IFRS Firms Research Articles

Conservatism and its determinants for Portuguese small and medium entities

In this study, we aim at analyzing whether Portuguese small and medium entities (SMEs) are accounting conservatively and what the determinants for conservatism are. While conservatism remains on accounting for a long time, both within the local accounting standards and IFRS firms may opt for a revaluation model to subsequently measure fixed assets. As the number of assets may be carried to higher values than firm becomes less conservative. Therefore, we propose that revaluations are a negative proxy for conservatism. We find that revaluations are not used in an often manner and they are higher for listed than for unlisted firms. Furthermore, our results suggest that debt and firm size are both positively associated with conservatism. Both associations are more significant for listed than non-listed firms. In addition, return on equity tends to increase conservatism, but only for the most indebted unlisted firms. These pieces of evidence are consistent with conservatism being a mechanism to regulate managers’ activity and to capture the confidence of stakeholders.

Does amortization of goodwill effect on companies' profits and future cash flows?

The International Accounting Standards Board (IASB) will discuss whether or not accounting rules for M&A change, and it plans to draw a conclusion in 2021. In view of this fact, it is considered that a series of large M&A have significant effects on corporate earnings worldwide. This paper examines whether the amortization and/or non-amortization of goodwill affect companies’ earnings and future cash flow, an analysis for which there are two reasons. First, IFRS initiates the debate on the premise of goodwill amortization. If goodwill is amortized, it will have a profound impact on corporate profits and cash flow. Second, M&A has recently increased in Japan due to the increase in retained earnings and because IFRS has not requested goodwill amortization. The conclusion is as follows: First, it has become clear that legally retained earnings accelerate M&A because they affect the future goodwill along with both accounting standards. Next, the results revealed that the amortization of goodwill corresponds with the future ROA in conformity with Japanese accounting standards. On the other hand, this study did not determine that goodwill affects ROA in IFRS companies. Particularly, IFRS firms invested greater amounts of money than did Japanese accounting firms. Therefore, IFRS firms' goodwill might not be effective applied to M&A within four years.

Can Accounting Standards Mitigate Real Earnings Management Activities? The Case of Inventory Costs

Prior literature suggests that managers engage in inventory overproduction to inflate current earnings but this form of real earnings management can result in significant economic costs (Bruggen et al. 2011). Additionally, Statement of Financial Accounting Standards (SFAS) No. 151 may inadvertently encourage overproduction by requiring that companies expense unallocated overhead in the current period (Young et al. 2014). In this study, we investigate whether, in recent years, managers’ overproduction decisions change, by examining whether abnormal production costs of suspect U.S. GAAP firms differ before versus after the adoption of SFAS 151. We also compare the behavior of suspect U.S. GAAP firms to that of suspect IFRS firms because the treatment of inventory costs under IFRS has always been similar to the treatment under SFAS 151. Thus, IFRS firms serve as a control group in our setting. We find that prior to the adoption of SFAS 151, suspect U.S. GAAP firms used overproduction to meet benchmarks, but we do not observe overproduction to meet benchmarks after the adoption of SFAS 151. In addition, we find that suspect IFRS firms do not engage in overproduction to meet benchmarks either before or after SFAS 151. Using a difference-in-differences design, we find that suspect U.S. GAAP firms reduce overproduction relative to suspect IFRS firms following the adoption of SFAS 151. Finally, in a supplementary test, we find that the quality of working capital accruals improves under SFAS 151, in that working capital accruals better reflect past, contemporaneous, and future cash flows. Overall, our results suggest that, in recent years, managers of U.S. firms have generally avoided overproduction, presumably because of the economic costs associated with this practice and/or because of increased monitoring and skepticism of management decisions following corporate failures that led to the enactment of the Sarbanes-Oxley Act of 2002.

Are Impairments and Unrealized Losses Equally (Un)timely?

We compare the timeliness of U.S. GAAP impairments to the timeliness of IFRS unrealized losses for investment property. Using the reporting of economic losses by U.S. and U.K. real estate firms around the time of the financial crisis, our results show that unrealized losses are substantially more timely than impairments. This result is not explained by the presence of U.S. GAAP valuation buffers, the use of undiscounted cash flows in impairment testing, the use of Big 4 auditors or the use of external appraisers, and it also holds when extending the sample to include IFRS firms from other EU countries. We argue that while both U.S. GAAP and IFRS use fair value measurements to evaluate economic losses, the recurring use of fair value measurements under the IFRS revaluation model leads to a routine implementation process, established valuation parameters, and increased investments in the valuation infrastructure. As a result, unrealized losses are likely to possess more timeliness than impairments. By showing how similar underlying transactions lead to different reporting outcomes, we contribute to the comparability literature and challenge the view that the fair value and the historical cost models provide equally timely information when the prices of non-financial assets decline.

Revenue Recognition: A Brave New World

We examine the market reaction to the discussions and deliberations during the period 1998 to 2015 surrounding the new revenue recognition standard issued simultaneously by the FASB and IASB. We find that market reactions to events leading to the joint standard differ for US GAAP and IFRS firms. The reaction is a net negative reaction for US GAAP reporters but a net positive reaction for IFRS reporters. US GAAP (IFRS) firms in high litigation industries experience negative (less positive) market reactions to those in low risk industries. In certain high-impact industries in the U.S. including medical equipment and telecommunications, the market reaction is positive suggesting benefits in these industries. Further, the results for the most visible and significant events are consistent with those based on the full set of events. The evidence suggests that the new revenue recognition standard imposes net costs to the U.S. firms, except in those industries expected to benefit the most, while it provides net benefits to IFRS reporters.

The Effect of the German Accounting Law Modernization Act on the Comparability of Private Local GAAP and IFRS Firms

One of the Accounting Law Modernization Act’s aims was to provide a long-lasting, lower-cost, easier, and full-fledged alternative to IFRS for private firms. While the comparability of accounting rules (i. e., the de jure comparability) between German GAAP (HGB) and IFRS increased as a result of this reform, related research indicates that reporting incentives play an important role in shaping reporting practices (i. e., de facto comparability). With heterogeneous incentives being present, it remains questionable whether de facto comparability between HGB and IFRS firms followed the increase in de jure comparability. Using consolidated accounts of private firms voluntarily reporting under IFRS together with variations of matched HGB reports and output-based comparability measures in a pre-post design including firm years from 2003 to 2011, I find that the de facto comparability between private HGB and IFRS firms increases (decreases) from the pre- to the post-BilMoG period for matched firm pairs belonging to similar (dissimilar) industries.

Internal control reporting and accounting standards: A cross-country comparison

In this study, I examine whether there is a difference between internal control reporting (measured through the presence/absence material weaknesses) among foreign and U.S. firms. I also examine the relation between internal control reporting and the accounting standards used by firms (i.e., U.S. and foreign) in their submitted SEC financial statements. Overall, my results indicate that foreign firms are more likely to report material weaknesses than U.S. firms. Furthermore, foreign firms that submit financial statements that are prepared using U.S. GAAP or prepared using their domestic standards and then reconciled to U.S. GAAP are more likely to report material weaknesses. Since country specific political factors could influence the reporting of material weaknesses I also examine whether rule of law impacts the reporting of material weaknesses. My results indicate that foreign firms that are classified as strong rule of law countries are less likely to report material weaknesses and foreign firms that are classified as weak rule of law countries are more likely to report material weaknesses. Additionally, foreign firms that prepare the SEC submitted financial statements using IFRS are less like to report material weaknesses in strong rule of law countries and there is no significant relation between IFRS firms and material weakness reporting in weak rule of law countries.

Opting for Swissness in Financial Reporting – Some Preliminary Explanations for the Shift of Accounting Standards among Large Corporations in Switzerland 2007-2013

During the last decades, several Swiss listed firms have decided to switch from internationally recognized accounting standards to Swiss GAAP FER. Some preliminary explanations are provided in this paper. Based on a match-pair sample of 62 firms over the period 2007-2013, the univariate signed tests exhibit that firms switching to their local GAAP are on average smaller, generate less profitability, have less investment opportunities and are less exposed internationally than IFRS firms. Besides, further analysis shows that the perceived quality of the firms’ financial statements that switch to Swiss standards is not impacted significantly (when measured by analyst forecast errors). Lastly, in the year of the accounting change, audit fees decreased for changing firms. These results may suggest an economically rational choice made by switching firms.

Unexpected Audit Fees and Audit Quality: Do Audit Fee Premiums Trigger Error Announcements and Earnings Management?

This study investigates the economic auditor-client dependency issue by examining the association between abnormal audit fee pricing and audit quality. Our study is the first to analyze this phenomenon empirically for the institutional setting of German IFRS firms by using a sample of 2,334 firm-year observations for the period from 2005 to 2010. Our empirical results demonstrate that positive abnormal audit fees are negatively associated with audit quality and imply that the audit fee premium is a significant indicator of compromised auditor independence due to economic auditor-client bonding. Audit fee discounts generally do not lead to a reduced audit effort, or respectively, audit quality is not impaired when client bar-gaining power is strong. The association of positive abnormal audit fees and audit quality is robust to different audit quality surrogates such as absolute discretionary accruals, financial restatements, and meeting or beating analysts’ earnings forecasts.

Abnormal audit fees and audit quality: initial evidence from the German audit market

This study investigates the economic auditor–client dependency issue by examining the association between abnormal audit fee pricing and audit quality. Our study is the first to analyze this phenomenon empirically for the institutional setting of German IFRS firms by using a sample of 2,334 firm-year observations for the period from 2005 to 2010. Our empirical results demonstrate that positive abnormal audit fees are negatively associated with audit quality and imply that the audit fee premium is a significant indicator of compromised auditor independence due to economic auditor–client bonding. Audit fee discounts generally do not lead to a reduced audit effort, or respectively, audit quality is not impaired when client bargaining power is strong. The association of positive abnormal audit fees and audit quality is robust to different audit quality surrogates such as absolute discretionary accruals, financial restatements, and meeting or beating analysts’ earnings forecasts.

The Predictive Power of Comprehensive Income and its Individual Components Under IFRS

This study examines the predictive power of comprehensive income and its individual components within the homogenous institutional setting of German IFRS firms. The results could be relevant for the standard setters IASB and FASB and their joint project “Financial Statement Presentation”. We find no evidence that comprehensive income has a superior predictive power for future firm operating performance than net income. Further, we fail to find significant incremental predictive power of aggregated or individual components of other comprehensive income for subsequent period’s firm operating performance. The actuarial gains and losses on defined benefit pension obligations even seem to merely add noise for the prediction of subsequent period’s net income and of subsequent period’s comprehensive income. In contrast, our analyses indicate that other comprehensive income components seem to have incremental predictive power beyond one period. Finally, we find that the predictive power of net income and comprehensive for future firm operating performance has deteriorated as a consequence of the IASB’s recent initiatives and actions.