The effects of the International Financial Reporting Standards (IFRS) adoption on earnings quality: evidence from Korea

Jee Hoon Yuk,Wook Bin Leem

doi:10.21511/imfi.14(3-1).2017.08

Abstract

This study investigates whether earnings quality of Korean listed firms was substantially improved after the IFRS adoption in long-term aspect and which firms listed in KOSPI or KOSDAQ market had been more enjoyed the benefit. Prior studies related to this subject don’t provide consistent results and have a limitation of insufficiency of research periods. Therefore, this study analyzes the positive effect of the IFRS adoption in Korea using long-term based approach and comparative analysis on each Korean stock market. Furthermore, this study considered Korean specific institutional environment in which main financial statements prepared and disclosed by listed firms were changed from individual financial statements to consolidated financial statements after the IFRS adoption. Results of the study found that earnings quality of Korean listed firms had been significantly improved during 5 years after the IFRS adoption. In addition, earnings quality on consolidated financial statements of KOSDAQ listed firms has improved more than that of KOSPI listed firms. The results provide meaningful implications to evaluate the effects of IFRS adoption on earnings quality and to assess accomplishment of fundamental purpose of the IFRS adoption in Korea.

Highlights

Korea adopted International Financial Reporting Standards (IFRS) in 2011 to improve international consistency of financial accounting standards and to enhance both accounting transparency and usefulness of accounting information
This study considered Korean specific institutional environment in which main financial statements prepared and disclosed by listed firms were changed from individual financial statements to consolidated financial statements after the IFRS adoption
Prior studies analyzing whether earnings quality is improved after the IFRS adoption didn’t provide consistent results

Summary

INTRODUCTION

Korea adopted International Financial Reporting Standards (IFRS) in 2011 to improve international consistency of financial accounting standards and to enhance both accounting transparency and usefulness of accounting information. Bae and Choi (2013) and Jeong (2013) which analyzed Korean firms report that earnings management increased after the IFRS adoption. Some studies report that earnings quality has improved after the IFRS adoption (Barth On the contrary, Callao and Jarne (2010) who studet al., 2008; Chen et al, 2010) while other studies ied on non-financial firms in 11 member countries suggest earnings quality was deteriorated after the of EU reported that earnings management mea-. Li and Park (2012) which studied on Tendeloo and Vanstraelen (2005) report no sub- Chinese firms reported that earnings quality stantial difference in earnings quality before and reduced as discretionary accruals increased after after IFRS adoption.

RESEARCH DESIGN

Findings

SUMMARY AND CONCLUSION