Decision usefulness of accounting information and compliance with accounting standards

Abstract

The overall aim of this thesis is to investigate decision usefulness of financial accounting information and compliance with financial accounting standards. This thesis builds on three complementary studies, which explore the decision usefulness of fair value accounting information and compliance of private companies with financial accounting standards. The information perspective of accounting information provides the theoretical framework for the thesis. From this perspective, information content of financial information is useful if it has impact on the users of the accounting information. The decision usefulness of fair value accounting (FVA) is analysed for two important user groups of financial statements, equity analysts and investors. The first study uses a case study approach and interviews with equity analysts to examine the usefulness of judgemental fair value adjustments (Level 3) and the impact that the implementation of IFRS 13 Fair Value Measurement had on the relevance of disclosures and disclosure practice. The second study focuses on investors and uses an event study methodology and regression analysis to examine the association between judgemental fair value adjustments recognised in the income statements and stock price reaction for listed European real estate companies. It also probes if increased disclosures about fair value following the implementation of IFRS 13 increased the relevance of the FVA. The third study examines the level of compliance with national accounting standards and factors which may influence the compliance level for a sample of Icelandic private companies. The first study finds that equity analysts focus on cash-flow and do not incorporate Level 3 fair values as an input in their valuation. These results indicate that Level 3 fair value measurements or fair value disclosures have little relevance or information value for equity analysts. However, the fair value disclosures appear to have to some extent confirmative value as they provide analysts with comfort over their own fair valuation measurements and verify the credibility of management. The additional fair value disclosure requirements implemented with IFRS 13 have scant relevance for equity analysts. The results provide evidence that standard-setters, auditors and preparers of financial statements with significant Level 3 fair value adjustments should focus on predictive and forward-looking disclosures to evaluate future cash flows. Detailed disclosures about the management valuation process and sensitivity analysis have limited relevance for the equity analysts. On the other hand, from the investors´ perspective, the findings of the second study indicate that FVA are value relevant after implementation of IFRS 13 but not in the period before the implementation. In addition, the findings indicate that FVA recognised in semi-annual financial statements are more value relevant compared to annual accounts and positive FVA have more value relevance than negative FVA. While the first two studies focus on the usefulness of accounting information, the third study goes a step further and explores management intentions to provide useful accounting information by analysing compliance with accounting standards. This study expands the literature by using management incentive theories to investigate compliance with national accounting standards by private companies, whereas prior research has mainly focused on publicly listed companies. The research reveals an overall compliance level of 75%, which demonstrates poor compliance, as the study is based on compliance with mandatory disclosures, where 100% compliance is required by law. Compliance is particularly low with mandatory disclosure requirements regarding investment in other companies, related party transactions and off-balance sheet liabilities. The overall results support concerns about lack of compliance, which have been raised by authorities, analysts, credit institutions and other consumers of Icelandic financial statements. Even though the information asymmetry in private companies appears to be resolved to some extent through private communications with different stakeholders, public financial statements play an important role. These findings have therefore direct implications for policy makers and regulators, as they highlight the importance of improving the enforcement and monitoring of compliance with the accounting regulation. Additionally, the study finds association between compliance levels and the size of a company, size of audit firm and sign-off date of financial statements. However, the age of a company, leverage or family ownership do not appear to influence compliance levels.