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Does Mandatory Adoption of IFRS Enhance Earnings Quality? Evidence From Closer to Home

Author

Listed:
  • Gopal V. Krishnan

    (Department of Accountancy, Bentley University, Waltham, MA 02452, USA)

  • Jing Zhang

    (Department of Accounting, Business School, University of Colorado Denver, 1475 Lawrence Street, Denver, CO 80202, USA)

Abstract

The global accounting convergence and the often discussed probable adoption of International Financial Reporting Standards (IFRS) by U.S. regulators is a timely topic. We contribute to the literature by examining a more recent mandatory IFRS adoption by Canada. Canadian GAAP (CGAAP) is often considered a close substitute for U.S. GAAP. One key feature of this setting is that two earnings numbers are available for fiscal year 2010 since Canadian firms were required to reconcile earnings under CGAAP with earnings under IFRS. We run a “horse race” of earnings quality between earnings under CGAAP and IFRS. We find that on average, relative to IFRS-earnings, earnings under CGAAP have greater association with next period cash flows and higher degree of persistence. Further, when the difference between earnings under CGAAP and IFRS is large, IFRS-earnings are less value-relevant and less persistent. These results strongly support the notion that higher earnings quality is associated with CGAAP. Finally, the results also indicate that differences between CGAAP and IFRS with regard to accounting for financial instruments and investments significantly impair the quality of IFRS-earnings. Our findings are potentially informative to any revival of policy debates on the possible adoption of IFRS by U.S. firms.

Suggested Citation

  • Gopal V. Krishnan & Jing Zhang, 2019. "Does Mandatory Adoption of IFRS Enhance Earnings Quality? Evidence From Closer to Home," The International Journal of Accounting (TIJA), World Scientific Publishing Co. Pte. Ltd., vol. 54(01), pages 1-42, March.
    • Handle: RePEc:wsi:tijaxx:v:54:y:2019:i:01:n:s1094406019500033
    DOI: 10.1142/S1094406019500033
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    Citations

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    Cited by:

    1. Adhikari, Ajay & Bansal, Manish & Kumar, Ashish, 2021. "IFRS convergence and accounting quality: India a case study," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 45(C).
    2. Shruti, R. & Thenmozhi, M., 2023. "Founder ownership and value relevance of IFRS convergence: Role of institutional investors," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    3. Wakil, Gulraze & Petruska, Karin A., 2022. "Does mandatory IFRS adoption affect large and small public firms' accounting quality differently? Evidence from Canada," Advances in accounting, Elsevier, vol. 57(C).
    4. Abdulrahman Alomair & Alan Farley & Helen Hong Yang, 2022. "The impact of IFRS adoption on the value relevance of accounting information in Saudi Arabia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2839-2878, June.

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