Earnings Quality during SFAS-to-IFRS Conversion in Taiwan

Abstract

Since IFRS emphasizes management judgment and fair value measures, the issues of faithful representation and relevance of earnings information have become major concerns. This study aims to examine whether or not faithful representation and the relevance of earnings information have improved among Taiwanese publicly traded companies in the context of the SFAS-IFRS changeover. Faithful representation of earnings information was assessed via accruals quality, while relevance was examined by testing both the predictive and confirmatory values of earnings. This study used Ohlson's residual income model to examine the confirmatory value of earnings. Unlike prior research using one-period earnings data, this study considered earnings persistence and modified the model by including earnings data for two consecutive periods to examine the predictive value of earnings. The results indicate no significant improvement in faithful representation quality, but significant improvements in both the predictive and confirmatory values of earnings information. Notably, after modifying a model used in previous research to test predictive value, the current work found that fair value oriented-IFRSs do not impair the predictive value of earnings information.