[Abstract]

Comparing the Relative Value Relevance of Operation Income between Consolidated and Separate Financial Statements under Pre- and Post-K-IFRS

Park, Jong Il & Na, Kyung A
 

This study investigates the changes in the relative value relevance of operating income in the consolidated financial statements and that in the individual (or separate) financial statements around the adoption of the International Financial Reporting Standard (IFRS) in 2011 in Korea. While the individual financial statements are prepared by each individual company as a legal entity, the consolidated financial statements are prepared by a parent company to present the financial position, the financial performance, and the cash flows of the parent company and its subsidiaries as a single economic entity. Before the adoption of
the IFRS, the individual financial statements were the primary financial statements while the consolidated financial statements were complementary. The status of these two statements has reversed with the adoption of the IFRS：the consolidated financial statements are now disclosed as the primary ones, and the individual financial statements of the parent company, termed “the separate financial statements”, as complementary ones.
Based on these changes in the reporting environment, we raise the following two research questions. First, is there a difference in the relative value relevance of operating income from the two types of financial statements? Second, has the relative value relevance of operating income from the two types of financial statements increased or decreased after the adoption of the IFRS? To address these questions, we examine all listed firms either on the Korean Stock Exchange(KOSPI sample) or on the Korean Securities Dealers Automated Quotations(KOSDAQ sample) that disclose the consolidated financial statements for 6 years (2008～2013) around the adoption of the IFRS. The total sample size is 5,520 firm year observations：2,210 observations from the Pre-IFRS period (2008～2010) and 3,310 observations from the Post-IFRS period (2011～2013). To estimate the operating income, the price level model of Ohlson (1995) is used.
Our major findings are as follows. First, the value of operating income reported in the individual (or separate) financial statements is more relevant than that in the consolidated financial statements in both the Pre-IFRS and the Post-IFRS periods. This result implies that the investors in the capital market, who are familiar with the individual financial statements, still make investment decisions mainly based on the separate financial statements in the Post-IFRS period, which is contrary to the intended purpose of the supervisory body such as the Korea Accounting Standards Board (KASB). This finding can help the KASB and the
supervisory body to make decisions on amending the accounting standards or policy related to the IFRS in which the consolidated financial statements are disclosed as the primary accounting information.
Second, results based on the full sample indicate that the value relevance of operating income from the consolidated financial statements as well as from the individual financial statements has significantly improved in the Post-IFRS period, revealing that accounting information after the mandatory adoption of the IFRS is more useful from the perspective of the investors in the capital market. Thus, compared to the old accounting standards (K-GAAP), the IFRS has been more effective in conveying useful information on a firm’s operating activities.
However, we find that this result holds only for the KOSPI sample when we test the KOSPI sample and KOSDAQ sample separately；for KOSDAQ firms, we observe that the value relevance of operating income from separate financial statements has increased in the post-IFRS period while there is no significant difference in the value relevance of consolidated operating income between the Pre-IFRS and the Post-IFRS period. Overall, the results of this study may provide additional empirical evidence to the related research on the effect of the IFRS adoption in Korea and contribute to the academia as well as to standard setters and policy makers for evaluating the effectiveness of the IFRS adoption.
 

▶ Key Words：K-IFRS, consolidated financial statement, separate financial statement, operating income, relative value relevance 

** Published on June 2015
** Full article available in Korean only

** Download here →7-1 Comparing between Consolidated and Separate Financial Statements under PrePostK-IFRS.pdf