Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe

Forthcoming Journal of Business Finance & Accounting

44 Pages Posted: 5 Jan 2012 Last revised: 6 Dec 2014

See all articles by Paul André

Paul André

HEC Lausanne

Andrei Filip

ESSEC Business School

Luc Paugam

HEC Paris; HEC Paris

Date Written: December 5, 2014

Abstract

We study the effect of mandatory IFRS adoption in Europe in 2005 on conditional conservatism. We capture conditional conservatism with a modified version of the Khan and Watts (2009) measure (C_Score) that also controls for potential shifts in unconditional conservatism and cost of capital. From a sample of 13,711 firm-year observations drawn from 16 European countries spanning the 2000-2010 period, we document an overall decline in the degree of conditional conservatism after the adoption of IFRS. We show that the decline in conditional conservatism is less pronounced for countries with high quality audit environments and strong enforcement of compliance with accounting standards using the Brown et al. (2014) index. As asset impairment tests are a key mechanism ensuring conditional conservatism in the IFRS framework, we further examine these. We show that firms booking an asset impairment present a smaller decline in the degree of conditional conservatism relative to firms that do not. We also demonstrate that firms that do not book an asset impairment when evidence suggests the probable need to do so experience a more pronounced reduction in conditional conservatism. We argue that IFRS are conceptually conditionally conservative but that inappropriate application of conditional conservatism principles is likely to prevent financial reporting from reaching the level of conservatism targeted by the IASB.

Keywords: Conditional Conservatism, IFRS, Europe, Enforcement, Governance, Intangibles, Impairment

JEL Classification: M4, F02, F30, G34, G38

Suggested Citation

Andre, Paul and Filip, Andrei and Paugam, Luc, Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe (December 5, 2014). Forthcoming Journal of Business Finance & Accounting. Available at SSRN: https://ssrn.com/abstract=1979748 or http://dx.doi.org/10.2139/ssrn.1979748

Paul Andre (Contact Author)

HEC Lausanne ( email )

UNIL-Dorigny
Anthropole
Lausanne, 1015
Switzerland

Andrei Filip

ESSEC Business School ( email )

3 Avenue Bernard Hirsch
CS 50105 CERGY
CERGY, CERGY PONTOISE CEDEX 95021
France
+33 1 34 43 33 61 (Phone)

Luc Paugam

HEC Paris ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

HEC Paris

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

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