The Impact of Industry Regulation, Taxation and Corporate Strategy on Accounting Method Choice -- Cash vs. Accrual Accounting for Tobacco Licence Fees
Posted: 25 May 1998
Date Written: November 1995
Case studies of the change from cash to accrual accounting for tobacco licence fees (TLF) by the three members of the Australian tobacco manufacturing oligopoly illustrate the endogeneity of accounting method choice and provide evidence of a "product market" effect on that choice. Prior to the switch the "results of operations" comprised net operating margin and timing differences between TLF invoiced (to customers) and TLF disbursements (to government). Changes in firms' institutional environment (regulation, taxation) and consequential changes in corporate strategy (sales mix, distribution channel) imply significant increases in the proportion of TLF timing differences in earnings. The accounting switch insulates operating results from the largely uncontrollable impact of TLF timing differences and, at the same time, removes an incentive for strategic buying by major customers.
JEL Classification: M41, H26
Suggested Citation: Suggested Citation