IFRS 15 impact on accrual-based earnings management - A comparison among European countries.

Abstract

Earnings quality refers to the usefulness of financial information, where high quality is beneficial for investors and other stakeholders. Earnings quality decreases when managers engage in earnings management, i.e., manipulating the firm's financial performance. Earnings management has been studied by academics and consists of accruals-based earnings management and real earnings management, whereas this study is based on accruals-based earnings management. In 2018 IASB introduced their new framework IFRS 15, and we investigated whether the introduction has reduced accrual-based earnings management in 30 European countries. Using the Dechow and Dichev (2002) model, mapping cash flow into working capital, we use a sample consisting of 3,304 firms, and 16,495 observations stretching from 2015 until 2020. We further investigate the implementation of IFRS 15 by controlling for industry and country effects. We find that accrual-based earnings management has increased since the introduction of IFRS 15 on the pooled sample, signalling a decrease in earnings quality. However, we find no significant result that the introduction of IFRS 15 has affected any specific industries or countries more. This could indicate that IFRS 15 has not been a driving force in mitigating accrual-based earnings management.