Academic journal article Academy of Accounting and Financial Studies Journal

OCI Value Relevance in Continental Europe: An Examination of the Adoption of IAS 1 Revised

Academic journal article Academy of Accounting and Financial Studies Journal

OCI Value Relevance in Continental Europe: An Examination of the Adoption of IAS 1 Revised

Article excerpt


The current study aims to contribute to scholarly knowledge on the value relevance (defined as "(...) the association between accounting amounts and security market values" (Barth et al., 2001) of Other Comprehensive Income (OCI) in Continental Europe during the period 1995-2010. This research theme has been largely understudied in the European context, mainly because of the peculiarities of the accounting tradition in continental European countries (more focused on historical cost) compared to Anglo Saxon countries (more focused on fair value). Coherently with this interpretation, while the Financial Accounting Standard Board (FASB) required U.S. firms to separately present Other Comprehensive Income and Comprehensive Income in 1997, the IASB did so only in 2009, through the implementation of IAS 1 Revised. Academic studies on this research topic are scant, and, to the best of our knowledge, there is no published study that examines the value relevance of OCI after 2008 and that introduces into the analysis some moderating variables of paramount importance, such as the importance of the equity market, the difference between national GAAP and IAS/IFRS and the variability of OCI.

Despite the lack of research, the issue has recently become particularly relevant following the International Accounting Standard Board issuance of IAS 1 Revised (effective from 2009), and because of the financial crisis, which has attracted the interest of investors and policy makers as to the changes in the fair value of companies' assets, which is a major component of OCI.

In order to investigate the issue, we collected an extensive dataset, covering firms belonging to 19 continental European countries over a 16-year period (from 1995 to 2010).

In the first part of the paper, we investigate the incremental OCI value relevance before and after the introduction of the IAS/IFRS in 2005. We study whether OCI was a relevant accounting item under national GAAPs and whether the introduction of IAS/IFRS caused any changes, finding that after its introduction, OCI value relevance increased. We go on to investigate whether this result is driven by countries with higher differences between national GAAP and IAS / IFRS, finding that increases in OCI value relevance were more pronounced in countries which were further from IAS/IFRS standards.

In the second part of the paper, we examine the impact of IAS 1 Revised (issued by the IASB in 2007 and mandatory from 2009 onwards) on OCI value relevance. This new standard, which specifically focuses on the presentation of OCI, may have increased its value relevance because of the increased transparency and clarity of its disclosure, coherently with the reporting location literature (see Hirst and Hopkins, 1998; Maines and McDaniel, 2000; Lee et al., 2006). We also test whether the increase in value relevance has been more pronounced in countries where the ability of firms to raise external funds in the form of equity (defined following Leutz et al., 2003; La Porta et al., 1997) was higher.

We found that the increases in value relevance were more pronounced in companies with less variable OCI, consistent with expectations. Results were also robust to some other specifications, discussed in the "sensitivity and robustness" paragraph.

The results we obtain may be of interest to both academics and regulators. Academic literature may employ our results as a first step towards a deeper analysis of accounting numbers' value relevance in different European countries. European regulators may be interested in actually seeing the effects of their activity over time (from the introduction of IAS/IFRS to the implementation of IAS 1 Revised) on the way in which investors make their economic decisions.

The rest of the paper is organized as follows: Section 1 provides a literature review on OCI value relevance in both the Anglo-Saxon and European contexts; Section 2 develops the hypotheses discussed in this work; Section 3 describes the methodology employed in the empirical analysis and provides some descriptive statistics on the sample; Section 4 and 5 report the results, the sensitivity analysis and the robustness tests and finally Section 6 concludes. …

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