European Journal of Accounting, Auditing and Finance Research (EJAAFR)

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Assessing the Quality Of Alternative Income Measures for IFRS Companies in Europe


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.

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