Strategic Balance Sheet Adjustments Under First-Time IFRS Adoption and the Consequences for Earnings Quality

56 Pages Posted: 6 Jan 2011

See all articles by Beatriz Garcia Osma

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration

Peter F. Pope

Bocconi University; London School of Economics

Date Written: January 4, 2011

Abstract

We study the consequences of mandatory adoption of International Financial Reporting Standards for earnings quality. On transitioning from local GAAP to IFRS, firms can make strategic balance sheet adjustments that in turn affect future reported earnings. We predict that earnings quality after IFRS adoption depends on the measurement and recognition choices made at the time of first-time IFRS adoption. When firms “clean up” the balance sheet by eliminating accumulated accruals bloat they have greater scope for accounting discretion in the years immediately after first-time adoption. Using a large sample of international firms, we model strategic balance sheet adjustments occurring on mandatory IFRS adoption and establish evidence that these adjustments are negatively associated with earnings quality in subsequent periods. Overall, our evidence is consistent with uneven IFRS implementation and enforcement around the world.

Keywords: Mandatory IFRS adoption, earnings quality, enforcement, IFRS transition adjustments

JEL Classification: G10, G38, M41

Suggested Citation

Garcia Osma, Beatriz and Pope, Peter F., Strategic Balance Sheet Adjustments Under First-Time IFRS Adoption and the Consequences for Earnings Quality (January 4, 2011). Available at SSRN: https://ssrn.com/abstract=1735009 or http://dx.doi.org/10.2139/ssrn.1735009

Beatriz Garcia Osma

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Peter F. Pope (Contact Author)

Bocconi University ( email )

Milan
Italy

London School of Economics ( email )

Houghton Street
London, WC2A 2AE
United Kingdom

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