (as proxied by the Italian GAAP) to an asset/liability approach (as proxied by the IAS/IFRS) has clearly worsened the level of matching between current revenue and expenses. Moreover, this study analyses if quality of the accounting numbers is systematically influenced by the degree of matching effectiveness through a direct correlation and highlights that the degree of matching is positively related to the predictability and persistence of earnings, while having a negative correlation with earnings volatility. This stresses the positive impact of such basic reporting processes on the quality of accounting numbers. These findings are particularly relevant for regulators, standard setters and academics, since they provide further insights for the debate on the accounting harmonisation process and represent an additional call for further research into this topic.