Material Changes in Financial Reporting Attributable to the Tax Reform Act of 1986

The financial statement disclosures of 1,863 public corporations were examined for 2 categories of accounting changes related to the Tax Reform Act of 1986 (TRA): 1. changes intended to maintain book-tax conformity, and 2. changes intended to reduce financial accounting income and thus reduce the firm's exposure to the alternative minimum tax (AMT). It was found that 55 companies made accounting changes that could be attributed to management's desire to maintain conformity between tax and book accounting. Given the likelihood that many more companies made similar accounting changes that were deemed to be immaterial, it is apparent that the managerial decision to maintain book-tax conformity had a significant influence on external financial reporting. The data suggest that companies should pursue long-run strategies with respect to the selection of financial accounting principles.