The impact of IFRS13 on earnings management of IAS39 reclassifying firms following the 2008 financial crisis

Purpose The purpose of this paper is to determine the effect of the “IFRS13: Fair value measurement” standard on earnings management behavior of IAS39 reclassifying firms. Design/methodology/approach The authors assess accrual-based earnings management following the Kothari et al.’s (2005) model. Real earnings management is identified by a comprehensive measure that combines overproduction, sales manipulation and discretionary expenditures. The authors measure the impact of “IFRS13: Fair Value Measurement” adoption on earnings management using Mann–Whitney’s comparison tests and simultaneous equation systems. Findings The findings show that IAS39 reclassifying firms increase their accounting earnings management before adopting “IFRS13: Fair Value Measurement.” However, this accounting manipulation diminishes after implementing this standard. IAS39 reclassifying firms switch to real earnings management alternatives. Research limitations/implications First, the study examined the two earnings management practices of companies that have adopted IAS39 amendments, yet it did not focus on the amount subject to manipulation because of the reclassification of assets. Second, the study did not distinguish between the different levels of fair value hierarchy when determining the impact of “IFRS13: Fair Value Measurement” adoption on earnings management. Practical implications These findings support the decisions of accounting standards setters to address untraceable recognition and measurement choices inherent in accounting standards. Originality/value The authors explore companies that took advantage of the positive effect of the IAS39 amendments on earnings before and after “IFRS13: Fair Value Measurement” adoption. The most important contribution of this study is to determine whether or not “IFRS13: Fair Value Measurement” reduces the accounting flexibility used by IAS39 reclassifying firms. Therefore, the specific aim is to examine the earnings management behavior of companies that benefited from the flexibility of the reclassification offered by the IAS39 amendments as an accounting manipulation instrument before and after IFRS13 standard adoption. Previous studies have not examined this effect.