The relationship between matching 'principle' and earnings attributes

Since the link between expenses and revenues is one of the basic concepts underpinning accrual accounting, the matching process has been defined as the central purpose of accounting, becoming a ground rule in the determination of periodic income. However, it is also true and has to be considered, that various issues have been raised about the usefulness of matching. In connection with this, the most often raised issue refers to the understanding of what matching means, depending on who is discussing about it. Specifically, it seems that the only reason why matching has been interpreted in so many different ways is that, in assessing the usefulness of matching processes, it has been modified to provide the accounting information required at a given period of time. Moreover, beside the different interpretations of matching process that followed the need to provide specific accounting information required at a given period of time, another fundamental issue, that has been pointed out, refers to the differences in matching process between the two main ideas of accounting system: the revenue/expense model and the asset/liability approach. Although there is an inherent conceptual tension between these two approaches, in practice, financial accounting has always been a pragmatic compromise between them. However, during the last decades, the emphasis of financial reporting standards have been gradually shifting from the revenue/expense model to the asset/liability approach. In response to the clear position taken by regulators and standard setters, several scholars have stressed theoretical and empirical drawbacks associated with the asset/liability approach, especially in connection with the substantial withdrawal from some fundamentals of accounting, among which the revenue recognition and the matching process rules. Starting from a theoretical and empirical review of all issues related with the accrual accounting system and its fundamentals, this study aims to analyze the consequences of a change in the financial reporting system on the effectiveness of the process of matching expenses with revenues. Specifically, this study highlights that starting from a situation in which there were no differences in the degree of matching between firms adopting a revenue/expense model and firms that opted for the implementation of an asset/liability approach (when they both adopted a revenue/expense reporting system), the choice to shift over an asset/liability accounting model represents a determinant of the observed worsening in the degree of matching for such a group of firms. Further, the analysis also aims to directly assess the effect that the possible different degree of matching could have on the quality of accounting numbers of private firms, controlling for a set of variables that might affect both matching process and earnings quality. In particular, assuming that the matching process is one of the milestones of accrual accounting, for the purpose of this study it is formally considered as a determinant of the quality of accounting numbers, and not just one of the many earnings quality attributes. Empirical findings suggest that the degree of matching is positively related to the predictability and the persistence of earnings, while has a negative correlation with the earnings volatility. In other words, the degree of matching is directly related to the quality of accounting numbers.