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Does recycling improve information usefulness of income? The case of Japan

Author

Listed:
  • Frendy
  • HU Dan Semba

Abstract

Purpose - The Accounting Standards Board of Japan (ASBJ) proposed a new set of endorsed International Financial Reporting Standards in June 2015. ASBJ claims that non-recycling of other comprehensive income (OCI) items decreases the information usefulness of earnings in a proposed comprehensive income standard. There has been no existing empirical evidence which supports the ASBJ’s statement and the purpose of the study is to test whether OCI recycling improves information usefulness of net income from six perspectives: relative and incremental value relevance, persistence, variability, operating cash flow and net income predictive power. Design/methodology/approach - This paper is an empirical work using a listed Japanese firms sample of 5,385 firm-years from fiscal year 2012-2014. Findings - The results challenge the ASBJ’s claim that recycling improves the general information usefulness characteristics of net income. The empirical results show that OCI recycling improves net income’s relative value relevance characteristic of financial firms. However, recycling information by itself does not improve the incremental value relevance, and the predictive power of operating cash flow and net income. The authors also find that the inclusion of recycling decreases the persistence and increases the variability of net income. Research limitations/implications - This paper has two research limitations. First, this study is constrained to analyze a limited OCI recycling data that is recently disclosed by listed Japanese firms. Second, the results of this study have limited external validity to capital markets with OCI reclassification standards that deviate from Japanese GAAP. Originality/value - This study provides initial empirical evidence that examines information usefulness of OCI recycling in Japan. The findings of this study are relevant for accounting standards setters aiming to increase the information usefulness of earnings for capital market investors.

Suggested Citation

  • Frendy & HU Dan Semba, 2017. "Does recycling improve information usefulness of income? The case of Japan," Asian Review of Accounting, Emerald Group Publishing Limited, vol. 25(3), pages 376-403, September.
    • Handle: RePEc:eme:arapps:ara-11-2015-0111
    DOI: 10.1108/ARA-11-2015-0111
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    Citations

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    Cited by:

    1. Melik Ertugrul & Ali Coskun, 2019. "DoesS Recycling Contribute To Accounting Quality," Bogazici Journal, Review of Social, Economic and Administrative Studies, Bogazici University, Department of Economics, vol. 33(2), pages 1-18.
    2. Albertina Paula Monteiro & Catarina Cepêda & Amélia Ferreira da Silva & Eduardo Leite & Élvio Camacho, 2021. "The role of accounting information in decision-making and companies’ sustainability development: the Portuguese accountants’ perspective," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 9(1), pages 486-501, September.
    3. Inês Pinto & Ana Isabel Morais, 2022. "Classification of Equity Instruments under IFRS 9: Determinants and Consequences," Australian Accounting Review, CPA Australia, vol. 32(4), pages 411-426, December.

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