IAS 41 and stock price informativeness

ABSTRACT

We investigate whether the adoption of International Accounting Standard 41: Agriculture influences firm-specific information flows capitalized into stock prices and thus affects stock price informativeness. Using a sample of IAS 41 adopters from countries that mandates IFRS in 2005 and the control samples of non-IAS 41 adopters, we find that price informativeness for IAS 41 adopters increases following IAS 41 adoption. We also find that the effect of IAS 41 adoption is similar between firms that transforms bearer plants, which derive value in use of assets and other biological assets. Overall, our results are consistent with the notion that the increased transparency from IAS 41 adoption broadly facilitates firm-specific information flows entering into stock market and thereby reduces synchronicity, making stock price more informative.

KEYWORDS:

• Fair value
• biological assets
• IAS 41
• firm-specific information
• stock price synchronicity

Acknowledgments

We thank participants at Accounting Theory and Practice Conference & Asian Accounting Association Conference 2017. We also would like to thank Ministry of Science and Technology grants for funding the project.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. This requirement is deleted after IFRS 13 was applied to annual periods beginning or after 1 January 2013; while the requirement of IFRS 13 is similar to that of IAS 41.

2. Biological transformation comprises the process of growth, degeneration, production and procreation that cause qualitative or quantitative changes in a biological asset (IASB 2001).

3. Agricultural produce is the ‘harvested product of the entity’s biological assets’ (IASB 2001).

4. Biological Asset Gross, Biological Assets Accumulated Depreciation and Biological Asset NBV represent biological assets that are classified as non-current, while Biological Assets Current represents biological assets that are classified as current. Unrealized Valuation Gains/Losses Biological Assets represents the gains or losses arising from changes in fair value of biological assets.

5. For firm-years when firm are not required to disclose fair value hierarchy information, we read through the disclosure about the method applied to determine fair value of biological assets and classify them among level 1, level 2 and level 3 (e.g., a discounted cash flow model is equivalent to a level 3 fair value).

6. After checking with the database, this may result from the misclassification in their data-collecting process (e.g., they misclassify mining assets as biological assets).

7. In an untabulated analysis, we test whether firms’ primary SIC code is directly associated with agricultural activities is a factor differentiating the effect of IAS 41. The results are not statistically significant.

8. The example is taken from the 2015 annual report of Australian Agricultural Company Limited.

9. The example is taken from the 2015 annual report of Australian Agricultural Company Limited.