Value relevance of financial statements in convergence with IFRS: analyses in the abnormal pricing error method

ABSTRACT

We use an econometrically distinct method to test whether the value relevance of financial statements, especially during convergence with International Financial Reporting Standards (IFRS), has improved in Taiwanese firms in 1990–2011. In contrast to a prior study, our results show that given transformation between two high-quality accounting standards, convergence with IFRS will not lead to further increases in value relevance of financial statements. Our findings may provide implications for international standard-setters and regulators, especially countries undecided about adopting or converging with IFRS.

KEYWORDS:

• Value relevance
• IFRS
• convergence
• standard-setting

JEL CLASSIFICATION:

• M40
• M41

Acknowledgement

We are grateful for comments from participants at the 2014 Annual Meeting of American Accounting Association and the 2008 International Conference on Innovation and Productivity Improvement in Service Industries of the Tohoku Unversity, Japan.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ All listed companies and financial institutions (except for credit cooperatives, credit card companies and insurance intermediaries, which are postponed until 2015) supervised by the Taiwan Financial Supervisory Commission are mandated to adopt International Financial Reporting Standards (IFRS) since 2013.

² In summary, there are three fundamental changes during the ‘IFRS-Converging Period’ (2000–2012): from income statement approach to balance sheet approach, from historical cost basis to fair value basis and from rule-based standards to principle-based standards.

³ We also do not find any increasing trend in value relevance during 2005–2008, a period where several key accounting standards (e.g., financial instruments, asset impairments and share-based payments) are effective.

⁴ Generally, the absolute value of total nonrecurring items only accounts for minimal portions of total after-tax earnings. Impacts of nonrecurring items on value relevance of earnings may be ignored.

⁵ We thank one referee’s concern that the lack of trend in value relevance in the IFRS-Converging Period may be due to Taiwan’s low legal enforcement. We search for a database called Worldwide Governance Indicators project (http://info.worldbank.org/governance/wgi/index.aspx#countryReports) under the World Bank and have two main findings. First, the relative rank of Taiwan’s legal enforcement is not low. Second, we do observe progress of Taiwan’s relative rank from 71.8 (2000) to 83.1 (2011). However, the value relevance of financial statements does not show an increasing trend in the same period. Therefore, enforcement may not be the main factor that affects the trend of value relevance in this study.

Additional information

Funding

We acknowledge financial support provided by National Science Committee, Taiwan, Republic of China [Research Grant No. NSC 94-2416-H006-031].