ATJ Asian Tax Journal

Asian Tax Journal

Print ISSN 1738-3323 Online ISSN 2733-9270

Comparing the Relative Value Relevance of Operation Income between Consolidated and Separate Financial Statements under K－IFRS

  • Jong-Il Park Chungbuk National University

Asian Tax Journal Vol. 16 No. 3 (2015), pp. 9-43

Abstract

This paper examines whether the operating income reported in the consolidated statements of comprehensive income provides more useful information to investors in terms of relative value relevance compared to that reported in the separate statements of comprehensive income after the adoption of K－IFRS in 2011 when consolidated financial statements became the main financial statements and individual financial statements of a parent company, previously reported as the main statements under the K－GAAP, were provided as auxiliary statements named “separate financial statements”. To analyze this issue, we collect all listed firms in the Korea Stock Exchange (KOSPI firms) and the Korean Securities Dealers Automated Quotations (KOSDAQ firms) reporting consolidated financial statements from 2011 to 2013, and use the regression model from Ohlson (1995) to estimate the value relevance of operating income from each type of financial statement. Then, we investigate the difference in the coefficients from the two regressions using parallelism test. We also compare the results based on the un－deflated Ohlson (1995)’s price－level model with those based on the deflated model (price－to－lagged price), since the latter controls for heteroscedasticity and scale effects (Easton and Sommers 2003). To check the robustness of the results, we run the regressions by each fiscal year (2011, 2012, and 2013) as well as by each market separately. Our major findings are as follows：the results based on the deflated model are significantly different from those based on the un－deflated model. When the un－deflated model is used, the value relevance of operating income from the separate financial statements is in general greater than that from the consolidated financial statements. However, in the results based on the deflated model, we do not observe a significant difference in the value relevance of operating income between the two types of financial statements. These results remain qualitatively the same across the markets and across the fiscal years. To summarize our results based on the deflated Ohlson (1995) model which better mitigates the heteroscedasticity and scale bias compared to the un－deflated counterpart, it is not likely that the consolidated operating income conveys more useful information than the operating income disclosed in the separate financial statements even after the consolidated financial statement became the main financial statements in 2011. This implies that investors do not seem to consider the consolidated financial statements, compared to that reported in the separate financial statements, as to be more important information in their investment decision, which is not consistent with the intended goal of the accounting standard setters and supervisory bodies. Our findings may not only provide additional evidence on the related current accounting literature but also act as an important reference to the standard setters and policy makers for their policy changes related to K－IFRS.

Keywords

  • K－IFRS
  • Consolidated financial statement
  • Separate financial statement
  • Operating income
  • Relative value relevance

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Asian Tax Journal

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