ACCTG 502 | Session 2 | The Effect of Fair Value Accounting on the performance evaluation role of earnings - 2020

Mark DeFond, Jinshuai Hu, Mingyi Hung, Siqi Li d

Introduction

We examine the effect of fair value accounting on the relationship between net income and cash payments following the global adoption of IFRS in 2005. We find that, while IFRS's non-fair-value provisions are linked to an increase in this relationship, its fair value provisions are linked to a decrease. Overall, we add to the literature on the usefulness of fair value accounting by providing evidence that it is associated with a reduction in this relationship. Under the assumptions we specify and with the caveats we mention, our findings suggest that fair value accounting may diminish the usefulness of earnings in assessing management performance.