Implications of IFRS Adoption on Accounting Information Relevance

This paper explores the implications of adopting IFRS in Australia and Europe on the book value and equity earnings’ value relevance. It examines the impact of IFRS adoption on the ability of the earnings and book value reported to describe the stock prices.

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IFRS-REPORTING ADOPTION IMPLICATION TO ACCOUNTING
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Executive summary of the outcome of the chosen topic
This paper is based on the article, “The impact of IFRS adoption on the value relevance
of book value and earnings” published in the year 2011 and co-authored by Clarkson, Hanna,
Richardson, and Thompson. In this article, the authors probed the implications of adopting IFRS
in Australia and Europe on the book value and equity earnings’ value relevance. The authors
utilized a sample of 3488 organizations that originally adopted IFRS-reporting in year 2005.
They were able to compare and contrast the figures reported initially for 2004 fiscal years to
those figures of IFRS provided in year 200 as the year 2004 IFRS relative figures. As a portion
of their inquiry, the authors ushered in a cross-product term, equivalent to the EPS and BVPS
products, into the conventional linear pricing models. The coefficient estimated on the cross-
product terms stood significant statistically and adverse, as suggested by the theory in essential
nonlinearities presence. Moreover, the authors showed an increased nonlinearity in the data
consequent to the adoption of IFRS, with the surge being profoundly declared for the Common
Law economies’ firms (Covrig, Defond and Hung 2007). When the coauthors controlled the
nonlinear effects, they did not experience alterations in the price relevance for the organizations
in both Common- and Code Law nations, opposing the outcomes from the linear pricing models.
The outcome further indicate that measurement errors distribution becomes increasingly identical
crossways Common- and Code-Law economies following the IFRS adoption, eliminating one
variation between these cohorts. Therefore, the IFRS-reporting adoption is found to improve the
comparability which is the inference that would never be feasible had the analysis in this article
be restricted purely on linear pricing models.
Focus significant implications of international accounting from their chosen paper or
chosen annual report

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The study examined how compulsory IFRS adoption in Australia and Europe impacted
the ability of the earnings and book value reported to describe the stock prices, a matter for
which little large-sample empirical proof is available. The original IFRS adoptions in year 2005
and the obligations that organizations restate their respective comparative 2004 figures to those
of the IFRS in the year 2005 filing, offers a chance to compare and contrast the 2004 earnings
and book value figures’ explanatory power measured under two distinct sets of accounting rules;
the initial local-country GAAP and the latest IFRS. The authors also compared the Common-and
Code-Law nation’s changes separately (Chua, Cheong and Gould 2012).
A regression model was introduced which added an extra explanatory variable to the
conventional earnings (EPS) and the book value (BVPS) explanatory terms-the product terms
(EPS*BVPS)-which is intended explicitly intended to cover the measurement error presence in
the variables of accounting. Where the information exhibited measurement error which surges
with the firm’s value, the product term was predicted to have a significant adverse coefficient.
The coauthors reported the proof that the product terms remained more significant when the
IFRS-reporting accounting figures (compared to the regression hinged on Local GAAP
accounting) and the surge in significance of product model is increasingly manifested for
Common Law countries’ firms (Ball 2006).
Taken together, the result for the Common- and Code-Law countries using WLS and
OLS demonstrate a decline (surge) in the BVPS and EPS value relevance following the adoption
of the IFRS-reporting standards. In comparison, a divergent deductions follows from the Product
Model that has failed to dispute the null that the goodness-of-fit influence of the adopting IFRS
is zero. The fundamental intuition here is that, for linear models, a decline (increase) in the
firms’ price relevance from Common-(Code) Lwa nations is triggered by an alterations in the

IFRS-Reporting Adoption Implication to Accounting 4
non-linearity of the pricing function. Controlling the non-linear impacts leads to no witnessed
change in the BVPS and EPS value relevance for both Common- and Code- Law economies
despite the swift to IFRS-reporting standards. Being that Product Model changes the critical
inference for the IFRS influence implies that the Product Model application remains justified and
must be taken into account by coming scholars when performing levels valuation studies (Hung
and Subramanyam 2007).
The coauthors further assess the impacts of IFRS-reporting adoption and implementation
to what is referred to as a market-oriented attribute including the value relevance of earnings and
book value for the stock price level by Francis, Lafond, Olson and Schipper (2004) and Schipper
(2009). Based on the mentioned attribute, the coauthors captured the benefits of the IFRS by a
rise in the linkage between price, earnings and book value. Because the authors held that
“goodness-of-fit” is the means they measured such a connection, their “no change” outcome
utilizing the Product Model is an implication that the IFRS adoption’s capital market benefits in
Australia and Europe stood limited (Clarkson et al. 2011).
Nevertheless, they showed that Product Model discloses capital market benefits of
adopting IFRS when the alternative market-oriented attribute (product term importance-viewed
as measuring error-capture) was examined. Following the adoption and subsequent
implementation, no variation in measurement error between Common-and Code Law countries
was observed, while prior to adopting IFRs, such a difference was profound. Where a person
interprets measurement error’s heteroscedasticity as one financial reporting quality dimension,
the implication is identical financial reporting quality following IFRS for 2 cohorts of nations
that had dissimilar financial reporting quality prior to the adoption of IFRS. Therefore, the
adoption and implementation of IFRS improves comparability. This inference was only made

IFRS-Reporting Adoption Implication to Accounting 5
possible because the investigation extended past linearity models. Thus such an inference can be
drawn from the data as the enforcement alongside incentives are held fixed to the examination.
Such an outcome points to a benefit of adopting IFRS, an inference which could be impossible
with confinement of analysis to the linear models as well as conventional “goodness-of-fit”
metrics. Therefore, the Product Model has a critical role to play in helping assess the IFRS-
reporting adoption benefits. Neither IFRS nor Product Model would be full without the other as
each element of the analysis is dependent on the other (Barth, Landsman and Lang 2008).
It is, therefore, speculated that the measurement error heteroscedasticity in the countries
with Code Law could have been shaped in 2 ways by the IFRS accounting standard adoption.
One of this ways is the decrease in the prior cross-sectional difference in conservatism and the
other ways is the surge in volatility of earnings (Daske and Gebhardt 2006). Resolving the
connection between heteroscedasticity of measurement error and the above two forces remain a
logical subsequent step for this literature presented in this article.
Conceptualize and focus contribution how your chosen topic align with international
accounting topic from your accounting theory and current issue Subject
Before the IFRS’s voluntary adoption, international accounting scholars examined the
book value and earnings relevance via cross-sectional designs. For instance Arce and Mora
(2002) explored the earnings and book value valuation in the valuation model levels across
eights European nations utilizing data from 1990 to 19998. They concluded that earnings stood
more relevant as opposed to book value in the Common Law nations and the reversed held for
the Code Law economies. The partition between Code-and Common-Law is hinged on the
anticipation that the role of earnings’ valuation need to remain more significant in shareholder
than to stakeholder economies. Accounting standards in Common Law economies are

IFRS-Reporting Adoption Implication to Accounting 6
established by private sector agencies and their purpose is to satisfy information requirement of
investors (Jeanjean and Stolowy 2008). On the other hand, standards are established by
government in Code Law nation s and accounting acts as a measure of the divide profits between
groups of stakeholders. Therefore, legal system demonstrate a natural partition for the inquiry
relating to the adoption of IFRS implications on the value relevance. A greater divergence
between IFRS and Local GAAP is reported by Bae, Tan and Walker (BTW, 2008) in Code- and
Common-Law countries due to Code Law nations adopting an insider economy perspective.
Other studies have examined the book value and earnings’ valuation relevance for the early
(voluntary) adopters of IAS succeeded by the IFRS using pre-post designs. Despite small
samples used in these respective studies, they have found conflicting outcomes to the ones of
Hung and Subramanyam (2007). Hund and Subramanyam explored the valuation relevance of
the restatement variations for eighty voluntary IAS adopters in Germany. This study discovered
that the merged earnings and book value relevance declined following the shift to IAS. Identical
results were experienced by Stergios, Athanasios and Nicholas (2007) for forty voluntary IAS
adopters in Greece. Studies relating to IFRS adoption like those of Armed and Goodwin (2006)
alongside Godwin et al. (2008) have concluded that aggregate variations between local GAAP
and IFRS show no incremental info for price in respective sample (Ampofo and Sellani 2005).
These studies provide conflicting information based on the use of incremental value
relevance strategies and hence making it increasingly hard to understand the connection between
IFRS adoption and value relevance of book value and earnings. It is this disparity that has
inspired me to choose this topic “implication of IFRS adoption in accounting information
relevance” because it aligns to the international topic of accounting theory and current issues.
This will help me come up with a clear position on what exactly is the associating between IFRS

IFRS-Reporting Adoption Implication to Accounting 7
adoption and accounting information value relevance. As observed in the literature, comparative
value relevance examination tackle the question of which GAAP figures better fit the price,
while incremental value relevance scrutiny ask whether, provided local GAAP figures’
knowledge, IFRS figures have incremental explanatory power for price. Reviewing this article
has helped me recognize that it is an already establishment in the literature that GAAP regimes
(IFRS and local) might each have incremental value relevance for the price provided the other,
however, one of the regimes might have more value relevance for prices as opposed to other.
Thus, I have been able to understand the significance of the relative test since investor will have
a single set of figures or the other, rather than both, as economies shift to IFRS (Ahmed, Neel
and Wang 2013).
In conclusion, the choice of the topic in this essay has made me understand the
international topic of the “current issues in accounting’ based on the implication of IFRS
adoption. As has been observed in the discussion, IFRS has increased the value relevance of
accounting information as opposed to years before its launch in 2005.

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References
Ahmed, A.S., Neel, M. and Wang, D., 2013. Does mandatory adoption of IFRS improve
accounting quality? Preliminary evidence. Contemporary Accounting Research, 30(4), pp.1344-
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Ball, R., 2006. International Financial Reporting Standards (IFRS): pros and cons for
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Chua, Y.L., Cheong, C.S. and Gould, G., 2012. The impact of mandatory IFRS adoption on
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Clarkson, P., Hanna, J.D., Richardson, G.D. and Thompson, R., 2011. The impact of IFRS
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Accounting & Economics, 7(1), pp.1-17.
http://www.convibra.com.br/upload/paper/2012/31/2012_31_3785.pdf
Covrig, V.M., Defond, M.L. and Hung, M., 2007. Home bias, foreign mutual fund holdings, and
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