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Financial Reporting under IAS/IFRS

Theoretical Background and Capital Market Evidence – A European Perspective

Vera Palea

This book provides the theoretical background and analyses capital market research related to the IAS/IFRS adoption in Europe, which is one of the most important and controversial events in the history of accounting. It adopts both an investor and a firm perspective and therefore investigates the effects of adopting IAS/IFRS on the decision-usefulness of financial reporting for investors as well as on the firms’ cost of capital. The book also focuses on fair value accounting, which is widely controversial.
All these issues are of considerable interest for standard setters and policy makers, whose primary aims are in fact to provide investors with useful information for their decision-making process and to allow firms to have access to a more efficient and cost-effective capital market.

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Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Chapter 1 The Decision Usefulness Approach to Financial Reporting and Capital Market Research . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2. Users of financial information . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3. The usefulness approach to financial reporting . . . . . . . . . . . . . . . 21 4. The qualitative characteristics of accounting information . . . . . . . 23 5. Capital market research and standard setting issues . . . . . . . . . . . 26 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Chapter 2 The Converging Process in Financial Reporting . . . . . . . . . . . . . . . . . 35 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 2. Convergence in accounting standards . . . . . . . . . . . . . . . . . . . . . . 36 3. Value relevance studies on different accounting standard sets: A theoretical background . . . . . . . . . . . . . . . . . . . . 38 4. The relative informativeness of different accounting standard sets: The case of reconciliation Form 20-F . . . . . . . . . . . 41 5. The relative informativeness of different accounting standard sets: Stakeholder versus shareholder models . . . . . . . . . . 44 10 6. IAS/IFRS versus US GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 7. The harmonization process in the European Union: The fourth and seventh directives . . . . . . . . . . . . . . . . . . . . . . . . 53 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 Chapter 3 The IAS/IFRS Adoption in the European Union . . . . . . . . . . . . . . . . 67 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 2. European Regulation 1606/2002 . . . . . . . . . . . . . . . . . . . . . . . . 68 3. The IAS/IFRS endorsement process in the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 4. The effects of the IAS/IFRS adoption on accounting quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75 5. The effects of the IAS/IFRS adoption on comparability of financial reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 Chapter 4 The Effect of Accounting Disclosure on the Firm’s Cost of Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 2. Cost of capital and accounting information . . . . . . . . . . . . . . . . 98 3. Empirical literature on the link between accounting information and firms’ cost of capital . . . . . . . . . . . . . . . . . . . . . 102 4. Research on the effects of IAS/IFRS adoption on the cost of capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 5. Research on the...

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