Study on the Future Accounting Quality of First Time IFRS Adopters Choosing Deemed-cost Option

This paper tests whether the firm’s application of deemed-cost for their fixed assets on the date of transition to IFRS are associated with their future firm accounting quality, as measured by ex-post comparability (De Franco et al. 2011) and earnings quality. In this study, we posit that management discretion on the deemed-cost option allowed at the time of IFRS adoption can affect the relationship between firm’s deemed-cost adoption and their future accounting comparability and earnings quality. For empirical analysis, we use firms listed in KOSPI between 2011 and 2015, and provide the transitional financial statements in 2010. Our empirical results are as follows: first, the comparability and the earnings quality of the deemed-cost adopters are higher than non-adopters. Second, regarding the impact of the different types of deemed-cost on accounting quality, those firms which adopt the fair value amounts on the transition date to IFRS show higher comparability and earnings quality than those of the firms apply past revaluation amounts. Last, the positive association between firm’s deemed-cost adoption and accounting quality is more pronounced when firms change the depreciation methods and the useful life of their fixed assets. Overall, the results imply that firm managers’ voluntary adoption of deemed-costs during the introduction of IFRS may be more meant to provide the market with transparent and relevant information related to firm’s fair value.