Comparison of Usefulness between Operating Profit and EBIT as a Performance Measure
Asian Tax Journal Vol. 20 No. 5 (2019), pp. 165-211
Abstract
The International Accounting Standards Board is proceeding the project on ‘Primary Financial Statements’ which mainly proposes presenting earnings before interest and income taxes as a performance measure in the statement of financial performance. We examine the usefulness of operating profit which is currently required to be presented in K－IFRS and earnings before interest and income taxes which is proposed to be required by the International Accounting Standards Board as a performance measure in terms of earnings persistence and explanation power of stock price. We find that earnings persistence and explanation power of stock price of operating profit is higher than those of earnings before interest and income taxes. Our results suggest that operating profit is more appropriate performance measure than earnings before interest and income taxes considering practice of financial reporting, business environments, law and regulations in Korea. It is important for jurisdictions adopting IFRS to respond proactively before finalising the amendments to IFRS by the International Accounting Standards Board. This timely study provides accounting standards setter and policy makers in Korea with implication regarding the potential impact of the result of the project on ‘Primary Financial Statements’ by the International Accounting Standards Board.
Keywords
- operating
- earnings before interest and income tax
- performance measure
- earnings persistence
- explanation power of stock price
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