Publication detail

The Adoption of IFRS 3: The Effects of Managerial Discretion and Stock Market Reactions

Author(s): Jiří Novák M.Sc., Ph.D., Deloitte Corporate Chair, Hamberg, Mattias; Paananen, Mari
Type: Articles in journals with impact factor
Year: 2010
Number: 0
ISSN / ISBN:
Published in: European Accounting Review
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Grants: 402/09/P154 Financial risk measurement for evaluating stock market efficiency
Abstract: In recent years, several accounting standards, including IFRS 3, issued by the IASB, substitute historical cost with fair value measures and so provide managers with increased discretion to determine fair value without an actual market for the asset. Using Swedish data, we document the accounting consequences of the adoption of IFRS 3 and the stock market’s reaction. After the adoption of this standard in January 2005 the amount of capitalized goodwill increased substantially. Goodwill impairments under IFRS are considerably lower than goodwill amortizations and impairments made under Swedish GAAP. Consequently, the adoption of IFRS 3 increased reported earnings. An analysis of economic incentives influencing the impairment decision at the initial adoption of IFRS 3 shows that tenured management is negatively associated with the impairment decision. However, most firms did not reclassify goodwill or make additional impairments. Firms with substantial amounts of goodwill yielded abnormally high returns despite abnormally low earnings. Investors seem to, correctly or incorrectly, have viewed the accrual-based increase in earnings stemming from IFRS 3 as an indication of higher future cash flows.

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