The Impact of the New IFRSs Developments on the Value-Relevance of Earnings and Book Values in Equity Valuation

• In Event: Audit Firm and Opinions

Abstract

ABSTRACT: The main objective of this study is to investigate the impact of the new IFRSs development on the value-relevance of earnings and book values in equity valuation. During the last two decades several International Financial Reporting Standards (IFRS) have been issued that might be described as a significant movement from the use of historical cost accounting to fair value accounting. This shift provides an opportunity to examine its effect on the value relevance of the accounting numbers and more specifically on the relative value relevance of earnings and book values. We examine the overtime change in these values over 22 years since the adoption of Kuwait to the IFRS in 1992 up to 2013. We partition the sample period into two distinct time periods. The first period includes years from 1992 to 2001 (mostly a historical cost accounting basis period) while the second includes years from 2002 to 2013 (a semi fair value accounting basis period).
The Ohlson (1995) model and a technique developed by Theil (1971) are used to measure the overall value relevance of earnings and book value, the incremental explanatory power of earnings, and the incremental explanatory power of book values. The study reports four primary findings. First, earnings and book values jointly and individually have significant explanatory power for securities prices over the twenty two year period. Second, the combined value-relevance of earnings and book values has not changed significantly over the period. Third, the incremental value-relevance of book value has increased over time while that of earnings has declined. Fourth, the combined explanatory power of earnings and book value has insignificantly decreased and that the incremental explanatory power of book values (earnings) has significantly increased (decreased) after the movement to the fair value accounting basis.
The study findings have important implications for research and standards setters and financial reporting regulators.
Keywords: Value Relevance; International Financial Reporting Standards; Fair value Accounting.

Authors

• Mostafa El Shamy, Kuwait University

• Metwally Ahmed Kayed, Kuwait University

• Ali Hewaidy, Kuwait University