Has the IASB Been Successful in Making Accounting Earnings More Useful for Prediction and Valuation? UK Evidence

Abstract

When producing IFRS financial standards, one of the IASB’s main goals was to create a set of standards which were more useful to investors as a predictive tool. We assess the success of the IASB in this goal by investigating the effects of the introduction of IFRS on the relative information content of reported earnings and forecasted earnings under UK GAAP and IFRS. Results indicate that the value relevance of forecasted earnings is significantly lower under IFRS while the value relevance of reported earnings is significantly larger. These findings suggest that IFRS substitutes price-relevant information previously provided to the market in the form of analyst forecasts by information encoded by companies in their reported earnings. This implies that the IASB was indeed successful in its stated goal. Furthermore, our results are in line with contemporary studies and point towards IFRS forecasts being more accurate and less dispersed than UK GAAP forecasts. This, in turn, implies that analysts are able to provide more informative forecasts under IFRS than under pre-IFRS regimes and that the aforementioned substitution effect is not a consequence of any decrease in the quality of forecasts under the new regime.

Keywords: IFRS, Value relevance, Analyst Forecasts, Valuation, Earnings