The Effect of Mandatory IFRS Adoption on Conditional Conservatism in Europe

33 Pages Posted: 14 May 2015

See all articles by Paul André

Paul André

HEC Lausanne

Andrei Filip

Catholic University of Lille - IESEG School of Management

Luc Paugam

HEC Paris, Accounting and Management Control Department; CFA Society France

Date Written: April/May 2015

Abstract

We study the effect of mandatory adoption of International Financial Reporting Standards (IFRS) in Europe in 2005 on conditional conservatism. We capture conditional conservatism with a modified version of the Khan and Watts 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. audit and enforcement 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 International Accounting Standards Board (IASB).

Keywords: conditional conservatism, IFRS, Europe, enforcement, impairment, goodwill, intangibles

Suggested Citation

Andre, Paul and Filip, Andrei and Paugam, Luc, The Effect of Mandatory IFRS Adoption on Conditional Conservatism in Europe (April/May 2015). Journal of Business Finance & Accounting, Vol. 42, Issue 3-4, pp. 482-514, 2015, Available at SSRN: https://ssrn.com/abstract=2605242 or http://dx.doi.org/10.1111/jbfa.12105

Paul Andre (Contact Author)

HEC Lausanne ( email )

UNIL-Dorigny
Anthropole
Lausanne, 1015
Switzerland

Andrei Filip

Catholic University of Lille - IESEG School of Management ( email )

Socle de la Grande Arche
1 Parvis de la Defense
Puteaux, Paris 92800
France

Luc Paugam

HEC Paris, Accounting and Management Control Department ( email )

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

CFA Society France ( email )

54 avenue Hoche
Paris, 75008
France

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