The Effects of IFRS on Net Income and Earnings Components: Value Relevance, Persistence and Predictive Value

Spanish Journal of Finance and Accounting - REFC, Vol. 45, No. 3, pp. 365-388

34 Pages Posted: 4 Jun 2016 Last revised: 14 Nov 2016

Date Written: June 1, 2016

Abstract

We examine whether the switch to IFRS has affected the value relevance and persistence of net income. In addition, since IFRS adoption has involved changes in the location of non-recurring items in the income statement, we also examine whether these changes have influenced the value relevance, persistence, and predictive value of the main income measures. Using a sample of Spanish listed firms, we find an increase in the value relevance of net income and non-significant changes in its persistence after 2005. We also find that non-recurring items were value relevant in the pre-adoption period and that the operating income is more value relevant after IFRS adoption. This suggests that the significant increase in the value relevance of operating income could be explained by the inclusion in this income measure of former extraordinary and special items. We also observe that the former extraordinary section under SAS was persistent, whereas the income measure of net profit/loss from discontinued operations under IFRS is neither value relevant nor persistent. We do not find significant changes in the attributes of financial income, but we do observe an increase in the value relevance of other consolidated items and corporation tax after IFRS adoption.

Keywords: International Financial Reporting Standards (IFRS), Accounting Quality, Value Relevance, Persistence, Predictability

JEL Classification: M41, G14

Suggested Citation

Cutillas-Gomariz, M. Fuensanta and Sánchez-Ballesta, Juan P. and Yagüe, José, The Effects of IFRS on Net Income and Earnings Components: Value Relevance, Persistence and Predictive Value (June 1, 2016). Spanish Journal of Finance and Accounting - REFC, Vol. 45, No. 3, pp. 365-388, Available at SSRN: https://ssrn.com/abstract=2788527

M. Fuensanta Cutillas-Gomariz

University of Murcia ( email )

Avda Teniente Flomesta, 5
Murcia, Murcia 30100
Spain

Juan P. Sánchez-Ballesta

University of Murcia ( email )

Avda Teniente Flomesta, 5
Murcia, Murcia 30100
Spain

José Yagüe (Contact Author)

University of Murcia ( email )

Department of Management and Finance
Campus de Espinardo s/n
Murcia, 30100
Spain
+34 868883862 (Phone)
+34 868887537 (Fax)

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