IFRS adoption and unconditional conservatism: an accrual-based analysis

• DOI: https://doi.org/10.1108/IJAIM-05-2021-0093
• Published date: 21 October 2021
• Date: 21 October 2021
• Pages: 848-866
• Subject Matter: Accounting & finance,Accounting/accountancy,Accounting methods/systems
• Author: Olga Fullana,Mariano González,David Toscano

IFRS adoption and unconditional

conservatism: an

accrual-based analysis

Olga Fullana

Universitat de València, Valencia, Spain

Mariano Gonz

alez

UNED, Madrid, Spain, and

David Toscano

Universidad de Huelva, Huelva, Spain

Abstract

Purpose –In this paper we analyse the effect on unconditionalconservatism of the mandatory adoption of

International FinancialReporting Standards (IFRS) by the European listedf‌irms in January 2005. Under the

hypothesis that accounting regulation inf‌luences the accounting conservatism, we use a non-market-based

measure of unconditionalconservatism –the accrual-based measure proposedby Givoly and Hayn (2000)–to

test this effect, controlling for the other determinants of the unconditional conservatism found in the

accountingliterature.

Design/methodology/approach –We use a panel data of 10 years and 96 non-f‌inancial listedf‌irms in

the Spanish stock market in whichthe differences between local GAAP and IFRS are more important. A pre-

estimation analysis of the data reveals that GLS with random effects is the correct estimation procedure.

However, to try to deal with the likely endogeneity in the set of variables, the authors perform an estimate

with a dynamic estimatorfor panels with few periods and many individualswhere the independent variables

are not strictlyexogenous.

Findings –As expected, results show evidence that support a signif‌icant reduction on the unconditional

conservatism of f‌irms in the sample due to the adoptionof IFRS. This evidence is relevant to equity market,

debt market and corporate governanceusers of the f‌inancial information, and also for the policymakers who

can assess the effectsof their mandate.

Research limitations/implications –Results shown in this paper haveall the limitations of system-,

country-, sample- and event-specif‌icstudies but, along with many others drawn in alternative contexts,may

help to correctly understand both the time-evolution and cross-sectional country differences of f‌irms’

unconditionalconservatism.

Originality/value –The study represents the f‌irst analysis of the effect of the adoption of IFRS on

unconditional conservatism of the European listed companies using a non-market accrual-based measure.

Results are not inf‌luenced by the dynamicsof the stock market and, by comparison, allow us to analyse this

JEL classif‌ication –M41, G14, G32

The authors are grateful for the comments from María del Mar Camacho, Manuel Cano, and an

anonymous referee from the XVII International ASEPUC Conference (Madrid, 2018), from Kooi S.

Yeap in the 7th Paris Financial Management Conference (2019), and from Prof. Juan M. Nave in the

Seminars on Empirical Finance Research at UCLM (Cuenca, 2020). The authors are also grateful for

comments and suggestions from three referees of IJAIM and from its editor Prof. Chunhui Liu. The

f‌inal version of this paper was written when David Toscano was visiting the Department of

Accounting at the Universitat de València (Spain).

Funding: Spanish Government MICINN-AEI PID2020-114563GB-I00.

IJAIM

29,5

848

Received9 May 2021

Revised17 August 2021

Accepted14 September 2021

InternationalJournal of

Accounting& Information

Management

Vol.29 No. 5, 2021

pp. 848-866

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-05-2021-0093

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

inf‌luence in results providedby using market-based measures of the unconditionalaccounting conservatism

providedby previousliterature.

Keywords Accounting-based measure, Accrual-based analysis, European listed f‌irms,

Mandatory IFRS adoption, Unconditional conservatism

Paper type Research paper

1. Introduction

Accounting conservatism is an important concept in the f‌irms’f‌inancial information that

implies the exercise of being cautious in the recognitionand measurement of results and net

assets of the company (Basu, 1997;Watts,2003, and Ball et al., 2013). Givoly et al. (2007) cite

as the only “off‌icial”def‌inition of conservatismthe one offered in the glossary of Statement

of Concepts No. 2 of the FASB, where it was def‌inedas “a prudent reaction to uncertainty to

try to ensure that uncertainty and risks inherent in business situations are adequately

considered”. However, despite its central role in accounting theory andpractice, there is no

single accepted def‌inition mainly because, as Basu (2005) argues, we can observe two

distinct types of accountingconservatism: one related to the income statement, and the other

related to the balancesheet of the company.

In this regard, the literature usually treats separately these two types of accounting

conservatism:

(1) the unconditional conservatism (Watts, 2003;Beaver and Ryan, 2005;Givoly et al.,

2007), which implies the systematic and independent persistence to underestimate

the net assetsof the company through policiesand methods that are conservative [1],

and have a negativeinf‌luence on the quality of accountinginformation; and

(2) the conditional conservatism that refers to the high degree of prudence required to

recognize good news (gains) versus bad (losses) (Basu, 1997)[

2], reducing the

discretion of managers to manipulate results (Dechow et al., 2010).

Under the hypothesis that accountingregulation inf‌luences the accounting conservatism, in

this paper, we analyse the effect of the mandatory adoption of International Financial

Reporting Standards (IFRS)on unconditional conservatism. The Europeanlisted f‌irms have

to prepare mandatorily their f‌inancial statements under IFRS from January 2005. As Hung

and Subramanyam (2007) note, this mandate“arguably is one of the most important events

in the history of f‌inancial reporting”and focuses on the accounting harmonization,

searching for transparencyand quality in the accounts reported by European companies.In

this context, the change from GAAP to IFRS could have a signif‌icant impact on the

conservatism, being relevant for the policymakers, practitioners and academics. We would

expect that the transition from the continental GAAP to the IFRS to reduces the overly

conservative practices achieving a more adjusted representation of the economic f‌irm

conditions to the reality.

Several reasons leadus to focus on the unconditional conservatism:

in continental accounting systems it is more likely to have a high level of

unconditional conservatism due to the important inf‌luence that tax regulations have

on them;

unconditional conservatism is a feature of f‌inancial information to be eradicated,

contrary to the more desirable conditional conservatism; [3] and

the previous evidence in the empirical literature, showing a trade-off between

unconditional conservatism and conditional conservatism [4], which anticipates a

IFRS adoption

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