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Abstract:
We examine the impact of incentives on accounting quality changes around IFRS adoption. In particular, we examine earnings management and timely loss recognition, constructs often used to assess accounting standards quality. While existing literature documents accounting quality improvements following IFRS adoption, we find that improvements are confined to firms with incentives to adopt. Further, we find that firms that resist IFRS have closer connections with banks and inside shareholders, which could explain these firms' lack of incentives to adopt IFRS. The overall results indicate that incentives dominate accounting standards in determining accounting quality.

IFRS, IAS, accounting quality, incentives, international accounting, regulation, standard setting

Abstract:
We examine whether companies choose fair value over historical cost when both valuation methods become available and when consistency in their application is expected. While prior research establishes the value relevance of fair value revaluations, the evidence is largely conditional on a company's discretionary choice to revalue assets. Little is known, however, about companies’ choice of fair value over historical cost and its determinants. We study a setting where companies need to pre-commit to one of the two valuation methods. With the exception of investment property owned by real estate companies, most companies choose historical cost over fair value; indeed, fair value is not used for plant, equipment, or intangible assets. We also find that companies that do use fair value accounting rely more heavily on debt financing than companies that do not.

Fair value accounting, IFRS, international accounting

Abstract:
We examine whether UK GAAP to IFRS earnings reconciliations convey information. As a result of debt contracting, mandatory accounting changes are expected to affect the likelihood of violating existing covenants based on rolling GAAP, leading to a redistribution of wealth between shareholders and lenders. Consistent with this prediction, we find significant market reactions to IFRS reconciliation announcements. These market reactions are more pronounced among firms that face a greater likelihood and costs of covenant violation and early announcements. While the association between later announcements and weaker market reactions is consistent with contractual implications of technical changes to earnings, which investors quickly learn to predict, it is inconsistent with IFRS forcing all firms in the sample to reveal firm-specific information through accruals. Thus, by showing that mandatory IFRS also affects debt contracting, we expand on existing IFRS research that focuses on how accounting quality and cost of capital are impacted.

debt contracting, mandatory accounting change, International Financial Reporting Standards

Abstract:
In this paper we study the determinants of debt contracting practices with respect to mandatory changes in GAAP during the period 1996-2004. Over this period, the syndicated loan market and the secondary market for private debt experienced rapid development that potentially altered contracting needs. We find that the practice of contractually excluding mandatory GAAP changes has been largely replaced by the practice of giving parties an option to “freeze” GAAP at any point in time. We argue that this new practice reduces renegotiation costs and allocates control in a way that limits wealth transfers associated with mandatory changes when loan ownership is dispersed and lending relationships are absent. Our findings indicate that the new practice is explained by the multi-lender nature of credit agreements, and that contracts anticipate wealth transfers and/or renegotiation costs of frequently forthcoming accounting standards by restricting their impact on covenants.

Debt contracting, Accounting change, Syndicated lending market, Private credit agreements