Paper 2

The International Journal of Accounting
Vol. 54, No. 1 (2019) 1950003 (42 pages)

c World Scientific Publishing Company
°
DOI: 10.1142/S1094406019500033
Does Mandatory Adoption of IFRS Enhance

Earnings Quality? Evidence From Closer to Home
by 46.148.120.119 on 07/10/19. Re-use and distribution is strictly not permitted, except for Open Access articles.
Gopal V. Krishnan*
Department of Accountancy
Bentley University
Int. J. Acc. 2019.54. Downloaded from www.worldscientific.com
Waltham, MA 02452
gkrishnan@bentley.edu
Jing Zhang
Department of Accounting
Business School, University of Colorado Denver
1475 Lawrence Street, Denver, CO 80202
jing.zhang@uah.edu
Published 16 April 2019
The global accounting convergence and the often discussed probable adoption of
International Financial Reporting Standards (IFRS) by U.S. regulators is a timely
topic. We contribute to the literature by examining a more recent mandatory IFRS
adoption by Canada. Canadian GAAP (CGAAP) is often considered a close sub-
stitute for U.S. GAAP. One key feature of this setting is that two earnings numbers
are available for fiscal year 2010 since Canadian firms were required to reconcile
earnings under CGAAP with earnings under IFRS. We run a \horse race" of
earnings quality between earnings under CGAAP and IFRS. We find that on av-
erage, relative to IFRS-earnings, earnings under CGAAP have greater association
with next period cash flows and higher degree of persistence. Further, when the
difference between earnings under CGAAP and IFRS is large, IFRS-earnings are
less value-relevant and less persistent. These results strongly support the notion
that higher earnings quality is associated with CGAAP. Finally, the results also
indicate that differences between CGAAP and IFRS with regard to accounting
for financial instruments and investments significantly impair the quality of
*Corresponding author.
1950003-1
G. V. Krishnan & J. Zhang
IFRS-earnings. Our findings are potentially informative to any revival of policy

debates on the possible adoption of IFRS by U.S. firms.
Keywords: IFRS; Canadian GAAP; Earnings Quality.
1. Introduction
The global accounting convergence and the potential adoption of Interna-
tional Financial Reporting Standards (IFRS) by the U.S. is a timely topic.

The Securities and Exchange Commission (SEC), the U.S. Congress, and
capital market participants are weighing the costs and benefits of switching
to IFRS, including the potential impact on U.S. firms’ financial reporting
quality. We contribute to this debate by exploiting a natural experiment
involving a switch from a high-quality accounting standard to IFRS: the

adoption of IFRS by Canada. Canada adopted IFRS in 2011 and firms were
required to provide reconciliation from Canadian GAAP (CGAAP) to IFRS
for the fiscal year before the adoption. The objective of this study is to
compare attributes of earnings quality (described below) under CGAAP
and IFRS.
We focus on IFRS adoption by Canada for the following reasons. CGAAP
is a high-quality accounting standard because since 1993, the SEC accepted
financial statements based on CGAAP for Canadian firms listed on U.S.
exchanges, making Canada the only country whose local GAAP is accepted
by the U.S. SEC for firms cross-listed in the U.S. exchanges.1 Canada is
U.S.’s largest trading partner, and the two countries are tied economically,
politically, culturally, and geographically.2 Cormier and Magnan (2016)
state, \In contrast to continental Europe, Canada has a legal and regulatory
regime that is much closer to the U.S. Hence, an analysis of IFRS in that
context is likely to provide more salient evidence."3 Thus, empirical evi-
dence on how earnings quality under IFRS compares with the earnings
1
This is through the Canada-U.S. Multijurisdictional Disclosure System (MJDS).
Bandyopadhyay et al. (1994) find that differences between U.S. GAAP earnings and CGAAP
earnings, on average, are not value relevant for a sample of Canadian firms listed on the
Toronto Stock Exchange and cross-listed in the U.S. Results in Barth and Clinch (1996) are
consistent with Bandyopadhyay et al. (1994). Further, Blanchette et al. (2013) note that
CGAAP and IFRS have many similarities and both sets of standards are considered as
principle-based and subject to similar conceptual foundations.
2
At about $300 billion, trade with Canada accounts for nearly 16 percent of the U.S.’s total
trade (U.S. Census Bureau 2015).
3
The information environment in Canada is comparable to that of the U.S. Canada ranks
second only to the U.S. in terms of legal liability costs as a percentage of GDP (U.S. Chamber
Institute for Legal Reform 2013).
1950003-2
Does Mandatory Adoption of IFRS Enhance Earnings Quality?
quality under CGAAP, a high-quality accounting standard, is potentially

informative to the SEC, investors, and other users of financial statements.
Also, a single-country focus eliminates concerns about differences in socio-
economic, political, and legal environments driving the results in a multi-
country study. Finally, prior research on Canadian adoption of IFRS reports
insignificant or mixed results (reviewed in the next section).
We take advantage of the disclosure by Canadian firms that reconciles
earnings under CGAAP with earnings under IFRS for the year prior to the
transition to IFRS. We are able to examine earnings quality under local
GAAP and IFRS in a setting where earnings under two alternative ac-
counting standards are reported for the same firm in a year. This setting
facilitates a cleaner comparison between local GAAP earnings and IFRS
earnings relative to settings where IFRS adopters are compared with other
firms or across time periods. We run a \horse race" of earnings quality
between earnings under CGAAP and IFRS. We also examine the reconcil-
iation information to shed light on what accounting issues are potentially
causing differences in earnings quality between CGAAP and IFRS.
We examine five attributes of earnings under CGAAP and IFRS to
gauge earnings quality: predictability of earnings for future cash flows,
earnings persistence, value-relevance of earnings, discretionary accruals,
and asymmetric timeliness of earnings. We select these attributes for the
following reasons. First, ability of earnings to predict future cash flows is a
fundamental objective of financial reporting.4 Further, forecasting future
cash flows plays a key role in economic models of equity value (Barth et al.,
2012). Second, earnings persistence
i.e., the association between current
earnings and future earnings is also an indicator of earnings quality
(Schipper & Vincent, 2003; Dechow & Schrand, 2004). Dichev et al. (2013)
survey CFOs and find that they view sustainable and persistent earnings as
the most common idea of earnings quality. Analysts also regard earnings
persistence as an important attribute of earnings. We examine value-rele-
vance of earnings because the relation between earnings and equity value is
extensively studied in accounting research. Barth et al. (2001) state that
value-relevance research provides insight into issues of interest to reg-
ulators and others. We select a measure of accrual quality (Dechow &
Dichev, 2002) to shed light on whether there is more or less earnings
4
Statement of Financial Accounting Concepts No. 1 (FASB, 1978) states that information
about earnings should be helpful to users in assessing the amounts, timing, and uncertainty of
future cash flows.
1950003-3
management under IFRS relative to CGAAP. Finally, we examine the

asymmetric timeliness of earnings, a fundamental attribute of accounting
earnings (Basu, 1997).
Our sample consists of 581 Canadian firms that adopted IFRS for fiscal
year 2011 and were required to provide CGAAP-to-IFRS reconciliation for
fiscal year 2010. We document several key findings. First, CGAAP-earn-
ings have greater predictive value for next period cash flows compared to
IFRS-earnings. In terms of magnitude, the coefficient on CGAAP-earnings

is more than four times the size of the coefficient on IFRS-earnings (sig-
nificant at the 0.01 level). Second, IFRS-earnings are not persistent;
CGAAP-earnings are highly persistent (significant at the 0.01 level).
Third, book value of equity and IFRS-earnings are value-relevant to
investors. However, the R2 improves when the difference between CGAAP-

earnings and IFRS-earnings is included in the model. Further, the results
indicate that when the difference between CGAAP-earnings and IFRS-
earnings is large, IFRS-earnings are less value-relevant and less persistent.
We also find that accrual quality is lower under IFRS, suggesting greater
earnings management relative to CGAAP. Finally, both sets of earnings
exhibit similar asymmetric timeliness of earnings. In summary, the results
strongly support the notion that higher earnings quality is associated with
CGAAP-earnings. Further analysis reveals that the top three accounting
issues in terms of transition from CGAAP to IFRS are: (1) compensation
(e.g., employee future benefits), (2) property, plant, and equipment
(PP&E), and (3) financial instruments and investments. Our results indi-
cate that differences between CGAAP and IFRS with regard to accounting
for financial instruments and investments significantly impair the quality of
IFRS-earnings.
Our study contributes to the literature on IFRS adoption by Canada in
several ways. First, our research design differs from those used in prior
studies in that we compare IFRS-earnings with CGAAP-earnings for the
same firm in the same year. This is a cleaner design than comparing a
different set of firms or comparing firms across different time periods, be-
cause our design is less likely to be affected by firm-level or/and year-level
confounding events. We also replicate two prior studies on the effect of IFRS
adoption in Canada using our research design and find different results than
found in those studies (discussed under Sensitivity Analyses). Second, we
shed light on what specific accounting issues (e.g., fair values) impair
earnings quality under IFRS relative to CGAAP. We believe this is an
important issue for the SEC, the FASB, investors, and others to better
1950003-4
understand how the adoption of IFRS will impact earnings of U.S firms.5 ; 6
Third, we examine multiple attributes of earnings
earnings predictability,
earnings persistence, accrual quality, timely loss recognition, and value-
relevance and our findings consistently (except for timely loss recogni-
tion) support the notion that higher earnings quality is associated with
CGAAP.
We acknowledge that one limitation of our study is that our analyses are
based on data from one year since earnings under CGAAP and IFRS are
available only for 2010. Thus, our findings could potentially be due to
\learning challenges" associated with the first-time adoption of IFRS. To
address this concern, we partition our sample based on the number of rec-
onciliation (between IFRS-earnings and CGAAP-earnings) items disclosed
by firms. We surmise that having fewer (more) reconciliation items will ease
(complicate) the adoption of IFRS. Thus, if our results are primarily driven
by the difficulty of applying IFRS, we should observe different results be-
tween the firms that have more reconciliation items and firms that have
fewer reconciliation items. However, after separately testing our models on
firms with more vs fewer reconciliation items, we find that our results con-
tinue to hold for both sub-samples. These results discussed under the
\Additional Analyses" section alleviate concerns that our findings are pri-
marily driven by the implementation challenges in the first year of IFRS
adoption.
The remainder of this paper is organized as follows. The next section
summarizes prior research that is relevant to this study. Section Three
describes the empirical models used to assess the earnings quality under
CGAAP and IFRS. Section Four describes the sample selection. Results are
in Section Five followed by conclusions.
2. Prior Research
A number of studies have compared attributes of earnings under IFRS with
the attributes of earnings under non-U.S. domestic accounting standards or
earnings of non-U.S. firms that voluntarily adopted U.S. GAAP. There is
also concurrent research on the consequences of IFRS adoption by Canada.
5
Horton and Serafeim (2010) and Christensen et al. (2009) examine whether information in
the IFRS-U.K. GAAP reconciliation provides incremental information to the market. We
complement their findings by focusing on Canada.
6
The SEC is considering an informal proposal that would allow voluntary filing of supple-
mental material based on IFRS by U.S. firms (Tysiac, 2014).
1950003-5
We summarize these strands of literature here and describe how our study
contributes to the literature.7 A summary of prior research appears in
Table 1.
Barth et al. (2008) find that firms applying International Accounting
Standards (IAS) from 21 countries generally evidence less earnings
management, more timely loss recognition, and more value-relevance of
accounting amounts relative to a matched sample of firms applying non-
U.S. domestic standards. Capkun et al. (2008) examine a sample of European

firms and find that managers use the transition to IFRS to improve the
reported earnings and return on assets. Jeanjean and Stolowy (2008) ex-
amine the effect of IFRS adoption on earnings management by focusing on
three first-time adopters: Australia, France, and the U.K. They find that the
pervasiveness of earnings management did not decline after IFRS adoption

and, in fact, increased in France. Christensen et al. (2009) examine whether
earnings reconciliation from U.K. GAAP to IFRS conveys information and
find that the market reactions are greatest for firms for which covenant
violations are expected to be costlier, i.e., small firms, firms with lower ratios
of interest cover, and firms with longer asset maturity. Ahmed et al. (2013)
find evidence consistent with the notion that accounting quality decreased
after Europe adopted IFRS and this finding holds mainly for countries with
strong enforcement. In a recent study, Capkun et al. (2016) examine a
sample of firms that adopted IAS/IFRS during the period 1994–2009 and
find an increase in earnings management (smoothing) for firms in countries
that allowed early adoption, as well as for firms in countries that did not
allow early adoption.
Two studies examined the effect of IFRS adoption on Australia. Chalmers
et al. (2011) conduct a longitudinal study covering years 1990 through 2008
and find that earnings become more value-relevant and persistent around
IFRS adoption. Chua et al. (2012) extend Chalmers et al. (2011) and provide
evidence that earnings smoothing has declined, timeliness of loss recognition
has improved, and the value-relevance has improved following the adoption
of IFRS.
Several studies have used a sample of German New Market firms that
were allowed (before 2005) to choose from German GAAP, IAS, or
U.S. GAAP, and later on required to use IFRS in 2005. Bartov et al. (2005)
do not find a significant difference in value relevance between U.S. GAAP
and IAS. Van der Meulen et al. (2007) find that U.S. GAAP outperform
7
For a comprehensive review of the IFRS adoption literature, see De George et al. (2016).
1950003-6
Table 1. A Summary of Prior Studies
Study Setting Sample Period Earnings Quality Measures Summary of the Results
Barth et al. (2008) 21 countries 1994–2003 Earnings smoothing; Meet IAS adopting firms have less earnings
positive earnings; Time- management, more timely loss rec-
ly loss recognition; ognition, and more value-relevance
Value relevance of accounting amounts relative to a
matched sample of firms applying
non-U.S. domestic standards.
Capkun et al. (2008) European 2004–2005 Earnings management Managers use the transition to IFRS to
improve the reported earnings and
Return on Assets.
Jeanjean and Stolowy Australia, France & UK 2004–2006 Distributions of reported Pervasiveness of earnings management
(2008) earnings did not decline after IFRS adoption
and, in fact, increased in France.
Christensen et al. UK 2004–2005 Market response to recon- Market reacts to IFRS announcements,
(2009) ciliation announcement especially for firms for whom cove-
1950003-7
nant violations are expected to be
costlier,
Ahmed et al. (2013) 20 countries 2002–2007 Income smoothing; Meet IFRS firms exhibit significant increases
earnings benchmarks; in income smoothing and aggressive
Accruals aggressiveness; accruals reporting, and a significant
Timely loss recognition decrease in timeliness of loss recog-
nition. There are not significant dif-
ferences across IFRS firms and
benchmark firms in meeting or beat-
ing earnings targets.
Capkun et al. (2016) 29 countries 1994–2009 Earnings smoothing There is an increase in earnings man-
agement (smoothing) for firms in
countries that allowed early adop-
tion, as well as for firms in countries
that did not allow early adoption.
Table 1. (Continued )
Chalmers et al. Australian 1990–2008 Value relevance; Earnings Earnings become more value-relevant
(2011) persistence and persistent around IFRS adop-
tion.
Chua et al. (2012) Australian 2005–2009 Earnings smoothing; Time- Earnings smoothing has reduced, while
ly loss recognition; the timeliness of loss recognition has
Value relevance improved post IFRS adoption. The
value relevance of financial state-

ment information has improved post
IFRS adoption.
Bartov et al. (2005) German 2000 Value relevance There is no significant difference in
value relevance between U.S. GAAP
and IAS.
Van der Meulen et al. German 1997–1999 Value relevance; Timely U.S. GAAP outperforms IFRS with re-
(2007) loss recognition; Earn- gard to earnings persistence as well
1950003-8
ings predictability; Ac- as predictability of earnings for fu-
crual quality ture cash flows.
Lin et al. (2012) German 2000–2010 Earnings smoothing; Meet German firms that switched from
positive earnings; Time- U.S. GAAP to IFRS exhibit more
ly loss recognition; earnings management and less timely
Value relevance loss recognition in the post-adoption
period. U.S. GAAP accounting
numbers are more value relevant
compared to IFRS accounting
numbers.
Atwood et al. (2011) 33 countries 2002–2008 Earnings persistence; U.S. GAAP-earnings are more closely
Earnings predictability associated with future cash flows
relative to IFRS-earnings. However,
there is no difference in the persis-
tence of positive earnings between
the two standards.
Sun et al. (2011) Foreign firms cross-lis- 2005–2008 Discretionary accruals; IFRS adoption led to an improvement in
ted in the U.S. Target beating; Earn- earnings quality based on small pos-
ings persistence; Timely itive earnings and earnings persis-
loss recognition; Earn- tence.
ings response coefficient
Zeghal et al. (2012) European 2001–2008 Earnings smoothing; Meet There has been some improvement in
positive earnings; accounting quality between the pre-
Accruals quality; Dis- and post-IFRS adoption periods.
1950003-9
cretionary accruals; Firms exhibit an increase in the ac-
Timely loss recognition; counting-based attributes, but a de-
Value relevance crease in the market-based after the
adoption of IFRS in 2005.
Barth et al. (2012) 27 countries 1992–2005 Earnings comparability IFRS firms have greater comparability
with U.S. firms when they apply
IFRS than when they apply
non-U.S. domestic standards.
Brochet et al. (2013) UK 2003–2006 Financial statement com- Mandatory adoption of IFRS improved
parability financial statement comparability.
Burnett et al. (2013) Canada 2006–2012 Earnings persistence; Dis- There is no evidence that cross-listed
cretionary accruals Canadian firms that adopted IFRS
have experienced any change in
earnings quality.
Leung (2015) Canada 2005–2014 Discretionary accruals; Discretionary accruals have been im-
Target beating; Timely proved post-IFRS adoption, but
loss recognition there is no change on meeting earn-
ings target or timely loss recognition.
Liu and Sun (2015) Canada 2011–2014 Discretionary accruals; No significant difference in discretionary
Meeting positive earn- accruals, the likelihood of having
ings; Earnings persis- small positive earnings and earnings

tence; Earnings response response coefficient between the pre-
coefficient and post-IFRS periods, but firms
have more persistent earnings after
IFRS adoption.
Khan et al. (2015) Canada 2009–2013 Abnormal return volatility; Abnormal return volatility and abnor-
Abnormal trading vol- mal trading volume, proxies for in-
ume during earnings an- formation content of earnings is
1950003-10
nouncement periods higher in the post-IFRS adoption
period only for firms listed on the
Toronto Stock Exchange.
Cormier and Magnan Canada 2009–2012 Value relevance Adoption of IFRS has improved value
(2016) relevance of earnings only for
Canadian firms that are cross-listed
in the U.S. market.
Okafor et al. (2016) Canada 2008–2013 Value relevance Accounting information prepared and
disclosed under IFRS exhibits higher
price and returns value relevance
than accounting information pre-
pared previously under local GAAP.
IFRS with regard to earnings persistence as well as predictability of earnings

for future cash flows. Lin et al. (2012) find that German firms that switched
from U.S. GAAP to IFRS had lower accounting quality, suggesting
U.S. GAAP earnings are of higher quality.
Atwood et al. (2011) conduct a multi-country study by examining
whether attributes of earnings differ between IFRS and domestic accounting
standards (both U.S. GAAP and non-U.S. GAAP) for the years 2002
through 2008. They find that U.S. GAAP-earnings are more closely associ-
ated with future cash flows relative to IFRS-earnings. However, there is no
difference in the persistence of positive earnings between the two standards.
Sun et al. (2011) examine the impact of IFRS adoption on the earnings
quality of foreign firms cross-listed in the U.S. from countries that have
already adopted IFRS on a mandatory basis. They use a matched sample

where each cross-listed firm is matched with a U.S. firm. Their results in-
dicate that IFRS adoption has no effect on several attributes of earnings.
However, they find evidence of improved earnings quality for the cross-listed
firms based on small positive earnings and earnings persistence. Zeghal et al.
(2012) examine the effect of mandatory adoption of IFRS on earnings quality
of European firms and find some improvement in accounting quality between
the pre- and post-IFRS adoption periods. However, they observe a decrease
in the market-based attributes (conditional conservatism and value-rele-
vance) after the adoption. Finally, two recent studies examine the compa-
rability effect of IFRS adoption. Barth et al. (2012) examine a sample of
IFRS firms domiciled in 27 countries and a matched sample of U.S. firms and
find that IFRS firms have greater comparability with U.S. firms when they
apply IFRS than when they apply non-U.S. domestic standards. Further,
comparability is greater for firms that adopt IFRS mandatorily, based on
countries with common law legal origin, with high enforcement, and in more
recent years. Brochet et al. (2013) take a different approach to examine
comparability. They use abnormal returns to insider purchases to proxy for
private information. For a sample of firms domiciled in the U.K. over 2003
through 2006, they find that abnormal returns to insider purchases are re-
duced following IFRS adoption, consistent with the notion that mandatory
adoption of IFRS improved financial statement comparability.
In summary, while several studies find a decrease in earnings quality
following mandatory adoption of IFRS, especially for European firms,
Australian evidence suggests the opposite. Thus, more research on manda-
tory IFRS adoption is warranted especially using more recent cases. Further,
it is not clear whether findings from Europe or Australia generalize to the
1950003-11
North American context. Cormier and Magnan (2016) state that \most
evidence on the economic consequences of IFRS adoption has limited bearing
for U.S. investors and regulators as it arises from countries with pre-IFRS
local GAAP that are quite distinct from U.S. GAAP." Next, we review prior
research on IFRS adoption by Canada.
2.1. Prior research on IFRS adoption in Canada

A handful of studies have examined the consequences of IFRS adoption by

Canada. Burnett et al. (2013) find no evidence that cross-listed Canadian
firms that adopted IFRS have experienced any change in earnings quality.
Leung (2015) examines discretionary accruals, meeting or beating earnings
benchmarks, and timely loss recognition and finds that while discretionary
accruals are lower after IFRS adoption, there is some evidence of more
benchmark meeting and less timely loss recognition after adoption. Overall,
he concludes that accounting quality has not improved after IFRS adoption.
A study by Liu and Sun (2015) compares the pre-IFRS versus the post-IFRS
earnings quality of Canadian firms and finds mixed results. They find no
significant differences in discretionary accruals, the likelihood of reporting
small positive earnings, and earnings response coefficients between the pre-
and post-IFRS periods, but find an increase in earnings persistence after
IFRS adoption. Liu and Sun (2015) also conclude that there has been no
significant change in earnings quality for Canadian firms after adopting
IFRS.
Khan et al. (2015) employ an event study methodology to examine
whether the information content of earnings announcements has changed
after adoption of IFRS for firms listed on the Toronto Stock Exchange and
the Canadian Venture Exchange. They find that abnormal return volatility
and abnormal trading volume, proxies for information content of earnings,
are higher in the post-IFRS adoption period only for firms listed on the
Toronto Stock Exchange. Khan et al. (2015) interpret that IFRS earnings
announcements increased the value-relevant information, but this result
does not apply to all listed Canadian firms. Finally, two concurrent studies
examine the value-relevance of IFRS adoption in Canada. Cormier and
Magnan (2016) find evidence that the adoption of IFRS has improved the
value-relevance of earnings only for Canadian firms that are cross-listed in
the U.S. market; CGAAP-earnings are value-relevant for firms that are
listed only in Canada, and IFRS adoption has no effect on the value-rele-
vance of earnings for these firms. On the other hand, Okafor et al. (2016) find
1950003-12
that accounting information under IFRS exhibits higher value-relevance

than accounting information under CGAAP. Overall, a majority of the
studies discussed above either fail to find a significant change in earnings
quality following IFRS adoption in Canada or report mixed results across
sub-samples or earnings attributes examined. Thus, additional research
using an alternative, cleaner research design is necessary to understand the
effect of IFRS adoption on earnings quality of Canadian firms.
3. Research Design
We measure the quality of earnings under CGAAP and IFRS by examining
five attributes of earnings: predictability value of current earnings for future
cash flows, earnings persistence, value-relevance of earnings, accrual quali-

ty, and asymmetric timeliness of earnings. In this section, we describe the
empirical models used to assess the earnings quality of the two accounting
standards.
Following Dechow et al. (1998), we estimate the following model to assess
the predictability of IFRS-earnings vs CGAAP-earnings for the next period
cash flows:
OCF2011 ¼ þ 1 CGAAPE2010 þ " ð1Þ
OCF2011 ¼ þ 1 IFRSE2010 þ " ð2Þ
where OCF2011 is the operating cash flow per share for fiscal year 2011.8
CGAAPE and IFRSE are, respectively, earnings per share under CGAAP
and IFRS. Definitions of all the variables appear in Appendix 2. Consistent
with prior research, 1 is predicted to be positive in models (1) and (2). A
comparison of the R2 of the two models will indicate which of the two
earnings numbers has higher predictive ability for the next period cash
flows.9 We also estimate the following horse-race model (3) to directly test
which earnings, CGAAPE or IFRSE has stronger explanatory power for
future cash flows:
OCF2011 ¼ þ 1 CGAAPE2010 þ 2 IFRSE2010 þ " ð3Þ
8
We use current year’s total shares outstanding as the scaling factor because total assets for
2010 under IFRS is not available for many of our sample firms and the number of total shares
outstanding is not affected by the transition of accounting standards.
9
One implicit assumption in our analysis is that operating cash flow is not susceptible to
accounting standards. We acknowledge that this may not be always true. However, we
believe that the effect of IFRS adoption on operating cash flow is immaterial relative to its
impact on earnings.
1950003-13
Next, we estimate the following models to test persistence of earnings

under CGAAP and IFRS:
CGAAPE2010 ¼ þ 1 CGAAPE2009 þ " ð4Þ
IFRSE2011 ¼ þ 1 IFRSE2010 þ " ð5Þ
Since CGAAP-earnings are unavailable beyond 2010, we use 2009 and

2010 CGAAP-earnings in model (4). IFRS-earnings are available for 2010,

and thus, we use 2010 and 2011 IFRS-earnings in model (5). To further shed
light on whether the difference in earnings between CGAAP and IFRS
contributes to earnings persistence, we estimate the following model:
IFRSE2011 ¼ þ 1 IFRSE2010 þ 2 DIFF þ 3 IFRSE2010 DIFF þ " ð6Þ
where DIFF equals 1 if the absolute value of CGAAP-IFRS earnings dif-

ference for 2010 is larger than sample median, and 0 otherwise. Finding a
negative (positive) 3 suggests that IFRS-earnings is less (more) persistent
when the differences between the two earnings are significant.
Turning to our third measure of earnings quality, following Barth et al.
(2008), we estimate the following model to examine the value-relevance of
IFRS-earnings conditioned on its difference from CGAAP-earnings:
PRICEpost 1ð3Þ ¼ þ 1 BV2011 þ 2 IFRSE2011 þ 3 DIFF þ 4 IFRSE2011

DIFF þ " ð7Þ
We use stock price at one or three months after the fiscal year end as the
dependent variable. Consistent with prior research, we expect positive
coefficients on 1 and 2 . The coefficient of interest in model (7) is 4 . If
investors perceive CGAAP-earnings to be more (less) informative than
IFRS-earnings, we would expect 4 to be negative (positive) and
significant.10 We also estimate an alternate value-relevance model in which
stock returns is used as the dependent variable (Ghosh & Moon, 2005).
RET2011 ¼ þ 1 IFRSE2011 þ 2 IFRSE2011 þ 3 DIFF þ 4 IFRSE2011

DIFF þ 5 IFRSE2011 DIFF þ " ð8Þ
10
The reconciliation information about 2010 earnings is available only in the 2011 annual
report. Therefore, we are not able to directly test how market investors react to 2010 IFRS/
CGAAP earnings. Instead, we adopt an indirect approach to test how investors react to 2011
IFRS-earnings, conditional on the difference between IFRS and CGAAP.
1950003-14
RET2011 is the stock return with a measurement period extending from

nine months prior to the 2011 fiscal year-end through three months after the
2011 fiscal year-end. IFRSE2011 is the change in IFRS-earnings in 2011.
The sum of earnings levels and change coefficients, 1 þ 2 captures capital
markets’ perception of earnings quality. The coefficients of interest in model
(8) are 4 and 5 . If investors perceive CGAAP-earnings as having a higher
(lower) quality than IFRS-earnings, we would expect 4 þ 5 to be negative
(positive) and significant.

Next, we follow Dechow and Dichev (2002) to measure accruals quality
under IFRS/CGAAP using the following model:
ACCR2010 ðIFRS=CGAAPÞ ¼ þ 1 CashFlow2009 þ 2 CashFlow2010

þ 3 CashFlow2011 þ " ð9Þ
ACCR2010 is the firm’s total accruals in year 2010, calculated as IFRS (or
CGAAP) earnings less operating cash flows. CashFlow represents operating
cash flows. All variables are scaled by total market capitalization at year
2010. The model is estimated separately for each industry (based on the
2-digit SIC code) in which there are at least ten firms. We measure accruals
quality as the absolute value of the residual from model (9). If earnings
quality is lower (higher) under IFRS compared to CGAAP, then accruals
quality under IFRS should be higher (lower) than accruals quality under
CGAAP.
Finally, we examine whether the asymmetric timeliness of earnings
(conservatism) differs between CGAAP and IFRS. Following Basu (1997),
we estimate the following model:
IFRSE2010 ðCGAAPE2010 Þ
Price2009
¼ þ 1 DR2010 þ 2 RET2010 þ 3 RET DR2010 þ " ð10Þ
Price2009 is the firm’s stock price in year 2009. DR2010 is an indicator

variable that equals to 1 if RET2010 is negative, and 0 otherwise. RET2010 is
the 12-month buy-and-hold stock return for year 2010, measured from nine
months prior to the 2010 fiscal year-end through three months after the 2010
fiscal year-end. 2 measures the timeliness of earnings with respect to pos-
itive returns, 2 þ 3 measures the timeliness of earnings with respect to
negative returns, and 3 measures the incremental timeliness of earnings
with respect to negative returns. A positive and significant 3 is consistent
1950003-15
with the asymmetric timeliness of earnings, i.e., earnings incorporate bad

news faster than good news. If earnings under IFRS is more conservative
than under CGAAP, then 3 under IFRS should be larger than 3 under
CGAAP.
4. Sample
Canada adopted IFRS in January 2011 and firms were required to provide
CGAAP-to-IFRS reconciliation for the fiscal year before the adoption.
We identify our sample from COMPUSTAT North America and SEDAR
for fiscal year 2010.11 Our initial sample consists of 1,015 publicly-held
Canadian firms. Next, we exclude 178 investment funds and trusts which
were required to adopt IFRS in 2014 and 129 firms that adopted IFRS for
fiscal year 2012 since their fiscal year begins at the end of 2010.12 After
excluding 96 firms that did not provide reconciliation information and 31
firms with missing financial information, our final sample consists of 581
firms.13
Industry distribution, descriptive statistics, and correlations are, re-
spectively, in Panels A through C of Table 2. About half of the sample firms
come from mining industry. Manufacturing firms represent about 19 percent
of the sample. We perform additional analyses separately for mining and
non-mining firms and those results are discussed in a later section.
The mean earnings per share under IFRS is higher than the mean earnings
per share based on CGAAP. The standard deviation of earnings is also
higher for IFRS compared to CGAAP. The top three accounting issues in
terms of transition from CGAAP to IFRS are compensation (e.g., employee
future benefits), PP&E, and financial instruments and investments. Each of
these issues impacted transition to IFRS for nearly a quarter of the sample
firms. Pearson correlations between both CGAAP-earnings and IFRS-
earnings are highly correlated with next period cash flows (both are signif-
icant at the 0.01 level). However, the correlation coefficient is higher for
CGAAP-earnings relative to IFRS-earnings. Both earnings are strongly
associated with each other.
11
SEDAR is the System for Electronic Document Analysis and Retrieval developed for the
Canadian Securities Administrators.
12
As a robustness test, we add back the 129 firms which adopted IFRS in fiscal year 2012. Our
results remain qualitatively the same.
13
Canadian companies which report under U.S. GAAP did not provide reconciliation to
IFRS.
1950003-16
Table 2. Industry Distribution, Descriptive Statistics, and Correlations
Panel A: Industry Distribution
Industry Number of Observations
Manufacturing 109
Agriculture 3
Mining 291
Construction 3
Transportation 36
Wholesale 11
Retail 21
Real estate & Insurance 58
Service 48
Other 1
Total 581
Panel B: Descriptive Statistics
1950003-17
Variable N Mean Median SD P25 P75
CGAAPE2010 581 0.427 0.009 1.155 0.053 0.436

IFRSE2010 581 0.456 0.012 1.585 0.060 0.447
DIFF 581 0.501 1.000 0.500 0.000 1.000
OCF2011 581 0.981 0.004 2.690 0.028 0.898
CGAAPE2009 523 0.338 0.012 0.996 0.073 0.452
PRICEpost1 566 7.344 1.068 13.514 0.235 8.811
PRICEpost3 561 7.402 1.008 13.639 0.207 8.710
BV2011 566 5.099 0.825 12.374 0.129 5.713
IFRSE2011 566 0.382 0.011 1.217 0.077 0.478
COMPEN 577 0.300 0.000 0.458 0.000 1.000
PPE 577 0.246 0.000 0.431 0.000 0.000
FINAN 577 0.232 0.000 0.423 0.000 0.000
Panel C: Pearson Correlations
OCF2011 CGAAPE2010 IFRSE2010 CGAAPE2009 PRICEpost1 PRICEpost3 BV2011 IFRSE2011
OCF2011 1
CGAAPE2010 0.7711 1
(<0.0001)
IFRSE2010 0.7020 0.8357 1

(<0.0001) (<0.0001)
CGAAPE2009 0.6329 0.5639 0.7416 1
(<0.0001) (<0.0001) (<0.0001)
PRICEpost1 0.7489 0.8296 0.7684 0.7174 1
(<0.0001) (<0.0001) (<0.0001) (<0.0001)
PRICEpost3 0.7544 0.8269 0.7636 0.7115 0.9941 1
(<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001)
0.8387 0.7497 0.7355 0.5923 0.7901 0.7974 1
1950003-18
BV2011
(<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001)
IFRSE2011 0.5727 0.6953 0.6486 0.6615 0.7223 0.7279 0.6047 1
(<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001) (<0.0001)
Notes: This table presents the industry distribution and descriptive statistics. The industry classification is based on the 2-digit SIC
code. We obtain Canadian GAAP earnings from COMPUSTAT North America Database. IFRS-earnings and reconciliation infor-
mation are hand-collected from SEDAR. Panel A presents the industry distribution and Panel B provides descriptive statistics for the
sample firms. Panel C presents a correlation matrix of the variables used in the tests. ***, **, and * indicate significance at the 1%,
5%, and 10% levels, respectively. See Appendix 2 for variable definitions.
5. Results
5.1. Earnings predictability
Results of models (1) through (3) on the predictability of CGAAP-earnings
vs IFRS-earnings for next period cash flows are in Table 3. All variables are
winsorized at top and bottom 1 percent. The standard errors are adjusted for
heteroscedasticity.14 Results in column (1) indicate that the coefficient on
CGAAPE2010 is positive and significant at the 0.01 level, indicating that

CGAAP-earnings is strongly associated with next period (2011) cash flows.
Results in column (2) indicate that the coefficient on IFRSE2010 is also
positive and significant at the 0.01 level though the magnitude of the coef-
ficient is significantly lower than CGAAP-earnings (Chi 2 ¼ 11:78,
p < 0:001). Also, the R2 is higher in column (1) by more than 10 percent, and
the Vuong test shows that the difference in R2 is statistically significant,
indicating that the CGAAP-earnings has more explanatory power compared
to IFRS-earnings. Column (3) provides the results of the horse race regres-
sion in which we include both IFRS- and CGAAP-earnings. Due to the high
correlation between IFRS-earnings and CGAAP-earnings, the degree of
multicollinearity is high in this model. As a result, the reliability of the
coefficients’ estimates is a concern. However, the goal of the horse race model
is to see which earnings (IFRS or CGAAP) variable loads higher. Results in
column (3) indicate that CGAAPE2010 stands out as it is associated with
next period cash flows with stronger statistical power, while IFRSE2010 is
significant only at the 0.10 level. Also, note the magnitude of the coefficient
on CGAAPE is much higher than the coefficient on IFRSE.
We partition the sample at the median value of the absolute difference
between CGAAP-earnings and IFRS-earnings and estimate model (1) sep-
arately for the above and below median sub-samples and those results are
reported in Panel B of Table 3. When the differences are low, i.e., below the
sample median (DIFF ¼ 0), the coefficients on CGAAPE2010 and IFRSE2010 ,
and the R2 in columns (1) and (2) are similar. For the above the median
partition (DIFF ¼ 1), we find that the coefficient on CGAAPE2010 is higher
than the coefficient on IFRSE2010 (significant at the 1% level). The R2 of the
regression with CGAAPE2010 is also significantly higher than that of the
regression with IFRSE2010 . These results are consistent with the results in
Panel A. Overall, the results in Table 3 strongly indicate that CGAAP-
earnings has greater predictive value for next period cash flows compared to
14
As each of our sample firms appears only once in the data, there is no need to cluster the
standard errors by firm or year.
1950003-19
Table 3. Predictability of Earnings for Future Cash Flows: IFRS vs CGAAP
Panel A: Full Sample
(1) (2) (3)

Variables OCF2011 OCF2011 OCF2011
CGAAPE2010 1.796*** 1.425***

(9.673) (4.796)
IFRSE2010 1.191*** 0.324*

(8.035) (1.853)
Constant 0.214*** 0.443*** 0.226***
(3.617) (6.367) (3.753)
Observations 581 581 581
R2 0.595 0.493 0.606
Test: CGAAPE2010 (1) ¼ IFRSE2010 (2) Chi 2 ¼ 11:78
p < 0:001
R 2 (1) ¼ R 2 (2) Z ¼ 2:022
p ¼ 0:043
Panel B: Sample Partitioned on DIFF
DIFF ¼ 1 DIFF ¼ 0
(1) (2) (1) (2)

Variables OCF2011 OCF2011 OCF2011 OCF2011
CGAAPE2010 1.793*** 1.313***

(8.643) (5.223)
IFRSE2010 1.128*** 1.314***
(7.276) (5.230)
Constant 0.387*** 0.853*** 0.087*** 0.087***
(3.032) (6.123) (4.230) (4.270)
Observations 291 291 294 294
R2 0.561 0.457 0.629 0.630
Test: CGAAPE2010 (1) ¼ IFRSE2010 (2) Chi 2 ¼ 11:18 Chi 2 ¼ 0:40
p < 0:001 p ¼ 0:525
R 2 (1) ¼ R 2 (2) Z ¼ 1:793 Z ¼ 0:513
p ¼ 0:073 p ¼ 0:608
Notes: This table presents the estimation results of the predictability of earnings for future
cash flows. Panel A tests the predictability of IFRS-earnings and CGAAP-earnings for future
cash flows on the full sample. The dependent variable is the operating cash flows per share in
year 2011. The independent variables of interest are: CGAAPE2010 , earnings per share in
2010 reported under CGAAP; IFRSE2010 , earnings per share in 2010 reported under
IFRS. Panel B separately tests the predictability of earnings for future cash flows on sample
firms whose IFRS-CGAAP divergence is smaller than median (DIFF ¼ 0) and sample firms
whose IFRS-CGAAP divergence larger than median (DIFF ¼ 1). ***, **, and * indicate
significance at the 1%, 5%, and 10% levels, respectively. See Appendix 2 for variable
definitions.
1950003-20
IFRS-earnings. In other words, higher earnings quality is associated with

CGAAP-earnings.
5.2. Earnings persistence

Results of models (4) through (6) on persistence of CGAAP-earnings vs
IFRS-earnings are in Table 4. Results in column (1) indicate that the coef-
ficient on IFRS2010 is not significant, indicating that IFRS-earnings is not

persistent. On the other hand, CGAAP-earnings (see column (2)) is highly
persistent (significant at the 0.01 level).15 Further, R2 in column (2) is much
higher for CGAAP-earnings (55 percent) compared to IFRS-earnings (about
11 percent). Results of model (6), which captures the differences between
Table 4. Earnings Persistence: IFRS vs CGAAP Earnings
(1) (2) (3)

Variables IFRSE2011 CGAAPE2010 IFRSE2011
IFRSE2010 0.400 1.321***

(1.421) (6.543)
CGAAPE2009 0.779***
(9.761)
DIFF 0.458***
(2.616)
IFRSE2010 DIFF 0.994***
(2.773)
Constant 0.237*** 0.206*** 0.004
(2.697) (4.246) (0.287)
R2 0.109 0.550 0.145
Notes: This table presents the estimation results of earnings

persistence. Column (1) tests the persistence of IFRS-earnings. The
dependent variable is earnings per share in 2011 reported under
IFRS (Columns 1 and 3). The independent variable of interest is
earnings per share in 2010 reported under IFRS. Column (2) pre-
sents the persistence of CGAAP-earnings. The dependent variable is
earnings per share in 2010 reported under CGAAP and the inde-
pendent variable is earnings per share in 2009 under CGAAP.
Column (3) tests the persistence of IFRS-earnings conditional on the
degree of divergence between IFRS and CGAAP-earnings. ***, **,
and * indicate significance at the 1%, 5%, and 10% levels, respec-
tively. See Appendix 2 for variable definitions.
15
In column (2) we estimate a regression of 2010 CGAAP-earnings on 2009 CGAAP-earnings
since CGAA- earnings are unavailable for 2011.
1950003-21
CGAAP-earnings and IFRS-earnings, are reported in column (3). Recall

that DIFF equals 1 if the absolute value of the difference between the two
earnings is larger than the sample median, and 0 otherwise. We find that
IFRSE2010 is positive and significant. This indicates that when the difference
between CGAAP-earnings and IFRS-earnings is small (below median),
IFRS-earnings are persistent. However, the coefficient on IFRSE2010 DIFF
is negative and significant at the 0.01 level. This indicates that when IFRS is
largely different from CGAAP, IFRS-earnings become less persistent. In

summary, the results in Table 4 strongly support the notion that higher
earnings quality is associated with CGAAP-earnings.
5.3. Value-relevance of earnings

Results of model (7) are in Panel A of Table 5. We use two variations of the
dependent variable: stock price at the end of one (PRICEpost1 ) or three
months (PRICEpost3 ) after 2011 fiscal year-end. Across all columns, the
coefficients on BV2011 and IFRSE2011 are both positive and significant at
the 0.01 level, indicating that IFRS-book value of equity and IFRS-earnings
are value-relevant to investors. More importantly, the coefficient on
IFRSE2011 DIFF is negative and significant at the 0.01 level in columns (2)
and (4). These results indicate that when the difference between CGAAP-
earnings and IFRS-earnings is large, IFRS-earnings are less value-relevant.
Results are similar when we use stock returns model instead of stock price
model (see Panel B). We find that the sum of the coefficients on
IFRS2011 DIFF þ IFRS2011 DIFF is negative and significant at the
0.05 level, consistent with the results in Panel A based on the price model. In
summary, the results in Table 5 strongly support the notion that higher
earnings quality is associated with CGAAP-earnings. These findings are
consistent with the results in Tables 3 and 4.
5.4. Accrual quality

Panel A of Table 6 provides the summary statistics on the variables used to
calculate the accruals quality measure. We scale all variables by the market
capitalization in 2010 because market capitalization is not affected by the
accounting standards. Panel B presents the univariate comparison between
accruals quality under CGAAP vs IFRS. There is no difference in total
accruals between CGAAP and IFRS. The mean accruals quality under
CGAAP is (0.818), which is significantly lower than the mean accrual
quality under IFRS (1.215), and the difference is significant at the 0.01 level.
1950003-22
Table 5. Value-Relevance: IFRS vs CGAAP Earnings
Panel A: Dependent Variable is Stock Price
(1) (2) (3) (4)

Variables PRICEpost1 PRICEpost1 PRICEpost3 PRICEpost3
BV2011 0.607*** 0.573*** 0.623*** 0.588***

(7.329) (7.338) (7.359) (7.377)
IFRSE2011 4.306*** 6.851*** 4.320*** 6.797***
(6.430) (8.574) (6.490) (9.126)

DIFF 3.704*** 3.796***
(5.530) (5.640)
IFRSE2011 DIFF 3.077*** 3.011***
(3.185) (3.336)
Constant 2.605*** 0.973*** 2.594*** 0.932***
(7.211) (7.356) (7.138) (7.050)
Observations 566 566 561 561

R2 0.719 0.740 0.731 0.752
Panel B: Dependent Variable is Stock Returns
(1) (2)
Variables RET2011 RET2011
IFRSE2011 0.140*** 0.285***

(3.087) (3.253)
IFRSE2011 0.004 0.002
(0.086) (0.037)
IFRSE2011 DIFF 0.199*
(1.913)
IFRSE2011 DIFF 0.006
(0.071)
DIFF 0.008
(0.088)
Constant 0.063 0.053
(1.438) (0.701)
Observations 554 554
R2 0.014 0.020
F-test
IFRSE2011 þ IFRSE2011 0.136*** 0.287***
IFRSE2011 DIFF þ IFRSE2011 DIFF 0.193**
Notes: This table presents the estimation results of the value-relevance of earnings. In Panel A,
the dependent variable is stock price. Stock prices are measured in two ways: 1 (3) month after
2011 fiscal year-end. Stock returns (Panel B) are measured from nine months prior to the 2011
fiscal year-end through three months after the 2011 fiscal year-end. Column (1) and (3) test the
value-relevance of IFRS-earnings, while column (2) and (4) test the value-relevance of IFRS-
earnings conditional on the degree of divergence between IFRS and CGAAP earnings. The
independent variables of interest are: IFRSE2011 , earnings per share in 2011 reported under
IFRS, and the interaction term IFRSE2011 DIFF. In Panel B, the dependent variable is
stock return of 2011, and the independent variables of interest are the two interaction
terms: IFRSE2011 DIFF, and IFRSE2011 DIFF. ***, **, and * indicate significance at
the 1%, 5%, and 10% levels, respectively. See Appendix 2 for variable definitions.
1950003-23
Table 6. Accrual Quality: IFRS vs CGAAP Earnings
Panel A: Summary Statistics
Variables N Mean Median SD P25 P75
IFRS Accrual2010 509 0.151 0.052 0.588 0.119 0.006

CGAAP Accrual2010 509 0.150 0.045 0.620 0.112 0.005
CashFlow2009 509 0.015 0.013 0.247 0.038 0.200
0.035
CashFlow2010 509 0.033 0.032 0.218 0.117

CashFlow2011 509 0.027 0.022 0.226 0.057 0.139
IFRS EM2010 509 1.215 0.705 2.014 0.344 1.204
CGAAP EM2010 509 0.818 0.502 1.268 0.241 0.835
Panel B: Comparison of Mean Total Accruals and Accrual Quality

Total Accruals Accrual Quality (AQ)
IFRS 0.151 1.215

CGAAP 0.150 0.818
Difference 0.001 0.397***
t-statistic 0.036 3.765
Notes: This table presents a comparison of accrual quality (AQ) measures (Dechow
and Dichev 2002) between IFRS and CGAAP. Higher values of AQ are consistent
with lower accrual quality, i.e., lower earnings quality. Panel A provides summary
statistics on variables used to calculate the AQ. Panel B provides comparison of
total accruals and AQ under IFRS and CGAAP. ***, **, and * indicate signifi-
cance at the 1%, 5%, and 10% levels, respectively. See Appendix 2 for variable
definitions.
This finding suggests that higher accrual quality is associated with CGAAP,
i.e., higher earnings quality.
5.5. A symmetric timeliness of earnings

Results of model (10) are in Table 7. We find that the variable of interest,
RET DR is positive and significant for both IFRS-earnings and CGAAP-
earnings, indicating that the property of asymmetric timeliness of earnings is
present for both sets of earnings. The coefficient for IFRS-earnings is slightly
higher compared to the coefficient for CGAAP-earnings. However, the dif-
ference is not statistically significant, indicating that asymmetric timeliness
of earnings is similar for IFRS and CGAAP.
5.6. Additional analyses

In this section, we discuss the results of two additional analyses to further
explore earnings quality under IFRS and CGAAP.
1950003-24
Table 7. Asymmetric Timeliness: IFRS vs CGAAP Earnings
(1) (2)
Variables IFRSE2010 /Price2009 CGAAPE2010 /Price2009
DR2010 0.040 0.023

(0.482) (0.269)
RET2010 0.028*** 0.057***
(6.170) (12.358)
RET2010 DR2010 0.562*** 0.505**

(2.474) (2.184)
Constant 0.079*** 0.083***
(2.654) (2.773)
Observations 501 501
R2 0.098 0.259
Test: Chi 2 ¼ 0:24
RET2010 DR2010 (1) ¼ RET2010 DR2010 (2) p ¼ 0:623

RET2010 þ RET2010 DR2010 (1) ¼ Chi 2 ¼ 0:06
RET2010 þ RET2010 DR2010 (2) p ¼ 0:809
Notes: This table presents a comparison of asymmetric timeliness of earnings between IFRS
and CGAAP-earnings RET2010 is the annual buy-and-hold return for 2010. DR2010 is a dummy
variable equal to 1 if RET2010 is negative, and 0 otherwise. Coefficient on RET2010 DR2010
captures the asymmetric timeliness of losses to gains. Sum of coefficient on RET2010 DR2010
and RET2010 captures the timely loss recognition. ***, **, and * indicate significance at the
1%, 5%, and 10% levels, respectively. See Appendix 2 for variable definitions.
5.6.1. Transition items and earnings quality

While the results discussed above compare the overall earnings quality
under IFRS vs CGAAP, next we seek to provide evidence on specific ac-
counting issues that could cause differences in earnings quality between the
two accounting standards. For example, prior research notes that there are
significant differences between CGAAP and IFRS with regard to accounting
for employee benefits, financial instrument and investment, PP&E, leases,
and related party transactions (BDO Canada 2017). To shed light on
whether these and other accounting issues impact the earnings quality, we
read each firm’s footnote to identify the transition items that have a sig-
nificant impact on the transition process. We define \significant impact" as
the magnitude of earnings changes caused by one transition item is equal to
or larger than 10% of the absolute difference between CGAAP-earnings and
IFRS-earnings. Appendix 1 presents an example of CGAAP-IFRS earnings
reconciliation information reported by firms. We first identify what transi-
tion items have a significant impact on the transition to IFRS and the fre-
quency of their occurrences. Panel A of Table 8 provides definitions for each
1950003-25
reconciliation item identified in our sample. In Panel B, we present the

magnitude of each identified reconciliation item, scaled by CGAAP-earn-
ings. On the mean level, financial instruments and investments is the
transition item with the largest magnitude, while asset retirement obligation
(ARO) is the transition item with the smallest magnitude. Panel C of
Table 8 presents the frequency of the occurrence of each identified recon-
ciliation items.16 The three transition items that occurred most frequently in
the sample were compensation (employee future benefits), PP&E, and fi-

nancial instruments and investments. Hence, we focus on these three tran-
sition items in the following multivariate tests.
We reestimate the models by including indicator variables to capture
firms that had identified compensation (COMPEN), PP&E (PPE), or
Table 8. Impact of Accounting Differences Related to Compensation, PP&E, and Financial

Instruments and Investment on Earnings Quality
Panel A: Definition of Reconciliation Items
Reconciliation Items Definition
Compensation Share-based compensation, pension evaluation (IAS 19)

PPE PPE related valuation, including fair value method for investment property, capitali-
zation of certain expense, depreciation and depletion (IAS 16/40)
Financial instruments & Re-measurement related to financial instruments (IAS39), and investment (IAS 29)
investment
Foreign currency exchange Change in foreign exchange rate (IAS 21)
Impairment Different impairment test under IFRS (IAS 36)
Consolidation Certain entity should be consolidated/deconsolidated under IFRS (IAS 27)
ARO Re-measurement of liability related to Asset Retirement Obligation (IAS 37)
Flow-through shares Issuance of flow-through shares (IAS 39)
Non-controlling interest Non-controlling interest is no longer included as part of net earnings (IAS 27)
Others Including accounting for Revenue recognition (IAS 18), Related party transaction
(IAS 24), Capitalization of development cost (IAS 38), Exploration & evaluation
cost (IAS 6), Provision (IAS 37), Customer loyalty program (IAS 15), Inventory
valuation (IAS 2), Leases (IAS 17), Income tax (IAS 12), Joint Entity (IAS 28),
Government grant (IAS 20)
Panel B: Magnitude (Absolute Value) of Reconciliation Items
Financial Foreign Flow- Non-

Instruments & Currency Through Controlling
Compensation PPE Investment Exchange Impairment Consolidation ARO Shares Interest
Mean 0.313 1.180 4.233 0.196 1.318 0.239 0.124 0.193 0.951
Median 0.040 0.384 0.234 0.084 0.244 0.086 0.027 0.134 0.142
16
The reconciliation items that occurred infrequently (less than 10 times) are grouped in the
\Others" category.
1950003-26
Table 8. (Continued)
Panel C: Distribution of Frequency of Reconciliation Items
Reconciliation Items Frequency Percentage (%)
Compensation 173 30.00

PPE 142 24.61
Financial Instruments & 134 23.22
Investment
Foreign currency exchange 72 12.48

Impairment 59 10.23
Consolidation 35 6.07
ARO 28 4.85
Flow-through shares 23 3.99
Non-controlling interest 18 3.12
Others 77 13.34
Panel D: Earnings Predictability of Future Cash Flows
(1) (2) (3)

Variables OCF2011 OCF2011 OCF2011
IFRSE2010 1.119*** 1.270*** 1.560***

(5.428) (9.915) (6.373)
IFRSE2010 COMPEN 0.236
(0.974)
IFRSE2010 PPE 0.329
(0.918)
IFRSE2010 FINAN 0.574*
(1.877)
COMPEN 0.152
(1.310)
PPE 0.321**
(2.230)
FINAN 0.427**
(2.248)
Constant 0.477*** 0.365*** 0.288***
(5.415) (4.565) (4.371)
R2 0.497 0.500 0.519
Panel E: Earnings Persistence
(1) (2) (3)

Variables IFRSE2011 IFRSE2011 IFRSE2011
IFRSE2010 0.512 0.122 1.006***

(1.563) (0.472) (6.887)
IFRSE2010 COMPEN 0.371
(0.658)
IFRSE2010 PPE 1.153***
(3.550)
IFRSE2010 FINAN 0.931**
(2.313)
COMPEN 0.252
1950003-27
Panel E: Earnings Persistence
(1) (2) (3)

Variables IFRSE2011 IFRSE2011 IFRSE2011
(1.093)
PPE 0.324**
(2.191)
FINAN 0.474**
(2.129)
Constant 0.182** 0.315*** 0.036
(2.087) (3.817) (1.261)
R2 0.128 0.276 0.240
Panel F: Value-Relevance of Earnings
(1) (2) (3) (4) (5) (6)

Variables PRICEpost1 PRICEpost1 PRICEpost1 PRICEpost3 PRICEpost3 PRICEpost3
BV2011 0.615*** 0.662*** 0.577*** 0.630*** 0.680*** 0.592***

(8.088) (12.356) (7.522) (8.099) (12.574) (7.611)
IFRSE2010 3.748*** 5.217*** 5.566*** 3.786*** 5.204*** 5.679***
(4.974) (7.818) (8.706) (5.111) (7.909) (8.749)
IFRSE2010 COMPEN 1.357 1.288
(1.050) (1.028)
IFRSE2010 PPE 3.994*** 3.916***
(3.355) (3.347)
IFRSE2010 FINAN 2.691** 2.896***
(2.277) (2.598)
COMPEN 0.342 0.403
(0.479) (0.559)
PPE 0.795 0.571
(1.528) (1.127)
FINAN 1.900*** 1.987***
(2.939) (3.089)
Constant 2.466*** 2.180*** 2.175*** 2.437*** 2.221*** 2.148***
(6.924) (6.744) (6.194) (6.861) (6.801) (6.102)
Observations 562 562 562 557 557 557
R2 0.723 0.745 0.733 0.735 0.757 0.747
Notes: This table presents the estimation results of how the IFRS-CGAAP differences related
to Compensation, PP&E and Financial Instruments and investment affect earnings quality.
Panel A provides the definition of each transition item that has been identified as having a
significant impact on the reconciliation between IFRS and CGAAP. Panel B presents the
magnitude of each identified transition item scaled by CGAAP-earnings. Panel C presents
the frequency of the occurrence of each identified reconciliation items. Panel D presents the
results of the predictability of earnings for future cash flows. Panel E presents the results of
earnings persistence. Panel F presents the results of value relevance of earnings. ***, **,
and * indicate significance at the 1%, 5%, and 10% levels, respectively. See Appendix 2 for
variable definitions.
1950003-28
financial instruments and investments (FINAN) as a major transition item.

These indicator variables take a value of 0 for other firms. We also interact
IFRS-earnings with each of the above three indicator variables. The coeffi-
cient on the interaction variable would indicate whether the transition item
impairs or enhances earnings quality of IFRS-earnings.
The results are in Table 8. Panels D, E, and F, respectively, present the
results of earnings predictability, earnings persistence, and value-relevance
of earnings. Results in Panel D indicate that while the coefficient on

IFRSE2010 is positive and significant at the 0.01 level, the interaction term
between transition items and IFRSE2010 is not significant in columns (1) and
(2). In column (3), the coefficient on IFRSE2010 FINAN is negative and
significant at the 0.10 level, indicating that the predictive ability of IFRS-
earnings for next period cash flows is lower for firms whose major transition
items include financial instruments and investment-related valuation, rela-
tive to other firms. Also, note the coefficient on IFRSE2010 in column (3) is
higher than 1.191 reported in column (2), Panel A of Table 3. In other words,
the predictive ability of IFRS-earnings is higher for firms without this
transition item.17
Results in Panel E, columns (1) and (2) indicate that IFRSE2010 is not
significant, i.e., IFRS-earnings are not persistent, consistent with the results
in column (1) of Table 4. However, the coefficient on IFRSE2010 PPE is
positive and significant at the 0.01 level, indicating that earnings persistence
is higher for firms whose major transition items include PP&E-related val-
uation relative to other firms. The coefficient on IFRSE2010 FINAN is
negative and significant at the 0.05 level, indicating that earnings persis-
tence is lower for firms whose major transition items include financial in-
strument and investment-related valuation relative to other firms. Also,
note the coefficient on IFRSE2010 in column (3) becomes significant once
financial instruments and investments are controlled for.
Finally, results in Panel F indicate that the coefficients on IFRSE2010
PPE and IFRSE2010 FINAN are negative and significant at the 0.01 level,
indicating that value-relevance of IFRS-earnings is lower for firms whose
major transition items include either PP&E related or financial instrument
and investment-relative valuation, relative to other firms. Overall, results in
Table 8 consistently indicate that differences between CGAAP and IFRS
17
Blanchette et al. (2013) find that the volatility of financial statement figures in most cases is
higher under IFRS than under CGAAP. In particular, adjustments related to consolidation,
financial instruments (including derivatives and hedges), and fair values for investment
property emerge as areas with the most significant volatility.
1950003-29
with regard to accounting for financial instruments and investments not only
have the largest magnitude, but also significantly impair quality of IFRS-
earnings. The results for PP&E are mixed. While earnings persistence is
higher, value-relevance is lower. Results are not significant for COMPEN.
5.6.2. IFRS implementation challenge

Next, we address the concern that the lower earnings quality observed for
IFRS could be due to challenges associated with the first-time adoption of

IFRS.18 We manually count the number of transition items in each firms’
transition process. We surmise that implementation challenges are increas-
ing in the number of transition items. If our results are primarily due to
implementation challenges, we would expect the results to be weaker
(stronger) for firms that have fewer (more) transition items. We partition
the sample at the median value of the number of transition items and the
variable Challenge equals 1 for firms with the number of reconciliation items
larger than sample median, and 0 otherwise, and reestimate the models
separately for each partition. The results are in Table 9. Results in Panel A
show that, in both samples, CGAAP-earnings have greater predictive value
for next period cash flows compared to IFRS-earnings, and the two coeffi-
cients are statistically different. Results in Panel B indicate that IFRS-
earnings becomes less persistent when it is largely different from CGAAP,
and this finding holds for both samples. Results in Panel C, columns (3) and
(4) indicate that for firms that have more transition items, when the dif-
ference between CGAAP-earnings and IFRS-earnings is large, IFRS-earn-
ings are less value-relevant. A similar albeit weaker result exists also in firms
that have fewer reconciliation items. Finally, results in Panel D indicate that
accruals quality under CGAAP is higher than under IFRS, regardless of the
extent of reconciliation items present.19 Overall, the results indicate that the
higher earnings quality associated with CGAAP relative to IFRS holds for
both sets firms, i.e., firms that have fewer or more transition items. These
findings mitigate the concern that our results are driven by challenges as-
sociated with the first-time adoption of IFRS.
18
However, we note that both CGAAP and IFRS have many similarities and both are
principles-based accounting standards subject to similar conceptual foundations (Blanchette
et al., 2013), suggesting that the transition should be less challenging.
19
Untabulated results show that asymmetric timeliness of earnings is similar for IFRS and
CGAAP in firms that have fewer or more transition items.
1950003-30
Table 9. The Effect of IFRS Implementation Challenge on Earnings Quality of IFRS vs CGAAP
Panel A: Earnings Predictability of Future Cash Flows
Challenge ¼ 0 Challenge ¼ 1
(1) (2) (3) (1) (2) (3)

Variables OCF2011 OCF2011 OCF2011 OCF2011 OCF2011 OCF2011
CGAAPE2010 0.876*** 1.047*** 1.979*** 1.508***

(3.720) (3.888) (10.487) (3.636)
IFRSE2010 0.379** 0.207 1.297*** 0.382
(1.980) (0.986) (7.519) (1.601)
Constant 0.114*** 0.215*** 0.117*** 0.399*** 0.784*** 0.433***
(3.706) (3.793) (3.759) (3.406) (5.986) (3.417)
1950003-31
Observations 310 310 310 267 267 267
R2 0.411 0.114 0.429 0.630 0.550 0.642
Test: CGAAPE2010 (1) ¼ IFRSE2010 (2) Chi 2 ¼ 5:57 Chi 2 ¼ 12:61
p ¼ 0:018 p < 0:001
R 2 (1) ¼ R 2 (2) Z ¼ 2:518 Z ¼ 1:33
p ¼ 0:012 p ¼ 0:183
Panel B: Earnings Persistence
(1) (2) (3) (4) (5) (6)

Variables IFRSE2011 CGAAPE2010 IFRSE2011 IFRSE2011 CGAAPE2010 IFRSE2011
IFRSE2010 0.278** 1.070*** 0.394 1.503***

(2.124) (9.288) (1.146) (6.071)
CGAAPE2009 0.695*** 0.776***
(6.600) (7.686)
IFRSE2010 DIFF 0.924*** 1.159***
(5.188) (2.677)
DIFF 0.249** 0.583**
1950003-32
(2.184) (2.250)
Constant 0.079* 0.111*** 0.005 0.453** 0.327*** 0.020
(1.903) (3.243) (0.359) (2.469) (3.380) (0.446)
Observations 310 267 310 267 250 267
R2 0.126 0.459 0.282 0.093 0.554 0.120
Test:
IFRSE2010 DIFF (3) ¼ IFRSE2010 DIFF (6) Chi 2 ¼ 0:26
p ¼ 0:613
Panel C: Value-Relevance
(1) (2) (3) (4) (5) (6) (7) (8)

Variables PRICEpost1 PRICEpost1 PRICEpost3 PRICEpost3 PRICEpost1 PRICEpost1 PRICEpost3 PRICEpost3
BV2011 0.685*** 0.497*** 0.869*** 0.621*** 0.586*** 0.565*** 0.598*** 0.577***

(4.259) (3.043) (5.255) (2.961) (6.756) (6.833) (6.868) (6.987)
IFRSE2011 4.474*** 7.235*** 4.080*** 6.312*** 4.089*** 7.037*** 4.094*** 7.204***
(3.917) (4.140) (3.821) (3.649) (5.208) (11.348) (5.216) (11.871)
DIFF 4.001* 3.888 4.638*** 4.766***
(1.783) (1.635) (5.416) (5.670)
1950003-33
IFRSE2011 DIFF 3.430* 2.383 -3.352*** 3.551***
(1.770) (1.279) (3.800) (4.233)
Constant 1.875*** 1.068*** 1.690*** 0.982*** 3.875*** 0.792*** 3.792*** 0.651***
(3.195) (5.757) (2.824) (4.811) (6.192) (3.959) (6.154) (3.512)
Observations 304 304 300 300 258 258 257 257
R2 0.281 0.307 0.283 0.304 0.741 0.758 0.756 0.775
Test:
p ¼ 0:899
p ¼ 0:551
Panel D: Accrual Quality

N Total Accrual Accrual Quality (AQ) N Total Accrual Accrual Quality (AQ)
CGAAP 263 0.111 1.100 243 0.186 0.897

IFRS 263 0.118 1.980 243 0.178 1.519
Difference 0.007 0.880*** 0.008 0.622***
t-statistic 0.749 4.206 0.441 7.534
1950003-34
Notes: This table presents the earnings quality attributes of firms partitioned on the number of reconciliation
(between CGAAP-earnings and IFRS-earnings) items, our proxy for implementation challenge associated with the
first-time adoption of IFRS. Challenge is an indicator variable which equals to 1 for firms with the number of
reconciliation items larger than sample median, to 0 otherwise. Panel A present the results predictability of earnings
for future cash flows. Panel B presents the results of earnings persistence. Panel C presents the results of value-
relevance of earnings. Panel D presents the results of accruals quality. ***, **, and * indicate significance at the 1%,
5%, and 10% levels, respectively. See Appendix 2 for variable definitions.
5.7. Sensitivity analyses

We conduct several tests to assess the robustness of our results to alternate
model specifications and samples. We describe them below. First, about half
of our sample comes from the mining industry. We estimate our models
separately for mining firms and non-mining firms and we find that results
(untabulated) for the mining and non-mining firms are similar to those
reported in Tables 3 through 7.

Second, we reestimate the models with additional controls, such as a loss
indicator, an indicator variable for firms cross-listed in the U.S., cash flows
for 2009 and 2010, and industry fixed effects. Untabulated results indicate
that cross-listing indicator is not significant, and we continue to find that,
compared to CGAAP-earnings, IFRS-earnings are less predictive of future
cash flow, as well as less persistent and less value-relevant. Overall, results
from the above sensitivity analyses indicate that our results are robust to
additional control variables, alternate model specifications, and samples.
Third, we examine whether our results are sensitive to the financial crisis.
We surmise that firms in the finance sector are more likely to be affected by
the financial crisis relative to firms in other industries. We create an indi-
cator variable FIN that equals 1 for firms in financial services industry, and
0 otherwise, and we interact this variable with our variables of interest.
About 10% of our sample firms are in the financial services and the unta-
bulated results indicate that the interaction variable is not significant in any
of the regressions, suggesting that our results are not sensitive to the
financial crisis.
Finally, we replicate two prior studies on IFRS implementation in
Canada to see whether our cleaner research design could lead to different
inferences than found in prior research. The first one is the study by Cormier
and Magnan (2016) which examines the value-relevance after the adoption of
IFRS using a regular time-series research design. By comparing the value-
relevance before and after IFRS adoption, they find that IFRS adoption
improves the value-relevance of earnings. We apply the exact same model to
our sample firms which have disclosed both IFRS-earnings and CGAAP-
earnings in the transition year. Then we use the difference between IFRS-
earnings and CGAAP-earnings to infer the impact of IFRS adoption on each
firm. Our untabulated results indicate that value-relevance is lower in
companies on which IFRS adoption has a larger impact. In other words,
when the difference between IFRS and CGAAP is significant, investors
perceive CGAAP-earnings to be more informative than IFRS-earnings.
1950003-35
This finding is different from Cormier and Magnan (2016). The second study
we replicate is Liu and Sun (2015), which compares the pre-IFRS versus the
post-IFRS earnings quality and concludes that there has been no significant
change in earnings quality for Canadian firms after adopting IFRS. More
specifically, they find (1) no significant difference in discretionary accruals
after IFRS adoption; (2) no difference on the likelihood of reporting small
positive earnings after IFRS adoption; (3) no difference on earnings response
coefficient (ERC) after IFRS adoption; and (4) earnings are more persistent
after IFRS adoption. One challenge in the pre vs post design employed by
Liu and Sun (2015) involves identifying and controlling for potential year-
level confounding effects. Using our research setting where these confounds
are mitigated, we replicate all four tests of Liu and Sun (2015) and reach a
different conclusion. We find (untabulated) that accrual quality is lower

under IFRS than under CGAAP; there is lower ERC and lower earnings
persistence under IFRS; and there is no difference between IFRS and
CGAAP on the likelihood of reporting small positive earnings. Overall, these
findings suggest that CGAAP-earnings are of higher quality compared to
IFRS-earnings. In sum, using an alternate and arguably a cleaner setting, we
find very different results from the aforementioned two prior studies, sup-
porting the notion that higher earnings quality is associated with
CGAAP. These extensions underscore the importance of a clean research
design in IFRS-related studies.
6. Conclusion
While prior research has examined the effect of mandatory IFRS adoption on
European and Australian firms, implications of those findings for U.S. firms
are not obvious given the significant differences in socio-economic, political,
and legal environments between the U.S. and other countries. We contribute
to the literature by examining a more recent mandatory IFRS adoption by
U.S.’s largest trading partner, Canada. We find that on average, relative to
IFRS-earnings, earnings under Canadian GAAP have greater association
with next period cash flows and highly persistent. When the difference be-
tween earnings under Canadian GAAP and IFRS-earnings is large, IFRS-
earnings are less value-relevant. Further, accruals quality is lower under
IFRS than under Canadian GAAP. In short, the results consistently support
the notion that higher earnings quality is associated with Canadian GAAP.
Additional analyses indicate that the following areas account for signifi-
cant differences between Canadian GAAP and IFRS: compensation, PP&E,
1950003-36
and financial instruments and investments. More importantly, differences

due to accounting for financial instruments and investments significantly
impair the quality of IFRS-earnings. Finally, we note that one limitation of
our study is that our analyses are based on data from one year since earnings
under CGAAP and IFRS are available only for 2010. Thus, we are unable to
examine whether our findings extend to years beyond 2010. Despite this
limitation, our findings are potentially informative to current policy debates
on the possible use of IFRS by U.S. firms because Canadian GAAP is a close
substitute for the U.S. GAAP.
Acknowledgments
We appreciate the helpful comments and suggestions from Changjiang

Wang, Mark Ma, Zvi Singer, workshop participants at American Univer-
sity, the 2016 Annual Meeting of the American Accounting Association, and
two anonymous reviewers.
Appendix 1: Reconciliation Between CGAAP-Earnings

and IFRS-Earnings
The following is a reconciliation table from Warnex Inc.’s 2011 annual re-
port. The reconciliation table reconciles the company’s net loss reported in
accordance with Canadian GAAP to its net loss in accordance with IFRS for
the year ended December 31, 2010.
Reconciliation of net loss Year ended December 31, 2010

Net loss and comprehensive loss under Canadian GAAP $(1,559,483)
Differences increasing (decreasing) reported amount:
Property, plant and equipment (i) (98,692)
Liability portion of debentures (ii) (36,595)
Provisions (iii)

Share-based compensation (iv) (41,004)
Net loss and comprehensive loss under IFRS (1,735,774)
(i) Property, plant and equipment

Upon transition to IFRS, the Company elected to value its lab equipment at
fair value as deemed cost. Based upon an evaluation received from a pro-
fessional independent valuer, the fair value of this equipment at January 1,
2010, was determined to be $493,458 higher than net carrying amount.
1950003-37
The fair value became the new cost basis of the lab equipment and additional
depreciation of $24,673 was taken on the bump up to fair value in Q1 2010
and each quarter thereafter totaling $98,692 annually.
(ii) Equity and liability portion of debentures
In accordance with Canadian GAAP, transaction costs incurred on the issue
of the debentures were expensed. IFRS requires that these transaction costs
be netted against the fair value of financial instrument in determining the

amortized cost using the effective interest method. Furthermore, IFRS
requires transaction costs that relate to the issue of a compound financial
instrument be allocated to the liability and equity components of the in-
strument in proportion to the allocation of proceeds. The Company incurred
transaction costs, upon the 2008 issue of debentures, of $112,616. Upon

transition to IFRS, the remaining balance amounted to $63,758, calculated
using the effective interest method, of which $57,758 related to the liability
portion and $5,998 to the equity portion of the debenture. The accretion of
interest, included in finance expenses, amounted to $8,583 in Q1 2010,
$8,950 in Q2 2010, $9,332 in Q3 2010 and $36,595 annually.
(iii) Provisions
In Q1 2010, the Company determined, in accordance with IAS 37 Provi-
sions, that a present obligation existed due to an ongoing event. A lawsuit
was instituted against the Company related to the dismissal of an employee
and an estimated amount of $25,000 was recorded in accordance with
IFRS. In Q2 2010, as per Canadian GAAP, the Company recorded a pro-
vision of $18,400. This lawsuit was settled in Q3 2010 for $12,000.
(iv) Share-based compensation
In the Canadian GAAP Q1 2010 consolidated financial statements, the
Company reversed the compensation expense for all options forfeited in the
period, even if the options had vested. In accordance with IFRS, the Com-
pany is not entitled to make subsequent adjustments to total equity after the
vesting date. The reversal of the compensation expense in the amount of
$41,004 was adjusted to be in accordance with IFRS.
1950003-38
Appendix 2: Variable Definitions
OCF2011 Operating cash flows per share for year 2011 under IFRS. The 2011
operating cash flow is from COMPUSTAT.
CGAAPE2010 Earnings (net income) per share for year 2010 under CGAAP.
The 2010 CGAAP net income is hand-collected from SEDAR.
CGAAPE2009 Earnings (net income) per share for year 2009 under CGAAP. The
2009 CGAAP net income is from COMPUSTAT.
IFRSE2010 Earnings (net income) per share for year 2010 under IFRS. The
2010 IFRS net income is hand-collected from SEDAR.
IFRSE2011 Earnings (net income) per share for year 2011 under IFRS. The
2011 IFRS net income is from COMPUSTAT.
DIFF Equals 1 if the absolute difference between 2010 CGAAP-earnings
and 2010 IFRS-earning is larger than the sample median, 0
otherwise.
PRICEpost1 Stock price one month after 2011 fiscal year-end. The stock price is
from CRSP.
PRICEpost3 Stock price three months after 2011 fiscal year-end. The stock price
is from CRSP.
BV2011 Book value of equity per share for fiscal year 2011 under IFRS. The
2011 IFRS book value of equity is from COMPUSTAT.
COMPEN Equals 1 if the compensation-related item has a significant impact
on the CGAAP-to-IFRS earnings transition 0 otherwise. The
CGAAP-IFRS transition information is hand-collected from
SEDAR.
PPE Equals 1 if the PP&E-related items has a significant impact on the
CGAAP-to-IFRS earnings transition, 0 otherwise. The
CGAAP-IFRS transition information is hand-collected from
SEDAR.
FINAN Equals 1 if the financial instruments and investment-related items
has a significant impact on CGAAP-to-IFRS earnings transi-
tion, 0 otherwise. The CGAAP-IFRS transition information is
hand-collected from SEDAR.
IFRS Accrual2010 Total accruals in year 2010, calculated as IFRS earnings less op-
erating cash flow, scaled by market capitalization of year 2010.
The 2010 IFRS earnings is hand-collected from SEDAR. The
2010 operating cash flow is from COMPUSTAT.
CGAAP Accrual2010 Total accruals in year 2010, calculated as CGAAP-earnings less
operating cash flow, scaled by market capitalization of year
2010. The 2010 CGAAP-earnings are hand-collected from
SEDAR. The operating cash flow are from COMPUSTAT.
CashFlow2009 Operating cash flows for year 2009, scaled by market capitalization
of year 2010. The 2009 operating cash flow is from COMPU-
STAT.
STAT.
STAT.
1950003-39
Appendix 2. (Continued)
CGAAP AQ2010 Absolute value of the residuals estimated from the Dechow and
Dichev (2002) model using CGAAP-earnings. Higher values
indicate lower accrual quality.
IFRS AQ2010 Absolute value of the residuals estimated from the Dechow and
Dichev (2002) model using IFRS-earning. Higher values indi-
cate lower accrual quality.
Price2009 Stock price at the end of fiscal year 2009. The stock price is from
CRSP.
RET2010 The 12-month buy-and-hold stock return for fiscal year 2010, from
nine months prior to the 2010 fiscal year-end through three
months after the 2010 fiscal year-end. The stock return is from
CRSP.
RET2011 The 12-month buy-and-hold stock return for fiscal year 2011, from
nine months prior to the 2011 fiscal year-end through three
months after the 2011 fiscal year-end. The stock return is from
CRSP.
DR2010 Equals 1 if RET2010 is negative, 0 otherwise.
References
Ahmed, S. A., Neel M., & Wang, D. (2013). Does mandatory adoption of IFRS
improve accounting quality? Preliminary evidence. Contemporary Accounting
Research, 30, 1344–1372.
Atwood, T. J., Drake, M. S., Myers, J. N., & Myers, L. (2011). Do earnings
reported under IFRS tell us more about future earnings and cash flows? Journal
of Accounting and Public Policy, 30, 103–121.
Bandyopadhyay, S., Hanna, J., & Richardson, G. (1994). Capital market effects of
U.S.-Canada GAAP differences. Journal of Accounting Research, 32, 262–277.
Barth, M., & Clinch, G. (1996). International accounting differences and their
relation to share prices: Evidence from U.K., Australian, and Canadian firms.
Contemporary Accounting Research, 13, 135–170.
Barth, M., Beaver, W., & Landsman, W. (2001). The relevance of the value rele-
vance literature for financial accounting standard setting: Another view.
Journal of Accounting and Economics, 31, 77–104.
Barth, M., Landsman, W., & Lang, M. (2008). International accounting standards
and accounting quality. Journal of Accounting Research, 46, 467–498.
Barth, M., Landsman, W., Lang, M., & Williams, C. (2012). Are IFRS-based and
US GAAP-based accounting amounts comparable? Journal of Accounting and
Economics, 54, 68–93.
Bartov, E., Goldberg, S., & Kim, M. (2005). Comparative value relevance among
German, U.S. and international accounting standards: A German stock market
perspective. Journal of Accounting, Auditing and Finance, 20, 95–119.
Basu, S. (1997). The conservatism principle and the asymmetric timeliness of
earnings. Journal of Accounting and Economics, 24, 3–37.
1950003-40
BDO Canada. (2017). ASPE-IFRS: A Comparison. Available at http://www.bdo.

ca/en-ca/insights/assurance-accounting/aspe-publications/aspe-ifrs-a-compar-
ison-series-employee-benefits/.
Blanchette, M., Racicot, F., & Sedzro, K. (2013). IFRS Adoption in Canada: An
Empirical Analysis of the Impact on Financial Statements. Certified General
Accountants Association of Canada.
Brochet, F., Jagolinzer, A. D., & Riedl, E. J. (2013). Mandatory IFRS adoption and
financial statement comparability. Contemporary Accounting Research, 30,
1373–1400.
Burnett, B. M., Gordon, E. A., Jorgensen, B. N., & Linthicum, C. L. (2013).
Earnings quality: Evidence from Canadian firms’ choice between IFRS and US
GAAP. Accounting Perspectives, 14, 212–249.
Capkun, V., Cazavan-Jeny, A., Jeanjean, T., & Weiss, L. (2008). Earnings man-
agement and value relevance during the mandatory transition from local
GAAPs to IFRS in Europe. Working paper, HEC Paris. Available at SSRN:

https://ssrn.com/abstract=1125716.
Capkun, V., Collins, D., & Jeanjean, T. (2016). The effect of IAS/IFRS adoption on
earnings management (smoothing): A closer look at competing explanations.
Journal of Accounting and Public Policy, 35, 352–394.
Chalmers, K., Clinch, G., & Godfrey, J. (2011). Changes in value relevance
of accounting information upon IFRS adoption: Evidence from Australia.
Australian Journal of Management, 36, 151–173.
Christensen, H., Lee, E., & Walker, M. (2009). Do IFRS reconciliations convey
information? The effect of debt contraction. Journal of Accounting Research,
47, 1167–1199.
Chua, Y. L., Cheong, C. S., & Gould, G. (2012). The impact of mandatory IFRS
adoption on accounting quality: Evidence from Australia. Journal of Interna-
tional Accounting Research, 11, 119–146.
Cormier, D., & Magnan, M. L. (2016). The advent of IFRS in Canada: Incidence of
value relevance. Journal of International Accounting Research, 15, 113–130.
Dechow, P. M., Kothari, S. P., & Watts, R. L. (1998). The relation between
earnings and cash flows. Journal of Accounting and Economics, 25, 133–168.
Dechow, P. M., & Dichev, I. D. (2002). The quality of accruals and earnings:
The role of accrual estimation errors. The Accounting Review, 77(Supplement),
35–59.
Dechow, P. M., & Schrand, C. (2004). Earnings Quality. CFA Institute.
De George, E. T., Li, X., & Shivakumar, L. (2016). A review of the IFRS adoption
literature. Review of Accounting Studies, 21, 898–1004.
Dichev, I., Graham, J., Harvey, C., & Rajgopal, S. (2013). Earnings quality: Evi-
dence from the field. Journal of Accounting & Economics, 56, 1–33.
Financial Accounting Standards Board (FASB) (1978). Objectives of Financial
Reporting by Business Enterprises. Statement of Financial Accounting Con-
cepts No. 1. Norwalk, CT: FASB.
Ghosh, A., & Moon, D. (2005). Auditor tenure and perceptions of audit quality. The
Accounting Review, 80, 585–612.
1950003-41
Horton, J., & Serafeim, G. (2010). Market reaction to and valuation of IFRS rec-
onciliation adjustments: First evidence from the UK. Review of Accounting
Studies, 15, 725–751.
Jeanjean, T., & Stolowy, H. (2008). Do accounting standards matter? An explor-
atory analysis of earnings management before and after IFRS adoption. Journal
of Accounting and Public Policy, 27, 480–494.
Khan, S., Anderson, M., Warsame, H., & Wright, M. (2015). Do IFRS-based
earnings announcements have more information content than Canadian
GAAP-based earnings announcements? Accounting Perspectives, 14, 276–302.

Leung, R. (2015). Earnings management motives and firm value following man-
datory IFRS adoption
Evidence from Canadian Companies. Working Paper,
University of the Fraser Valley.
Lin, S., Riccardi, W., & Wang, C. (2012). Does accounting quality change following
a switch from U.S. GAAP to IFRS? Evidence from Germany. Journal of Ac-
counting and Public Policy, 31, 641–657.

Liu, G., & Sun, J. (2015). Did the mandatory adoption of IFRS affect the earnings
quality of Canadian firms? Accounting Perspectives, 14, 250–275.
Okafor, O. N., Anderson, M., & Warsame, H. (2016). IFRS and value relevance:
Evidence based on Canadian adoption. International Journal of Managerial
Finance, 12, 136–160.
Schipper, K., & Vincent, L. (2003). Earnings quality. Accounting Horizons, 17,
97–110.
Sun, J., Cahan, S. F., & Emanuel, D. (2011). How would the mandatory adoption of
IFRS affect earnings quality of U.S. firms? Evidence from cross-listed firms in
the U.S. Accounting Horizons, 25, 837–860.
Tysiac, K. (2014). SEC will seek comments on new possibility for voluntary
IFRS adoption. Journal of Accountancy. Available at http://www.journal-
ofaccountancy.com/news/2014/dec/ifrs-voluntary-adoption-201411476.html.
U.S. Census Bureau. (2015). Available at http://www.census.gov/foreign-trade/
statistics/highlights/top/top1506yr.html.
Van der Meulen, S., Gaeremynck, A., & Willekens, M. (2007). Attribute differences
between U.S. GAAP and IFRS earnings: An exploratory study. The Interna-
tional Journal of Accounting, 42, 123–142.
Zeghal, D., Chtourou, S. M., & Fourati, Y. M. (2012). The effect of mandatory
adoption of IFRS on earnings quality: Evidence from the European Union.
Journal of International Accounting Research, 11, 1–25.
1950003-42

Paper 2

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Paper 2

Uploaded by

Copyright:

Available Formats

The International Journal of Accounting

Vol. 54, No. 1 (2019) 1950003 (42 pages)

Does Mandatory Adoption of IFRS Enhance

Published 16 April 2019

IFRS-earnings. Our ﬁndings are potentially informative to any revival of policy

tional Financial Reporting Standards (IFRS) by the U.S. is a timely topic.

involving a switch from a high-quality accounting standard to IFRS: the

quality under CGAAP, a high-quality accounting standard, is potentially

management under IFRS relative to CGAAP. Finally, we examine the

IFRS-earnings. In terms of magnitude, the coeﬃcient on CGAAP-earnings

investors. However, the R2 improves when the diﬀerence between CGAAP-

U.S. domestic standards. Capkun et al. (2008) examine a sample of European

pervasiveness of earnings management did not decline after IFRS adoption

Table 1. A Summary of Prior Studies

value relevance of ﬁnancial state-

ings; Earnings persis- small positive earnings and earnings

IFRS with regard to earnings persistence as well as predictability of earnings

already adopted IFRS on a mandatory basis. They use a matched sample

2.1. Prior research on IFRS adoption in Canada

A handful of studies have examined the consequences of IFRS adoption by

that accounting information under IFRS exhibits higher value-relevance

cash ﬂows, earnings persistence, value-relevance of earnings, accrual quali-

Next, we estimate the following models to test persistence of earnings

IFRSE2011 ¼ þ 1 IFRSE2010 þ " ð5Þ

Since CGAAP-earnings are unavailable beyond 2010, we use 2009 and

2010 CGAAP-earnings in model (4). IFRS-earnings are available for 2010,

where DIFF equals 1 if the absolute value of CGAAP-IFRS earnings dif-

PRICEpost 1ð3Þ ¼ þ 1 BV2011 þ 2 IFRSE2011 þ 3 DIFF þ 4 IFRSE2011

RET2011 ¼ þ 1 IFRSE2011 þ 2 IFRSE2011 þ 3 DIFF þ 4 IFRSE2011

RET2011 is the stock return with a measurement period extending from

(positive) and signiﬁcant.

ACCR2010 ðIFRS=CGAAPÞ ¼ þ 1 CashFlow2009 þ 2 CashFlow2010

þ 3 CashFlow2011 þ " ð9Þ

Price2009 is the ﬁrm’s stock price in year 2009. DR2010 is an indicator

with the asymmetric timeliness of earnings, i.e., earnings incorporate bad

Table 2. Industry Distribution, Descriptive Statistics, and Correlations

Panel A: Industry Distribution

Industry Number of Observations

Panel B: Descriptive Statistics

CGAAPE2010 581 0.427 0.009 1.155 0.053 0.436

Panel C: Pearson Correlations

OCF2011 CGAAPE2010 IFRSE2010 CGAAPE2009 PRICEpost1 PRICEpost3 BV2011 IFRSE2011

IFRSE2010 0.7020 0.8357 1

CGAAPE2010 is positive and signiﬁcant at the 0.01 level, indicating that

Table 3. Predictability of Earnings for Future Cash Flows: IFRS vs CGAAP

Panel A: Full Sample

(1) (2) (3)

CGAAPE2010 1.796*** 1.425***

IFRSE2010 1.191*** 0.324*

Panel B: Sample Partitioned on DIFF

(1) (2) (1) (2)

CGAAPE2010 1.793*** 1.313***

IFRS-earnings. In other words, higher earnings quality is associated with

5.2. Earnings persistence

ﬁcient on IFRS2010 is not signiﬁcant, indicating that IFRS-earnings is not

Table 4. Earnings Persistence: IFRS vs CGAAP Earnings

(1) (2) (3)

IFRSE2010 0.400 1.321***

Notes: This table presents the estimation results of earnings

CGAAP-earnings and IFRS-earnings, are reported in column (3). Recall

largely diﬀerent from CGAAP, IFRS-earnings become less persistent. In

5.3. Value-relevance of earnings

CGAAPE2010 1.796* 1.425*

CGAAPE2010 1.793* 1.313*

BV2011 0.607* 0.573* 0.623* 0.588*

IFRSE2011 0.140* 0.285*

RET2010 DR2010 0.562* 0.505

IFRSE2010 1.119* 1.270* 1.560***

BV2011 0.615* 0.662* 0.577* 0.630* 0.680* 0.592*

CGAAPE2010 0.876* 1.047* 1.979* 1.508*

IFRSE2010 0.278 1.070* 0.394 1.503***

BV2011 0.685* 0.497* 0.869* 0.621* 0.586* 0.565* 0.598* 0.577*