Assessing the Quality Of Alternative Income Measures for IFRS Companies in Europe (Review Completed - Accepted)
This research look into the effectiveness of eleven different earnings measures as: net income, total comprehensive income, gross income, operating income after depreciations, income before income taxes, earnings before preferred dividends, earnings before extraordinary items, earnings before extraordinary items and preferred dividends, earnings before interest and taxes, earnings before interest, taxes, depreciations and amortization and Institutional Brokers‟ Estimate System (I/B/E/S) earnings. We estimate and compare six attributes of each performance measures that are assumed in the literature to enhance the quality of reported earnings, including: value relevance, predictability, persistence, timeliness, conditional conservatism and smoothing. Our main objective is to understand which, in comparative terms, is better quality and to examine the quality of the additional earnings measures beyond the minimum required by International Accounting Standards IAS N° 1. We base our inferences on a sample of 2,655 firms from 25 countries that applied International Financial Reporting Standards regulation (IAS/IFRS) over the time period (2006-2012). We find evidence that I/B/E/S actual reported earnings, disclosed by the Analyst Estimate Tracking Services is significantly more value relevant than the other ten income metrics. We show that EBITDA is of higher quality than the other ten measures in terms of predictability of future cash flow and timeliness. We further find that gross income provides better earnings‟ quality beyond the other ten metrics in terms of predictability of future earnings, persistence and smoothing. We conclude also superior explaining power of EBIT for the ability to reflect quickly bad news about the firm‟s performance conditional conservatism among the ten earnings measures. As a final point, our empirical evidence shows that net income produces better earnings quality properties than total comprehensive income. Overall, our empirical results provide several interesting insights. Our findings lead to the conclusion that there is no single earnings measure that dominates all others. Furthermore, our results confirm that none of IAS N° 1 required earnings as net income and comprehensive income gains in terms of earnings quality properties. Accordingly, we documents that subtotals earnings measures generally tend to be more useful when they include core operating expenses and eliminate more transitory components like EBITDA or IBES metrics. These results should be of some concern to accounting standard setters, as well as regulatory agencies as they give evidence of the lower quality of the IFRS earnings.
Keywords: Alternatives Earnings Measures, Earnings Quality, Financial Statement Presentation, GAAP Earnings, IAS N° 1, IAS/IFRS Regulation, Income Measurement, Non-GAAP Earnings.
Quality Of Net Income Vs Total Comprehensive Income In The Context Of IAS/IFRS Regulation (Review Completed - Accepted)
Worldwide researches in the field of accounting have tried to provide fair and useful financial performance measures for a wide range of users. As well, academics and professionals have established for decade income as the key performance measures in making economic decisions (Ball and Brown, 1968; Beaver, 1968; Lev, 1989). The purpose of this study is to investigate the quality of total comprehensive income TCI relative to net income NI, prepared in accordance with International Financial Reporting Standards IAS/IFRS. Through a data set covering 2,273 firms belonging to 22 countries from Europe, Asia and Australia during (2006-2010), we provide evidence that net income always dominates comprehensive income as a valuation metric. In fact, we find that NI is more value relevant and predicts future operating cash flows and income better than TCI. Also, NI better explain the actual operating cash flows than TCI. Moreover NI is more persistent and timely than TCI. We demonstrate also, that the quality of accruals linked to NI is better than those related to TCI. Though, we find that TCI is less smoothing and more conservative than NI. These results do not support the claim that income measured on a comprehensive basis is a better measure of firm performance than NI. These results raise the questions about the usefulness of mandating TCI in IAS/IFRS regulation. Our findings, therefore, should be of interest to IASB as they provide evidence of the fewer quality of the TCI. Perhaps it is time for the IASB to reconsider other comprehensive income components. The IASB should focus on items included in other comprehensive income to progress the quality of the TCI metric. Our results get evidence else, that net income should be retained as a primary decision-relevant metric as suggested by Goncharov and Hodgson (2011).
Keywords: Earnings Quality, Financial Statement Presentation, IAS/IFRS Regulation, Net Income, Total Comprehensive Income