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        The adoption of IFRS 3: the effects of managerial discretion and stock market reactions

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        S110.pdf (PDF, 317Kb)
        Author
        Hamberg, Mattias
        Paananen, Mari
        Novak, Jiri
        Attention
        2299/6606
        Abstract
        In recent years, several accounting standards, including IFRS 3, issued by the IASB, substitute historical cost with fair value measures and so provide managers with increased discretion to determine fair value without an actual market for the asset. Using Swedish data, we document the accounting consequences of the adoption of IFRS 3 and the stock market's reaction. After the adoption of this standard in January 2005 the amount of capitalized goodwill increased substantially. Goodwill impairments under IFRS are considerably lower than goodwill amortizations and impairments made under Swedish GAAP. Consequently, the adoption of IFRS 3 increased reported earnings. An analysis of economic incentives influencing the impairment decision at the initial adoption of IFRS 3 shows that tenured management is negatively associated with the impairment decision. However, most firms did not reclassify goodwill or make additional impairments. Firms with substantial amounts of goodwill yielded abnormally high returns despite abnormally low earnings. Investors seem to, correctly or incorrectly, have viewed the accrual-based increase in earnings stemming from IFRS 3 as an indication of higher future cash flows.
        Publication date
        2011
        Published in
        European Accounting Review
        Published version
        https://doi.org/10.1080/09638181003687877
        Other links
        http://hdl.handle.net/2299/6606
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