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

28 Pages Posted: 15 Nov 2013

See all articles by Young-Soo Choi

Young-Soo Choi

Sungkyunkwan University

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Joao Toniato

UBS Investment Bank

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Date Written: September/October 2013

Abstract

When producing International Financial Reporting Standards (IFRS), one of the main goals of the International Accounting Standards Board (IASB) 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 achieving this goal by investigating the effects of the introduction of IFRS on the relative information content of reported earnings and forecasted earnings under UK generally accepted accounting practices (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 with information encoded by companies in their reported earnings. This implies that the IASB was indeed successful in its stated goal and points 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

Suggested Citation

Choi, Young-Soo and Peasnell, Kenneth V. and Toniato, Joao, Has the IASB Been Successful in Making Accounting Earnings More Useful for Prediction and Valuation? UK Evidence (September/October 2013). Journal of Business Finance & Accounting, Vol. 40, Issue 7-8, pp. 741-768, 2013, Available at SSRN: https://ssrn.com/abstract=2354730 or http://dx.doi.org/10.1111/jbfa.12025

Young-Soo Choi (Contact Author)

Sungkyunkwan University ( email )

School of Business
53 Myeongnyun-dong 3-ga, Jongno-gu
Seoul, 110-745
Korea
+8227600423 (Phone)
+8227600440 (Fax)

Kenneth V. Peasnell

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Joao Toniato

UBS Investment Bank

1 Finsbury Avenue
London, EC2M 2PP
United Kingdom

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