Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe

ESSEC Working Paper 1311

42 Pages Posted: 2 Oct 2013 Last revised: 5 Dec 2014

See all articles by Paul André

Paul André

HEC Lausanne

Andrei Filip

ESSEC Business School

Luc Paugam

HEC Paris, Accounting and Management Control Department

Date Written: August 27, 2013

Abstract

We study the effect of the mandatory adoption of IFRS in Europe in 2005 on conditional conservatism. To capture conditional conservatism, we use three measures: the Basu (1997) measure, the Khan and Watts (2009) measure, and a measure controlling for potential shifts in unconditional conservatism and cost of capital after the adoption of IFRS. From a sample of 7,251 firm-year observations drawn from 16 European countries, we document an overall decline of the degree of conditional conservatism across our three measures. While there is no change in weak enforcement/governance countries which remain less conditionally conservative than strong enforcement/governance countries, the latter exhibit a significant decrease. Further, we demonstrate that the decline is more significant for firms carrying intangible assets and goodwill in their balance sheets, items for which impairment tests rely on unverifiable fair value estimates. We argue that IFRS are conceptually conditionally conservative but that inappropriate application of conditional conservatism principles may have prevented financial reporting from reaching the level of conservatism targeted by the IASB.

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

JEL Classification: M41, M48, G38

Suggested Citation

Andre, Paul and Filip, Andrei and Paugam, Luc, Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe (August 27, 2013). ESSEC Working Paper 1311, Available at SSRN: https://ssrn.com/abstract=2333532 or http://dx.doi.org/10.2139/ssrn.2333532

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, Accounting and Management Control Department ( email )

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

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