The Links between Accounting and Tax Reporting: The Case of Bad Debt Expense in the Italian Context

This study shows the way tax rules, rather than accounting ones, affect the measurement of receivables for the purpose of preparing the financial statements of Italian private (unlisted) companies according to national accounting standards. Through the distribution approach, it shows that Italian companies are likely to account for bad debt expense that corresponds to the maximum tax-deductible amount. Considering that the impact of tax rules on the preparation of the financial statements may affect the quality of earnings, the main implication of the findings of this study is that the earnings reported by Italian companies are not unconditionally formative regarding the company‟s performance. In other words, they may be of poor quality. As a result, they should be interpreted with caution by those who use financial statement information.