Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

Posted: 23 Aug 2018

See all articles by Jimmy Downes

Jimmy Downes

University of Nebraska at Lincoln

Tony Kang

University of Nebraska - Lincoln

Sohyung Kim

Brock University - Faculty of Business

Cheol Lee

Wayne State University

Date Written: July 15, 2018

Abstract

We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals.

Keywords: International Accounting; IFRS; Accounting Estimates; GAAP Differences; Predicted Cash Flows

JEL Classification: M16; M49; O52

Suggested Citation

Downes, Jimmy and Kang, Tony and Kim, Sohyung and Lee, Cheol, Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates (July 15, 2018). Accounting Horizons, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3230151

Jimmy Downes

University of Nebraska at Lincoln ( email )

1400 R St
Lincoln, NE 68588
United States

Tony Kang

University of Nebraska - Lincoln ( email )

307 College of Business Administration
Lincoln, NE 68588-0488
United States

Sohyung Kim (Contact Author)

Brock University - Faculty of Business ( email )

St. Catharines, Ontario L2S 3A1
Canada

Cheol Lee

Wayne State University ( email )

United States
313-577-2242 (Phone)

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