Income smoothing by valuation of repurchase obligations in the annual financial statements of car dealerships

Abstract

This paper deals with the accounting patterns of German car dealerships in the period from 2006 to 2010. In connection with the brokerage of passenger car leases the car dealers and lessors agree on hedging the residual values of the lease car returns. Such hedging instruments require accounting for expected losses in case of impairment. The relation of total amount of outstanding repurchase obligations as of balance sheet date to balance sheet totals qualifies the related risk assessment of the hedging instrument to be an outstanding device for artificial income smoothing. Annual financial statements of 42 dealerships were analysed whether accounting for future losses from repurchase obligations is used for income smoothing purposes. The influence of changes in income tax rulings is taken into account.