The Impact Of The Mandatory Adoption Of International Accounting Standards (IAS/IFRS) On Accounting Estimates: An Empirical Study

Abstract

Accounting estimates and forecasts enhance the usefulness of financial information by giving management a forum to share key nonpublic information with prospective investors. However, the growing difficulty of creating credible estimates and predictions, as well as the frequent abuse of estimates by managers, have an impact on the quality of financial information. Whether or if these competing pressures result in better financial information is one of the basic challenges in accounting, given the growing importance of estimates in financial statements, especially as a result of the shift to fair value accounting. We analyze the role that accrual-based accounting estimates play in the reliability of financial statements by looking at how well they predict future cash flows and profits. Accounting estimates that are higher than those in working capital items (excluding inventory), according to our out-of-sample forecasting experiments, do not enhance cash flow forecasting. Estimates, however, do help with forecasting profits for the next year, while they do not help with forecasting earnings for later years. Accounting estimates are only beneficial to investors, as the data reveal, and we recommend ways to increase their value.