The Impact of Mandatory IFRS Adoption on Equity Valuation of Accounting Numbers for Security Investors in the EU

Posted: 28 Sep 2010

See all articles by Joseph Aharony

Joseph Aharony

Tel Aviv University - Faculty of Management; Singapore Management University - School of Accountancy

Ran Barniv

Kent State University - Department of Accounting

Haim Falk

The Technion, Israel Institute of Technology

Date Written: September 3, 2010

Abstract

Motivated by the European Union (EU) decision to mandate application of the International Financial Reporting Standards (IFRS) to the consolidated financial statements of all EU listed firms (Regulation (EC) 1606/2002), starting in December 2005, we compare the value relevance of accounting information in 14 European countries in the year prior to and the year of the mandatory adoption of the IFRS. We focus on three accounting information items for which measurements under IFRS are likely to differ considerably from measurements under domestic accounting practices across the EU countries prior to the introduction of the international standards: goodwill, research and development expenses (R&D), and asset revaluation. These three items, selected on an a priori basis, have been shown in previous research to differ in the effect of uncertainty on their future benefits. We use valuation models that include these three variables and in addition the book value of equity and earnings. Overall, our study suggests that the adoption of the IFRS has increased the value relevance of the three accounting numbers for investors in equity securities in the EU. Association tests support our two hypotheses: (1) in the year prior to the mandatory adoption of the IFRS, the incremental value relevance to investors of the three domestic GAAP-based accounting items was greater in countries where the respective domestic standards were more compatible with the IFRS; and (2) the higher the deviation of the three domestic GAAP-based accounting items from their corresponding IFRS values, the greater the incremental value relevance to investors from the switch to IFRS.

Keywords: Mandatory IFRS Adoption, goodwill, research and development expenses (R&D), asset revaluation, value relevance to investors

JEL Classification: M41, G15

Suggested Citation

Aharony, Joseph and Barniv, Ran and Falk, Haim, The Impact of Mandatory IFRS Adoption on Equity Valuation of Accounting Numbers for Security Investors in the EU (September 3, 2010). European Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1675485

Joseph Aharony

Tel Aviv University - Faculty of Management ( email )

69978 Tel Aviv
Israel

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Ran Barniv (Contact Author)

Kent State University - Department of Accounting ( email )

P.O. Box 5190
Kent, OH 44242-0001
United States
330-672-1112 (Phone)
330-672-2548 (Fax)

Haim Falk

The Technion, Israel Institute of Technology ( email )

Faculty of Industrial Engineering & Management
Haifa 32000
ISRAEL
+972 4 829 4419 (Phone)

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