Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe
André, Paul; Filip, Andrei; Paugam, Luc (2013-08), Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe. https://basepub.dauphine.fr/handle/123456789/13148
TypeDocument de travail / Working paper
Series titleResearch Center ESSEC Working Paper
MetadataShow full item record
Abstract (EN)We study the effect of the mandatory adoption of IFRS in Europe in 2005 on conditional conservatism. To capture conditional conservatism, we use three measures: the Basu (1997) measure, the Khan and Watts (2009) measure, and a measure controlling for potential shifts in unconditional conservatism and cost of capital after the adoption of IFRS. From a sample of 7,251 firm-year observations drawn from 16 European countries, we document an overall decline of the degree of conditional conservatism across our three measures. While there is no change in weak enforcement/governance countries which remain less conditionally conservative than strong enforcement/governance countries, the latter exhibit a significant decrease. Further, we demonstrate that the decline is more significant for firms carrying intangible assets and goodwill in their balance sheets, items for which impairment tests rely on unverifiable fair value estimates. We argue that IFRS are conceptually conditionally conservative but that inappropriate application of conditional conservatism principles may have prevented financial reporting from reaching the level of conservatism targeted by the IASB.
Subjects / KeywordsConditional Conservatism; IFRS; Europe; Enforcement; Governance; Intangibles; Impairment
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