A Comparison of Earnings Persistence under Korean GAAP versus IFRS
Asian Tax Journal Vol. 12 No. 4 (2011), pp. 45-68
Abstract
This research conducted a comparative analysis on 32 domestic listed companies which early adopted K－IFRS in 2009 and 2010 to examine the differences in durability of profits, comparing with 64 companies of the same kind for the same years that adopted K－GAAP as the controlled group. The earnings persistence can be measured by how well current profits can explain future profits. I analyzed this, focusing on correlations between the current profits (reported profits) that represent the quality of profits and the future cash flow (reported profits, cash flows) with the same research methodology and viewpoints as the conceptual system of FASB and IASB of Atwood et al.(2011). Since sampling of the companies that early adopted K－IFRS voluntarily is not random sampling, the sample selection bias may exist. So in this research, Heckman(1979)’s 2SLS method was used to control the sample election bias. The results of the analysis are as follows. First, when the current reported profits were positive,the earnings persistence was found to be higher in the case of applying K－IFRS than in the case of applying K－GAAP, and from this, it can be seen that the predictive power with regard to future reported profits is higher in application of K－IFRS than in application of K－GAAP. However, I find that earnings reported under K－GAAP are more closely associated with future cash flows than earnings reported under K－IFRS. Second, when current reported profits are negative, the predictive power with regard to the future profits (reported profits, cash flows) is higher in application of K－GAAP than in application of K－IFRS. However this difference is not significant. The country’s all listed companies are required to adopt K－IFRS in 2011, so under these circumstances, it is considered that this early research will contribute to recognizing the utility of accounting information about adopting K－IFRS. Although this research was made on the early adoption companies, this research will be of help to predicting changes in value relations of accounting information when mandatory adoption companies change from K－GAAP to K－IFRS.
Keywords
- K－IFRS
- K－GAAP
- earnings persistence
- early adoption companies
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