15 Financial: Pension / IFRS / Fair Value / Environment (FAR7)
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Chair: Audrey Wenhsin Hsu
Professor, College of Management, National Taiwan University, Taiwan
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ItemThe Informativeness of Reclassified Items: Evidence from Pension Accounting( 2017-08-31)The FASB Invitation to Comment (2016) questions whether it should continue to allow employers to recognize pension-related actuarial gains/losses and increases/decreases in prior service costs in other comprehensive income (OCI), close them to accumulated other comprehensive income (AOCI), and subsequently reclassify them to earnings. The question arises because reclassification adjustments affect earnings many periods after the economic event that gave rise to them. We use hand-collected data to assess the usefulness of pension-related reclassifications related to actuarial gains/losses (RECLASS_GL) and prior service cost adjustments (RECLASS_PSC), OCI amounts (OCI_GL and OCI_PSC), and AOCI amounts (AOCI_GL and AOCI_PSC) for predicting pension expense and pension cash contributions. We find RECLASS(GL and PSC), OCI_GL, and AOCI(GL and PSC) are useful predictors of pension expense, while OCI_PSC is not. In contrast, we find that only OCI_GL and AOCI_GL are useful predictors of cash contributions to the pension fund. Additional tests provide evidence that RECLASS_GL and OCI_GL exhibits explanatory power for firms’ market value of equity, but AOCI_GL does not. Using firm’s estimates of year ahead RECLASS_GL, we also provide evidence that the unexpected portion of RECLASS_GL exhibits explanatory power for firms’ short window market-adjusted returns. Together this suggests that the market prices the pension related actuarial gains/losses included in comprehensive income for the current year (RECLASS_GL and OCI_GL), but not the gains/losses contained in the balance sheet (AOCI_GL), even though these amounts are useful predictors of future pension expense and pension cash contributions.
ItemThe Effect of IFRS Adoption on the Predictive Ability of Aggregate Accruals for Economic Growth( 2017-08-31)Using aggregate-level difference-in-differences analysis across 34 countries, I find that the extent to which aggregate accruals predict change in Gross Domestic Product (GDP) is greater for countries that adopted International Financial Reporting Standards (IFRS) than for countries that did not. I do not find a similar change in the predictive ability of aggregate cash flows following IFRS adoption. IFRS adoption also enables aggregate accruals to better predict a component of GDP (corporate profits) and factors related to GDP change (change in corporate investment and unemployment rate). The results are more pronounced for adopting countries with greater differences between local accounting standards and IFRS and for adopting countries with stronger enforcement. These findings support the view that IFRS adoption improves the measurement and recognition of firms’ fundamentals, and suggest that a change in accounting standards can reduce imperfections in accounting measurements of real output from business activities. These inferences have implications for accounting standard setters, users of financial statements, and policy-makers interested in understanding and predicting macroeconomic activity.
ItemA missing link? How selection effects shape evidence on the economic consequences of mandatory IFRS adoption( 2017-08-24)Since 2005, the year of mandatory adoption of IFRS in many jurisdictions worldwide, the number of listed firms in these countries has been on the decline, compared to non-IFRS jurisdictions. We posit that this decrease is, among other things, consistent with regulatory avoidance by specific firms that opt to leave regulated stock exchanges and hence the IFRS mandate due to unfavorable cost-benefit trade-offs. These firm reactions to the regulation likely create a selection effect in studies that investigate economic outcomes of mandatory IFRS adoption. For a global sample of firms, we find evidence in line with these systematic firm responses. In a cross-country study of the effects of mandatory IFRS adoption on liquidity, we then corroborate previous evidence of positive effects, which are clustered in countries that installed enforcement mechanisms concurrent with the IFRS mandate. However, when we incorporate the selection effect into our model, we show that this effect explains liquidity findings in the post IFRS period beyond the previously documented IFRS, EU, and enforcement variation. Taken together, our findings provide a new perspective on the effects of mandatory IFRS adoption by shedding light on a novel “causal path” from mandatory IFRS adoption to positive market outcomes.