Andrei Filip

IFRS AND THE VALUE RELEVANCE OF EARNINGS: EVIDENCE FROM THE EMERGING MARKET OF ROMANIA

This paper investigates the impact of the mandatory IFRS adoption on the value relevance of earnings on the Bucharest Stock Exchange, at a time when the EU did not have an official position regarding IFRS. Findings suggest that the implementation of IFRS has increased the contemporaneous association between market returns and earnings. Additional analyses reveal that this result is mainly driven by small firms and that the accounting reforms have increased the timeliness of earnings. In the light of the expansion of IFRS worldwide, this paper examines the mandatory IFRS adoption in an institutional setting where accounting reforms were accompanied by economic reforms in preparation for Romanias accession to the EU. Such a single-country case study may help researchers better understand the impact of accounting regulations and institutional factors on the properties of accounting earnings.

Legal Regime and Financial Reporting Quality

This article uses the Canadian environment, where French civil law in the province of Quebec coexists with common law in the rest of Canada (denoted as bijural), to test the thesis of the neutrality of the legal system with regard to financial reporting quality. This single-country design allows for a better control over other factors that influence financial reporting quality. The French civil law environment appears to encourage firms to publish accounting data of better quality due to the greater liability risk faced by auditors and corporate directors under that regime. These findings, based on ten years of data and seven attributes of financial reporting quality, are robust to different matching procedures and model specifications. This research contributes to the current debates in Canada as to whether financial market regulation under French civil law and common law jurisdictions should be unified under a single common law national securities regulator. At the broader level, the results support claims that a more in-depth understanding of the implementation of civil law and common law is needed rather than gross generalization about the two systems. These results especially call into question that common law regimes are unambiguously superior to civil law regimes in encouraging high quality financial reports.

Examining the Patterns of Goodwill Impairments in Europe and the US

Abstract We examine the patterns of goodwill impairments in Europe and in the US over the period from 2006 to 2015, for a sample of more than 35,000 firm-year observations. We define the timeliness of goodwill impairments as the frequency of accounting impairments conditional to indications of economic impairments. We measure indications of economic impairment with three metrics: equity market value minus equity book value less than goodwill, market-to-book smaller than one and negative earnings before interest, tax, depreciation and amortisation (EBITDA). Our research strategy leads us to draw very different conclusions than those in the recent EFRAG (2016) study. While median levels of goodwill on the books between US and European firms are relatively similar, we find several indications that US firms recognise timelier impairments, at least during 2008 and 2009, that is, the early years of the financial crisis. We further document that US impairers write down a much greater percentage of their beginning balance of goodwill than European impairers. During the financial crisis, the median level of impairment by US firms was 63% of opening goodwill in 2008 and 40% in 2009, whereas median European write-downs were only 6% and 7% of opening goodwill, respectively. Even though European firms are more likely to impair over multiple years, the cumulative impairments never come close to the level of US firms, be it in a single year or cumulative over multiple years. We also find that the frequency of accounting impairment is small compared to the number of firms presenting evidence of economic impairment: only 20–25% of firms recognise impairments depending on the measure of economic impairment. This has often been interpreted by academics as a sign of untimely write-offs. Accounting differences between US Generally Accepted Accounting Principles and International Financial Reporting Standards are unlikely to explain our results. One caveat of our analysis is that it does not allow us to draw conclusions on whether the observed differences between US and European firms are driven by differences in conditional conservatism and/or big bath accounting practices.

Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe

We study the effect of the mandatory adoption of IFRS in Europe in 2005 on conditional conservatism. To capture conditional conservatism, we use three measures: the Basu (1997) measure, the Khan and Watts (2009) measure, and a measure controlling for potential shifts in unconditional conservatism and cost of capital after the adoption of IFRS. From a sample of 7,251 firm-year observations drawn from 16 European countries, we document an overall decline of the degree of conditional conservatism across our three measures. While there is no change in weak enforcement/governance countries which remain less conditionally conservative than strong enforcement/governance countries, the latter exhibit a significant decrease. Further, we demonstrate that the decline is more significant for firms carrying intangible assets and goodwill in their balance sheets, items for which impairment tests rely on unverifiable fair value estimates. We argue that IFRS are conceptually conditionally conservative but that inappropriate application of conditional conservatism principles may have prevented financial reporting from reaching the level of conservatism targeted by the IASB.It is argued that IFRS put more emphasis on neutrality than conservatism. We examine the impact of the mandatory change to IFRS in 2005 by European firms on the level of accounting conservatism and check whether well documented differences in conservatism across countries and varied institutional and legal settings survive the change. We document that accounting conservatism has decreased after the adoption of IFRS overall and more specifically across French and German law origin countries and countries with important debt markets and with less developed equity markets. We also find a reduction in conservatism in countries where the tax book conformity was high. More importantly, we document that differences across countries, institutional and legal settings disappear after mandatory IFRS adoption. We only find weak evidence that insider economies with weak enforcement (Leuz et al. 2003’s cluster 3 which includes Greece, Italy, Portugal, and Spain) continue to have a lower level of conservatism. Finally, the decrease in conservatism is most significant in countries which had the greatest difference with the new IFRS standards. Overall, we conclude that accounting standards do matter!

The value relevance of earnings in Europe after IFRS implementation: why do national differences persist?

Since 2005, all European listed companies must comply with IFRS in the preparation of their consolidated financial statements. Several studies have investigated the consequences of this political decision, comparing various dimensions of accounting quality before and after IFRS implementation. But they do not really address the following question: will the adoption of a common set of accounting standards result in a standardisation of accounting quality throughout Europe, or will national differences persist due to the influence of local characteristics? In order to provide evidence on this issue, we measure the value relevance of accounting earnings in 16 European countries over the period 2006–2007. The results show that country differences persist despite the use of common accounting standards, which is consistent with the idea that legal and regulatory country characteristics as well as market forces still impact the association between market returns and accounting data.

Corporate Reporting in Central and Eastern Europe: Issues, Challenges and Research Opportunities

Abstract The purpose of this paper, building upon the papers included in this special section of Accounting in Europe on Corporate reporting in CEE countries and on our knowledge of the region, is to broaden out and open up dialogue and debate about how local institutions are evolving and impact the corporate reporting practices in this under-researched region. We begin by discussing the institutional context for conducting research on corporate reporting by entities in Central and Eastern Europe (CEE), within the broader context of emerging, transitional economies. We also reflect on how research conducted on CEE countries can make a relevant contribution to the international literature, and exemplify by summarizing the research questions and findings of the papers included in the special section. A future research agenda emerges, given the gaps in the international literature and the future research implications suggested in the papers constituting the special section.

Financial reporting quality revisited: interactions between earnings management and the value relevance of accounting information

The concept of financial reporting quality is not new. Earnings management, timely loss recognition and value relevance are often used in prior research as metrics of accounting quality. The objective of the present study is to analyse the interaction between these metrics. By using a sample of 576 Canadian listed firms, we predict that firms with less earnings management exhibit higher value relevance of accounting data. We provide evidence that earnings that are not manipulated (or do not need to be manipulated) are more informative than earnings that are.