Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe

Paul Andre, Andrei Filip () and Luc Paugam ()
Additional contact information
Andrei Filip: ESSEC Business School, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE Cedex, FRANCE, http://www.essec.edu
Luc Paugam: ESSEC Business School et Université Paris IX Dauphine, Postal: Avenue Bernard Hirsch - B.P. 50105, 95021 CERGY-PONTOISE Cedex, FRANCE, http://www.essec.edu

No WP1311, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: 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.

Keywords: Conditional Conservatism; IFRS; Europe; Enforcement; Governance; Intangibles; Impairment (search for similar items in EconPapers)
JEL-codes: G38 M41 M48 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2013-08
New Economics Papers: this item is included in nep-acc
Note: M41, M48, G38
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Working Paper: Impact of Mandatory IFRS Adoption on Conditional Conservatism in Europe (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:essewp:dr-13011

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