The relationships between IFRS, earnings losses threshold and earnings management

Abstract

An increasing number of countries have adopted International Financial Reporting Standards (IFRS). Prior research indicates that IFRS increase the relevance of financial statements, but also increase opportunism in earnings management (EM). Despite this, no evidence is found in this study to demonstrate that the adoption of IFRS increases the use of EM by companies as a whole. Furthermore, the results indicate that the use of IFRS can enhance the neutrality of financial statements. However, these phenomena occur only in the case of firms with positive earnings. Therefore, if a firm faces earnings losses (ELOSS), the manager will often exhibit EM behaviour after implementing IFRS. Thus, when the firm has ELOSS and adopts IFRS, the situation that results will usually decrease the neutrality of financial statements. As for the management implications, these findings suggest that the government and regulator should implement more in-depth supervision to prevent the increased use of EM by managers following the adoption of IFRS.

Keywords:

• International Financial Reporting Standards (IFRS)
• earnings losses
• earnings management
• discretionary accruals
• neutrality

JEL Classification:

• C20
• M41
• G39

Acknowledgement

The research support in the form of NSC grant No. NSC 101-2410-H-035-012- is gratefully acknowledged.

Notes

1. r≦∣0.3|: low correlation; |0.3| < r < |0.7|: medium correlation; r ≧ ∣.7|: high correlation.