The Influence Of Firm’s Fair Value System On Earnings Quality Under IFRS

Abstract

This paper analyzes the influence of firms’ fair value system on earnings quality under IFRS. Korean firms are required to adopt IFRS in 2011. IFRS adoption was expected to increase value relevance of book value of equity and benefit information users’ decision making. However, prior Korean studies report that value relevance of book value of equity is indifferent between under K-GAAP and IFRS. We consider that the indifference in value relevance of book value of equity after IFRS adoption is due to different level of fair value system among firms. We investigate whether the different level of fair value system among firms lead to the difference in earnings quality. Furthermore, we examine how each firm’s fair value system affect earnings quality under IFRS.
 This study finds following results. First, firms with weak fair value system smooth income more frequently. Second, firms with weak fair value system experience small amount of positive profit and slight increase in net income compared to prior period more frequently. Third, firms with weak fair value system make less timely loss recognition. Lastly, book value of equity and goodwill has low relative value relevance for weak fair value systemic firms, while both book value of equity and goodwill have incremental value relevance for firms with strong fair value evaluation system.

Risk Disclosure and Earnings Quality in Indonesia Banking Industries: Fair Value, Diversification, Financial Stability

“…This result is in line with the result of the research of Annisa & Taqwa (2020). However, this result is not in line with the result of Pompili & Tutino (2019), Rhee et al (2018), Tutino & Pompili (2018), Šodan (2015), Palasari (2018), Takacs et al (2020), andMauro et al (2017). This difference is presumed to occur because this study uses a total fair value proxy as used in the research of Annisa & Taqwa (2020), while other research uses various proxies to measure fair value.…”

“…Fair value measurement gives managers more discretion over the valuation of assets and liabilities; also, fair value is more difficult and expensive to audit (Benston, 2008). Pompili & Tutino (2019), Rhee et al (2018), Tutino & Pompili (2018), Šodan (2015), dan Palasari (2018) found that earnings can reduce earnings quality. H1: Fair value has a negative effect on earnings quality.…”

“…Previous studies have carried out a study on earnings quality both in the international scope and within the scope of Indonesia. At global coverage, determinant factors on earnings quality such as fair value (Takacs et al, 2020;Pompili & Tutino, 2019;Rhee et al, 2018;Tutino & Pompili, 2018;Mauro et al, 2017;Šodan, 2015), corporate social responsibility (Rezaee et al, 2020;Mohmed et al, 2019;Bozzolan et al, 2015;Kim et al, 2012;Salewski & Zülch, 2012), voluntary disclosure (Salem et al, 2020;Karajeh, 2019;Consoni et al, 2017;Kangarlouei et al, 2013;Francis et al, 2008), diversification (Masud et al, 2017;El Mehdi & Seboui, 2011;Rodríguez-Pérez & van Hemmen, 2010), size (Phuong et al, 2020), financial stability (Riahi, 2020), audit quality (Alzoubi, 2018), profitability (Phuong et al, 2020), dividend (Mulchandani et al, 2020), dan capital structure (Phuong et al, 2020). Studies in Indonesia had investigated several determinant factors such as corporate governance (Sudirgo et al, 2021;Yasa et al, 2020;Saksessia & Firmansyah, 2020;Wijaya et al, 2020;Yasa et al, 2019;Nariman & Ekadjaja, 2018), size (Anam & Afrohah, 2020;Purnamasari & Fachrurrozie, 2020;Anggrainy & Priyadi, 2019;…”

“…Takacs et al (2020) and Mauro et al (2017) found that fair value increases earnings quality. However, Pompili & Tutino (2019), Rhee et al (2018), Tutino & Pompili (2018), Šodan (2015), dan Palasari (2018) found that fair value reduces earnings quality. Besides that, Annisa & Taqwa (2020) found that fair value does not affect earnings quality.…”