HI6025 Accounting Theory And Current Issues

Answer:

Executive summary of the outcome of the chosen topic

This paper is based on the article, “The impact of IFRS adoption on the value relevance of book value and earnings” published in the year 2011 and co-authored by Clarkson, Hanna, Richardson, and Thompson. In this article, the authors probed the implications of adopting IFRS in Australia and Europe on the book value and equity earnings’ value relevance. The authors utilized a sample of 3488 organizations that originally adopted IFRS-reporting in year 2005. They were able to compare and contrast the figures reported initially for 2004 fiscal years to those figures of IFRS provided in year 200 as the year 2004 IFRS relative figures. As a portion of their inquiry, the authors ushered in a cross-product term, equivalent to the EPS and BVPS products, into the conventional linear pricing models. The coefficient estimated on the cross-product terms stood significant statistically and adverse, as suggested by the theory in essential nonlinearities presence. Moreover, the authors showed an increased nonlinearity in the data consequent to the adoption of IFRS, with the surge being profoundly declared for the Common Law economies’ firms (Covrig, Defond and Hung 2007). When the coauthors controlled the nonlinear effects, they did not experience alterations in the price relevance for the organizations in both Common- and Code Law nations, opposing the outcomes from the linear pricing models. The outcome further indicate that measurement errors distribution becomes increasingly identical crossways Common- and Code-Law economies following the IFRS adoption, eliminating one variation between these cohorts. Therefore, the IFRS-reporting adoption is found to improve the comparability which is the inference that would never be feasible had the analysis in this article be restricted purely on linear pricing models.   

Focus significant implications of international accounting from their chosen paper or chosen annual report

The study examined how compulsory IFRS adoption in Australia and Europe impacted the ability of the earnings and book value reported to describe the stock prices, a matter for which little large-sample empirical proof is available. The original IFRS adoptions in year 2005 and the obligations that organizations restate their respective comparative 2004 figures to those of the IFRS in the year 2005 filing, offers a chance to compare and contrast the 2004 earnings and book value figures’ explanatory power measured under two distinct sets of accounting rules; the initial local-country GAAP and the latest IFRS. The authors also compared the Common-and Code-Law nation’s changes separately (Chua, Cheong and Gould 2012).

A regression model was introduced which added an extra explanatory variable to the conventional earnings (EPS) and the book value (BVPS) explanatory terms-the product terms (EPS*BVPS)-which is intended explicitly intended to cover the measurement error presence in the variables of accounting. Where the information exhibited measurement error which surges with the firm’s value, the product term was predicted to have a significant adverse coefficient. The coauthors reported the proof that the product terms remained more significant when the IFRS-reporting accounting figures (compared to the regression hinged on Local GAAP accounting) and the surge in significance of product model is increasingly manifested for Common Law countries’ firms (Ball 2006).

Taken together, the result for the Common- and Code-Law countries using WLS and OLS demonstrate a decline (surge) in the BVPS and EPS value relevance following the adoption of the IFRS-reporting standards. In comparison, a divergent deductions follows from the Product Model that has failed to dispute the null that the goodness-of-fit influence of the adopting IFRS is zero. The fundamental intuition here is that, for linear models, a decline (increase) in the firms’ price relevance from Common-(Code) Lwa nations is triggered by an alterations in the non-linearity of the pricing function.  Controlling the non-linear impacts leads to no witnessed change in the BVPS and EPS value relevance for both Common- and Code- Law economies despite the swift to IFRS-reporting standards. Being that Product Model changes the critical inference for the IFRS influence implies that the Product Model application remains justified and must be taken into account by coming scholars when performing levels valuation studies (Hung and Subramanyam 2007).

The coauthors further assess the impacts of IFRS-reporting adoption and implementation to what is referred to as a market-oriented attribute including the value relevance of earnings and book value for the stock price level by Francis, Lafond, Olson and Schipper (2004) and Schipper (2009). Based on the mentioned attribute, the coauthors captured the benefits of the IFRS by a rise in the linkage between price, earnings and book value. Because the authors held that “goodness-of-fit” is the means they measured such a connection, their “no change” outcome utilizing the Product Model is an implication that the IFRS adoption’s capital market benefits in Australia and Europe stood limited (Clarkson et al. 2011).

Nevertheless, they showed that Product Model discloses capital market benefits of adopting IFRS when the alternative market-oriented attribute (product term importance-viewed as measuring error-capture) was examined. Following the adoption and subsequent implementation, no variation in measurement error between Common-and Code Law countries was observed, while prior to adopting IFRs, such a difference was profound.  Where a person interprets measurement error’s heteroscedasticity as one financial reporting quality dimension, the implication is identical financial reporting quality following IFRS for 2 cohorts of nations that had dissimilar financial reporting quality prior to the adoption of IFRS. Therefore, the adoption and implementation of IFRS improves comparability. This inference was only made possible because the investigation extended past linearity models. Thus such an inference can be drawn from the data as the enforcement alongside incentives are held fixed to the examination. Such an outcome points to a benefit of adopting IFRS, an inference which could be impossible with confinement of analysis to the linear models as well as conventional “goodness-of-fit” metrics. Therefore, the Product Model has a critical role to play in helping assess the IFRS-reporting adoption benefits. Neither IFRS nor Product Model would be full without the other as each element of the analysis is dependent on the other (Barth, Landsman and Lang 2008).

It is, therefore, speculated that the measurement error heteroscedasticity in the countries with Code Law could have been shaped in 2 ways by the IFRS accounting standard adoption. One of this ways is the decrease in the prior cross-sectional difference in conservatism and the other ways is the surge in volatility of earnings (Daske and Gebhardt 2006). Resolving the connection between heteroscedasticity of measurement error and the above two forces remain a logical subsequent step for this literature presented in this article.        

Conceptualize and focus contribution how your chosen topic align with international accounting topic from your accounting theory and current issue Subject

Before the IFRS’s voluntary adoption, international accounting scholars examined the book value and earnings relevance via cross-sectional designs. For instance Arce and Mora (2002) explored the earnings and book value valuation in the valuation model levels across eights European nations utilizing data from 1990 to 19998. They concluded that earnings stood more relevant as opposed to book value in the Common Law nations and the reversed held for the Code Law economies. The partition between Code-and Common-Law is hinged on the anticipation that the role of earnings’ valuation need to remain more significant in shareholder than to stakeholder economies. Accounting standards in Common Law economies are established by private sector agencies and their purpose is to satisfy information requirement of investors (Jeanjean and Stolowy 2008). On the other hand, standards are established by government in Code Law nation s and accounting acts as a measure of the divide profits between groups of stakeholders. Therefore, legal system demonstrate a natural partition for the inquiry relating to the adoption of IFRS implications on the value relevance. A greater divergence between IFRS and Local GAAP is reported by Bae, Tan and Walker (BTW, 2008) in Code- and Common-Law countries due to Code Law nations adopting an insider economy perspective. Other studies have examined the book value and earnings’ valuation relevance for the early (voluntary) adopters of IAS succeeded by the IFRS using pre-post designs. Despite small samples used in these respective studies, they have found conflicting outcomes to the ones of Hung and Subramanyam (2007). Hund and Subramanyam explored the valuation relevance of the restatement variations for eighty voluntary IAS adopters in Germany. This study discovered that the merged earnings and book value relevance declined following the shift to IAS. Identical results were experienced by Stergios, Athanasios and Nicholas (2007) for forty voluntary IAS adopters in Greece. Studies relating to IFRS adoption like those of Armed and Goodwin (2006) alongside Godwin et al. (2008) have concluded that aggregate variations between local GAAP and IFRS show no incremental info for price in respective sample (Ampofo and Sellani 2005).

These studies provide conflicting information based on the use of incremental value relevance strategies and hence making it increasingly hard to understand the connection between IFRS adoption and value relevance of book value and earnings. It is this disparity that has inspired me to choose this topic “implication of IFRS adoption in accounting information relevance” because it aligns to the international topic of accounting theory and current issues. This will help me come up with a clear position on what exactly is the associating between IFRS adoption and accounting information value relevance. As observed in the literature, comparative value relevance examination tackle the question of which GAAP figures better fit the price, while incremental value relevance scrutiny ask whether, provided local GAAP figures’ knowledge, IFRS figures have incremental explanatory power for price. Reviewing this article has helped me recognize that it is an already establishment in the literature that GAAP regimes (IFRS and local) might each have incremental value relevance for the price provided the other, however, one of the regimes might have more value relevance for prices as opposed to other. Thus, I have been able to understand the significance of the relative test since investor will have a single set of figures or the other, rather than both, as economies shift to IFRS (Ahmed, Neel and Wang 2013).

In conclusion, the choice of the topic in this essay has made me understand the international topic of the “current issues in accounting’ based on the implication of IFRS adoption. As has been observed in the discussion, IFRS has increased the value relevance of accounting information as opposed to years before its launch in 2005. 

References

Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), pp.1344-1372.

Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for investors. Accounting and business research, 36(sup1), pp.5-27.

Barth, M.E., Landsman, W.R. and Lang, M.H., 2008. International accounting standards and accounting quality. Journal of accounting research, 46(3), pp.467-498.

Chua, Y.L., Cheong, C.S. and Gould, G., 2012. The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia. Journal of International Accounting Research, 11(1), pp.119-146.

Clarkson, P., Hanna, J.D., Richardson, G.D. and Thompson, R., 2011. The impact of IFRS adoption on the value relevance of book value and earnings. Journal of Contemporary Accounting & Economics, 7(1), pp.1-17. https://www.convibra.com.br/upload/paper/2012/31/2012_31_3785.pdf

Covrig, V.M., Defond, M.L. and Hung, M., 2007. Home bias, foreign mutual fund holdings, and the voluntary adoption of international accounting standards. Journal of Accounting Research, 45(1), pp.41-70.

Daske, H. and Gebhardt, G., 2006. International financial reporting standards and experts’ perceptions of disclosure quality. Abacus, 42(3?4), pp.461-498.

Hung, M. and Subramanyam, K.R., 2007. Financial statement effects of adopting international accounting standards: the case of Germany. Review of accounting studies, 12(4), pp.623-657.

Jeanjean, T. and Stolowy, H., 2008. Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption. Journal of accounting and public policy, 27(6), pp.480-494.

Ampofo, A.A. and Sellani, R.J., 2005, June. Examining the differences between United States Generally Accepted Accounting Principles (US GAAP) and International Accounting Standards (IAS): implications for the harmonization of accounting standards. In Accounting forum(Vol. 29, No. 2, pp. 219-231). Elsevier.