Accounting Theory: IFRS Adoption and Information Relevance Report

This report examines the implications of International Financial Reporting Standards (IFRS) adoption, focusing on its impact on the value relevance of book value and earnings. It references a study analyzing the compulsory IFRS adoption in Australia and Europe, highlighting the changes in earnings and book value's ability to describe stock prices. The report discusses the effects on Common and Code Law countries, noting a decline in BVPS and EPS value relevance following IFRS adoption under certain models. It also explores the potential for measurement error heteroscedasticity in Code Law countries due to IFRS. The study concludes that IFRS adoption has generally increased the value relevance of accounting information since its launch in 2005, contributing to the understanding of current issues in accounting.

IFRS-REPORTING ADOPTION IMPLICATION TO ACCOUNTINGBy (Student’s Name)
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Outcome Summary
• 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.
• 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.

Implications of international accounting from
Article
• 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

Implications of international accounting from
Article Cont.
• 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).

Implications of international accounting from
Article Cont.
• 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.

Implications of international
accounting from Article Cont.
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).

Implications of international
accounting from Article Cont.
• It is 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).

Implications of international
accounting from Article Cont.
• The connection between heteroscedasticity of
measurement error and the above two forces remain a
logical subsequent step for this literature presented in
this article.

Topic alignment with
international accounting topic
• 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.

Topic alignment with international
accounting topic Cont.
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.

Topic alignment with international
accounting topic Cont.
• 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.

Topic alignment with international
accounting topic Cont.
• 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.