Contractibility of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption

Shivakumar, L, Ball, R and Li, X (2015) Contractibility of financial statement information prepared under IFRS: Evidence from debt contracts around IFRS adoption. Journal of Accounting Research, 53 (5). pp. 915-963. OPEN ACCESS

Abstract

We outline several properties of IFRS that potentially affect the contractibility or the transparency of financial statement information, and hence the use of that information in debt contracts. Those properties include the increased choice among accounting rules IFRS gives to managers, enhanced rule-making uncertainty, and increased emphasis on fair value accounting. Consistent with reduced contractibility of IFRS financial statement information, we find a significant reduction in accounting-based debt covenants following mandatory IFRS adoption. The reduction in accounting covenant use is associated with measures of the difference between prior domestic standards and IFRS. Because IFRS adoption changed financial reporting in many ways simultaneously, it is difficult to trace the decline in accounting covenant use to individual IFRS properties, though we report larger declines in accounting covenant use in banks, which have a higher proportion of assets and liabilities that are fair-valued. Our findings are better explained by reduced contractibility than by increased transparency, which would predict reduced nonaccounting covenant use as well, whereas we observe increases. Overall, we conclude that IFRS rules sacrifice debt contracting usefulness to achieve other objectives, such as provision of accounting information relevant to valuation.

More Details

Item Type: Article
Subject Areas: Accounting
Additional Information: © 2015, University of Chicago on behalf of the Accounting Research Center
Subjects: A > Accounting valuations
F > Financial statements
A > Auditing standards
Date Deposited: 22 Mar 2016 16:44
Last Modified: 16 Jan 2019 11:44
URI: http://lbsresearch.london.edu/id/eprint/194
More

Export and Share


Download

Accepted Version - Text
  • Available under License

Statistics

Altmetrics

Downloads from LBS Research Online

View details

Actions (login required)

Edit Item Edit Item