The13)Value Relevance of Other Operating Income Items and an Operating Income Disclosure－Type under IFRS Adoption
Asian Tax Journal Vol. 17 No. 3 (2016), pp. 127-156
Abstract
The revised K－IFRS No. 1001 in 2012 requires firms to disclose their operating income(“OI”), defined as gross profit minus selling and administrative expenses under the past K－GAAP. The K－GAAP OI represents an standardized income measure. The disclosure policy is not consistent with the intent of IFRS, which allows firms to calculate their own OI reflecting the firm－specific operating situation. This study is to suggest a desirable OI disclosure manner. To do this, the value relevances of other operating profit and loss (“Other OI”) as well as alternative OI numbers under K－IFRS versus K－GAAP has been empirically investigated by applying a Ohlson model(1995) to the firms adopting IFRS in 2011. The first results show that K－GAAP OI is more value－relevant than K－IFRS OI. This can be interpreted as the effects of the latter OI’s more transitory characteristics rather than mangers’ opportunistic selections of Other OI items to be included in OI, since the combined explanation powers of equity book value and the alternative OIs have no significant difference. In addition, K －IFRS OI is even more value－relevant for firms with larger K－IFRS OI than the K－GAAP OI. Second, the Other OI does have another significant value relevance, whereas the relevance in 2011 is not differentiated from the ones in 2010 and 2012. This implies mangers’ discretion in choosing K－IFRS OI’s components is not a severe concern in market value aspect. This study therefore suggests to follow the OI disclosure manner under the original K－IFRS, but K－GAAP OI is also to be presented as a separate line item to improve the comparability of accounting information. This study designed some approaches different from the existing domestic literature：To more focus on the components of income items, the Ohlson(1995) model was revised by substituting the book value at the end of period with the beginning value. The relative value relevances of Other OIs in 2010, 2011 and 2012 have been also examined to evaluate the Other OI as an OI component.
Keywords
- K－IFRS
- operating income
- other operating profit and loss
- value relevance
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