IFRS vs. Japanese GAAP Tested with Value Relevance Methodology
Abstract
This study is one of the first empirical evaluations of voluntary IFRS adoption in Japan, and it shows that the earnings announcements of Nikkei 225 firms using IFRS have higher value relevance than earnings announcements of Nikkei 225 firms using Japanese GAAP (earning announcements from 2008-2022). This study uses value relevance methodology that relates surprise earnings (calculated with Bloomberg-compiled analyst earnings expectations) to abnormal returns over the 12 months before the announcement, a methodology evolved from the seminal work of Ball and Brown (1968). Another finding here is the strength of qualitative variables to measure surprise earnings. Japan represents a unique opportunity to compare IFRS to a local standard in a large, developed economy using similar companies except for the accounting standard. These results provide essential data to the IFRS literature, stakeholders navigating the Japanese accounting environment, and other jurisdictions weighing the benefits of IFRS.
Keywords
Full Text:
PDFReferences
Agana, J. A., Zamore, S., and Domeher, D. (2023). IFRS Adoption: A Systematic Review of the Underlying Theories. Journal of Financial Reporting and Accounting. https://doi.org/10.1108/jfra-08-2022-0317.
Auer, K. (1996). Capital Market Reactions to Earnings Announcements: Empirical Evidence on the Difference in the Information Content of IAS-based Earnings and EC Directives-based Earnings. European Accounting Review 5(4): 587–623.
Ahmed, A. S., M. Neel, and D. Wang. (2013). Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence. Contemporary Accounting Research 30 (4): 1344–1372.
Amano, Y. (2020). Real Effects of Intangibles Capitalization—Empirical Evidence from Voluntary IFRS Adoption in Japan. Journal of International Accounting Research 19(3): 19-36.
Ball, R., and P. Brown. (1968). An Empirical Evaluation of Accounting Income Numbers. Journal of Accounting Research 6(2): 159-78. https://doi.org/10.2307/2490232.
Ball, R., and P. Brown. (2014). A Retrospective. The Accounting Review 89(1): 1–26. doi: 10.2308/accr-50604.
Ball, R., A. Robin, and J. S. Wu. (2003). Incentives Versus Standards: Properties of Accounting Income in Four East Asian Countries. Journal of Accounting and Economics 36 (1-3): 235-270. doi:10.1016/j.jacceco.2003.10.003.
Ball, R. (2015). GAAP vs. IFRS: Why We Should Celebrate Convergence Being Unattainable. Unpublished interview, World Finance. Available at https://www.youtube.com/watch?v=o4P05klvMK0.
Ball, R. and L. Shivakumar. (2008). How Much New Information Is There in Earnings? Journal of Accounting Research. doi: 10.1111/j.1475-679x.2008.00299.x.
Bamber, L. (1986). The Information Content of Annual Earnings Releases: A Trading Volume Approach. Journal of Accounting Research 24(1): 40-56. doi:10.2307/2490803.
Ban, K., and H. Takeuchi. (2018). Japanese Companies in Good Position for M&A Activity. Unpublished article, The Urethane BLOG. Available at https://everchem.com/16856-2/.
Barth, M. E., W.R. Landsman, and M. Lang. (2008). International Accounting Standards and Accounting Quality. Journal of Accounting Research: 467–498.
Barth, M. E., W. R. Landsman, M. Lang, and C. Williams. (2012). Are IFRS-based and US GAAP-based Accounting Amounts Comparable? Journal of Accounting and Economics 54: 68–93.
Barth, M. E., W.R. Landsman, D. Young, and Z. Zhuang. (2014). Relevance of Differences between Net Income Based on IFRS and Domestic Standards for European Firms. Journal of Business Finance and Accounting 43: 297–327.
Barth, M. E., Li, K., and McClure, C. G. (2023). Evolution in Value Relevance of Accounting Information.’ The Accounting Review, 98(1), 1–28. https://doi.org/10.2308/tar-2019-0521.
Bartov, E., S. R. Goldberg, and M. Kim. (2005). Comparative Value Relevance among German, U.S., and International Accounting Standards: A German Stock Market Perspective. Journal of Accounting, Auditing, and Finance 20: 95–119.
Basu, S. (1997). The Conservatism Principle and the Asymmetric Timeliness of Earnings. Journal of Accounting and Economics 24(1): 3–37. doi: 10.1016/s0165-4101(97)00014-1.
Brown, P. and J. Kennelly. (1972). The Informational Content of Quarterly Earnings: An Extension and Some Further Evidence. The Journal of Business 45(3): 403-415. Available at www.jstor.org/stable/2351496.
Beaver, W. H. (1968). The Informational Content of Annual Earnings Announcements. Journal of Accounting Research 6: 67. https://doi.org/10.2307/2490070.
Bloomberg L.P. Nikkei 225 Function for performance metrics, Equity Screening Function for Nikkei 225 company lists, Company Information Function for individual company metrics. Retrieved from Bloomberg Terminal on dates ranging from January 2020 to December 2022.
Burnand, M. (2019). Japan: The Fading Economy. Unpublished video, Economics Explained. Available at https://www.youtube.com/watch?v=ErUQnd-YFGg.
Chen, L.H., and H. Sami. (2004). Trading Volume Reaction to the Earnings Reconciliation from IAS to US GAAP on Form 20-F. Working paper. Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=542922.
Chen, L.H., and H. Sami. (2008). Trading Volume Reaction to the Earnings Reconciliation from IAS to US GAAP. Contemporary Accounting Research 25 (1): 15-53. doi:10.1506/car.25.1.1.
Chen, L.H., and H. Sami. (2009). Trading Volume Reaction to the Earnings Reconciliation from IFRS to US GAAP: Further Evidence. Unpublished paper, American Accounting Association National Meeting, New York, NY. Available at SSRN: https://ssrn.com/abstract=1392931.
Chen, L.H., and H. Sami. (2013). The Impact of Firm Characteristics on Trading Volume Reactions to the Earnings Reconciliation from IFRS to US GAAP. Contemporary Accounting Research 30(2): 697–718.
Chen, J. (2022a). What is the Nikkei? Unpublished article, Investopedia. Retrieved from https://www.investopedia.com/terms/n/nikkei.asp.
Chen, J. (2022b). Bloomberg. Unpublished article, Investopedia. Available at https://www.investopedia.com/terms/b/bloomberg.asp.
Christensen, H. B., L. Hail, and C. Leuz. (2013). Mandatory IFRS Reporting and Changes in Enforcement. Journal of Accounting and Economics 56 (2-3): 147-177. http://dx.doi.org/10.1016/j.jacceco.2013.10.007.
Christensen, H. B., E. Lee, M. Walker, and C. Zeng. (2015). Incentives or Standards: What Determines Accounting Quality Changes around IFRS Adoption. European Accounting Review 24(1): 31–61.
Cozby, P. and S. Bates. (2015). Methods in Behavioral Research. McGraw-Hill Education, New York.
Daske, H., L. Hail, C. Leuz, and R. Verdi. (2008). Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences. Journal of Accounting Research. https://doi.org/10.1111/j.1475-679x.2008.00306.x.
De George, E. T., X. Li, and L. Shivakumar. (2016). A Review of the IFRS Adoption Literature. Review of Accounting Studies 21(3): 898–1004. https://doi.org/10.1007/s11142-016-9363-1.
De Gregorio, Z. (2018). The Difference between GAAP and IFRS. Unpublished video, Wolves and Finance. Available at https://www.youtube.com/watch?v=8IJ3uUYAWmQ.
Dun & Bradstreet. (2023). Bloomberg L.P. Unpublished website, Dun & Bradstreet Business Directory. Available at https://www.dnb.com/business-directory/company-profiles.bloomberg_lp.e6b0b2e85f42abaff14a962ee44bb5e5.html.
Ernst & Young. (2016). JGAAP-IFRS Standards. Unpublished paper. Available at https://www.eyjapan.jp/services/assurance/ifrs/issue/ifrs-others/other/pdf/ifrs-jgaap-comparison-v6-en.pdf.
Financial Services Agency (FAS). (2022). Functions of the FSA. Unpublished document, FSA. Available at https://www.fsa.go.jp/common/about/organization/fsa_responsibility_en.pdf.
Firth, M. (1976). The Impact of Earnings Announcements on the Share Price Behaviour of Similar Type Firms. The Economic Journal 86(342): 296-306. doi:10.2307/2230748.
Freed, N., S. Jones, and T. Bergquist. (2014). Understanding Business Statistics. John Wiley & Sons, Hoboken.
Freeman, R. N., and S. Y. Tse. (1992). A Non-linearNon-linear Model of Security Price Responses to Unexpected Earnings. Journal of Accounting Research 30(2): 185-209.
FXCM. (2018). What is the Nikkei 225 Stock Index? Unpublished article, FXCM. Available at https://www.fxcm.com/uk/insights/nikkei-225-index/.
Gignac, G. (2015). Bootstrapping in SPSS - Part 2. Unpublished video, How 2 Stats. Available at https://www.youtube.com/watch?v=P3T96y3wijg.
Gu, J. (2021). Voluntary IFRS adoption and accounting quality: Evidence from Japan. Economic Research-Ekonomska Istraživanja 34(1):1985-2012. DOI: 10.1080/1331677X.2020.1860793.
Griffin, P. A. (1976). Competitive Information in the Stock Market: An Empirical Study of Earnings, Dividends and Analysts Forecasts. The Journal of Finance 31(2): 631. doi: 10.2307/2326631.
Hargrave, M. (2022). Goodwill (Accounting): What It Is, How It Works, How to Calculate. Unpublished article, Investopedia. Available at https://www.investopedia.com/terms/g/goodwill.asp.
Hayn, C. (1995). The Information Content of Losses. Journal of Accounting and Economics 20(2): 125–153. doi: 10.1016/0165-4101(95)00397-2.
Harris, T., and K. Muller. (1999). The Market Valuation of IAS Versus US-GAAP Accounting Measures Using Form 20-F Reconciliations. Journal of Accounting and Economics 26(1–3): 285–312.
Hoogervorst, H. (2018). Chairman's speech: Japan and IFRS Standards. Unpublished speech. Available at https://www.ifrs.org/news-and-events/2018/08/chairmans-speech-japan-and-ifrs-standards/.
Horton, J., and G. Serafeim. (2010). Market Reaction to and Valuation of IFRS Reconciliation Adjustments: First evidence from the UK. Review of Accounting Studies 15: 725–751.
Hung, M., and K. R. Subramanyam. (2007). Financial Statement Effects of Adopting International Accounting Standards: The Case of Germany. Review of Accounting Studies 12: 623–657.
IFRS Foundation. (2022). Analysis of the IFRS Accounting Jurisdiction Profiles. Unpublished website, IFRS Foundation. Available at https://www.ifrs.org/use-around-the-world/use-of-ifrs-standards-by-jurisdiction/#analysis-of-the-167-profiles.
IFRS Foundation. (2023). Benefits of IFRS Accounting Standards. Unpublished website, IFRS Foundation. Available at https://www.ifrs.org/use-around-the-world/why-global-accounting-standards/.
IFRS Foundation. (2017). IFRS Standards – Application Around the World. Jurisdictional Profile: Indonesia. Unpublished website, IFRS Foundation. Available at https://www.ifrs.org/content/dam/ifrs/publications/jurisdictions/pdf-profiles/indonesia-ifrs-profile.pdf.
Imhanzenobe, J. (2022). Value Relevance and Changes in Accounting Standards: A Review of the IFRS Adoption Literature. Cogent Business & Management, 9(1). https://doi.org/10.1080/23311975.2022.2039057.
Jarva, H., and A. Lantto. (2012). Information Content of IFRS versus Domestic Accounting Standards: Evidence from Finland. The Finnish Journal of Business Economics 2: 141-177. doi:10.2139/ssrn.1588087.
Kashiwazaki, R., S. Sato, and F. Takeda. (2019). Does IFRS Adoption Accelerate M&A? The Consequences of Different Goodwill Accounting in Japan. Int Adv Econ Res 25: 399–415. https://doi.org/10.1007/s11294-019-09757-0.
Kolakowski, M. (2021). Bloomberg vs. Reuters: What’s the Difference? Unpublished article, Investopedia. Available at https://www.investopedia.com/articles/investing/052815/financial-news-comparison-bloomberg-vs-reuters.asp.
Kenton, W. (2022). Capital Asset Pricing Model (CAPM) and Assumptions Explained. Unpublished Article, Investopedia. Available at https://www.investopedia.com/terms/c/capm.asp.
Kim, J.-B., and H. Shi. (2012). IFRS Reporting, Firm-Specific Information Flows, and Institutional Environments: International Evidence. Review of Accounting Studies 17(3): 474–517. doi: 10.1007/s11142-012-9190-y.
Kothari, S. (2001). Capital Markets Research in Accounting. Journal of Accounting and Economics 31(1-3): 105-231. doi:10.1016/s0165-4101(01)00030-1s.
Landsman, W., E. Maydew, and J. Thornock. (2012). The Information Content of Annual Earnings Announcements and Mandatory Adoption of IFRS. Journal of Accounting and Economics 53(1-2): 34-54. doi:10.1016/j.jacceco.2011.04.002.
Lang, M., and L. Stice-Lawrence. (2015). Textual Analysis and International Financial Reporting: Large Sample Evidence. Journal of Accounting and Economics 60: 110–135.
Lara, J. M., B. G. Osma, and F. Penalva. (2020). Conditional Conservatism and the Limits to Earnings Management. Journal of Accounting and Public Policy 39(4).
Lestari, T., and Takada, T. (2015). Value Relevance of Accounting Information During IFRS Convergence Process In Indonesia. The Indonesian Journal of Accounting Research, 18(1), 96–116. https://doi.org/10.33312/ijar.366.
Lev, B. (1989). On the Usefulness of Earnings and Earnings Research: Lessons and Directions from Two Decades of Empirical Research. Journal of Accounting Research 27: 153-192.
Lin, S., W. Riccardi, and C. Wang. (2012). Does Accounting Quality Change Following a Switch from US GAAP to IFRS? Evidence from Germany. Journal of Accounting and Public Policy 31: 641–657.
Li, X., and H. I. Yang. (2016). Mandatory Financial Reporting and Voluntary Disclosure: The Effect of Mandatory IFRS Adoption on Management Forecasts. The Accounting Review 91(3): 933-953. doi:10.2308/accr-51296.
Majaski, C. (2021). IFRS vs. US GAAP: What's the Difference? Unpublished article, Investopedia. Available at https://www.investopedia.com/ask/answers/09/ifrs-gaap.asp.
Marin, M. (2019). Bootstrap Confidence Interval with Examples | Statistics Tutorial #36 | MarinStatsLectures. Unpublished video, MarinStatsLectures. Available at https://www.youtube.com/watch?v=-YgeLJRZQYY.
Nichols, D. C., and J. M. Wahlen. (2004). How Do Earnings Numbers Relate to Stock Returns? A Review of Classic Accounting Research with Updated Evidence. Accounting Horizons 18(4): 263–286. doi: 10.2308/acch.2004.18.4.263.
Nielsen, B. (2022). The Lost Decade: Lessons from Japan's Real Estate Crisis. Unpublished article, Investopedia. Available at https://www.investopedia.com/articles/economics/08/japan-1990s-credit-crunch-liquidity-trap.asp.
Nobes, C. W., and S. A. Zeff. (2016). Have Canada, Japan, and Switzerland Adopted IFRS? Australian Accounting Review 26(3): 284–290. doi: 10.1111/auar.12131.
Ozu, C., M. Nakamura, K. Nagata, and S. Gray. (2018). Transitioning to IFRS in Japan: Corporate Perceptions of Costs and Benefits. Australian Accounting Review 28(1): 4-13.
Ramanna, K., and W. Sletten. (2014). Network Effects in Countries’ Adoption of IFRS. The Accounting Review 89(4): 1517–1543.
Reuters. (2015). Japan fines Ernst & Young affiliate $17.4 million over Toshiba audit. Unpublished article, Reuters. Available at https://www.reuters.com/article/us-toshiba-accounting-ernst-idUSKBN0U505S20151222.
Ricketts, R., M. Riley, and R. Shortridge. (2018). Information Content of IFRS Versus GAAP Financial Statements. Journal of Financial Reporting and Accounting 16(1): pp.120-137. https://doi.org/10.1108/JFRA-08-2016-0067.
Sato, S., and F. Takeda. (2017). IFRS Adoption and Stock Prices of Japanese Firms in Governance System Transition. International Journal of Accounting 52(4). doi: 10.2139/ssrn.2767316.
Soobrian, L. (2018). An Event Study and Financial Analysis of FASB Accounting Standards, leases, No. 842. GSTF Journal on Business Review (GBR) 5(2).
Takeda, F., and T. Watanabe. (2015). Corporate Governance and Stock Prices of Japanese Firms Adopting International Financial Reporting Standards: Early Evidence. The Doshisha Business Review 67(6): 37–45. doi: 10.2139/ssrn.2538622.
Tsunogaya, N., A. Hellmann, and S.D. Scagnelli. (2012). Adoption of IFRS in Japan: Challenges and Consequences. Pacific Accounting Review 27(1): 3–27. doi: 10.1108/par-11-2012-0056.
Tsunogaya, N. (2016). Issues Affecting Decisions on Mandatory Adoption of International Financial Reporting Standards (IFRS) in Japan. Accounting, Auditing and Accountability Journal 29(5): 828–860. doi: 10.1108/aaaj-07-2014-1765.
Tysiac, K. (2014). Revenue Recognition: No Time to Wait. Journal of Accountancy.
Van Tendeloo, B., and A. Vanstraelen. (2005). Earnings Management under German GAAP versus IFRS. European Accounting Review 14(1): 155–180.
de VROE, P. US GAAP vs IFRS. Unpublished video, The Finance Storyteller (2019). Available at https://www.youtube.com/watch?v=7B96MhOGaqE.
Wahyuni, E., Puspitasari, G., and Puspitasari, E. (2020). Has IFRS improved accounting quality in Indonesia? A systematic literature review of 2010-2016. Journal of Accounting and Investment, 21(1). https://doi.org/10.18196/jai.2101135.
Widodo Lo, E. (2012). The Value Relevance of Accounting Information in Transition to IAS/IFRS: The Case of Indonesia. Jurnal Akuntansi & Manajemen, 23(2): 139-151.
Williams, Z. (2020). The Value of Information Content in IFRS Financial Statements. Doctoral dissertation, Hampton University, Publication No. 28087168, ProQuest LLC.
Yeaton, K. (2015). A New World of Revenue Recognition: Revenue from Contracts with Customers. The CPA Journal 85(7): 50.
Yorihiro, K. (2011). Update: IFRS Developments in Japan. Financial Executive.
DOI: http://doi.org/10.33312/ijar.709
Refbacks
- There are currently no refbacks.
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
The Indonesian Journal of Accounting Research (IJAR)
Ikatan Akuntan Indonesia
Graha Akuntan, Jl. Sindanglaya No.1 Menteng, Jakarta Pusat 10310
Editorial Secretariat
CP : Farinza
Phone : +62 812-2848-2829
Fax : +62 274 524606
Website: http://ijar-iaikapd.or.id/
Email : sekretariat@ijar-iaikapd.or.id
Marketing and Sales Office
CP : Reza Fauzi
Divisi Pelayanan, Keanggotaan dan Mitra IAI.
Grha Akuntan, Jl. Sindanglaya No.1, Menteng.
Telp.021-31904232 Ext.324/321
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ISSN 2086-6887 (Print)ISSN 2655 - 1748 (online)
-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.
----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------