Does Fair Value Accounting Under IFRS 13 Affect Earnings Quality?

Abstract

Purpose :Applying IFRS 13 is associated with the difficulty of measuring fair value impartially, free from management intervention and attempts to manage earnings. This study explores the impact of accounting measurement changes resulting from applying IFRS 13 on earnings quality (EQ).

Design/methodology/approach: This study depends on secondary data for 10 years (2013-2022). To reach homogeneous explanations, companies in the financial and service sectors were excluded. After applying the company selection criteria, 360 observations were obtained for a sample of 36 industrial companies. Earnings management (EM) was measured using discretionary accruals. Two approaches were used to explore exposure to fair value accounting (FVA), the income approach and the statement of financial position approach.

Findings: The results indicate that exposing companies in Jordan to FVA allows management to manage earnings. Regarding the control variables, we find that audit quality, internal audit quality, financial performance, and financial leverage affect EM. Board size and performance-based board compensation do not affect EM.

Practical implications: The study serves many internal and external parties that pay great attention to financial reports and the data and information they contain that reflect the company’s earnings. This study may contribute to identifying the methods that company management may follow in manipulating earnings. This may help to work on reducing the impact of management discretionary power on the EQ, which contributes to protecting stakeholders.

Originality/value: The outcomes of the current study contribute to providing further evidence to the accounting literature regarding the impact of IFRS adoption on EQ. Since most of the present studies on IFRS 13 adoption have been focused on data from developed countries, this research paper contributes to filling the gap in the current accounting literature by examining the impact of IFRS 13 enforcement on EQ in emerging markets. The results of this study may help regulatory authorities in assessing the extent to which management exploits discretionary power when using FVA.