Accounting choices under ifrs and their effect on over-investment in capital expenditures

IFRS
in 2005 because 
IAS/IFRS
standards changed considerably from the 
early adoption period to the mandatory adoption period (Capkun et al. 2011a). In contrast 
to Barth et al. (2008), Ahmed et al. (2010) find less timely loss recognition following 
IFRS
mandatory adoption relative to a control sample of firms that did not adopt 
IFRS
standards. However, their control sample is largely comprised of U.S. firms and we know 
from prior research (e.g., Givoly and Hayn 2000; Barth et al. 2012) that relative to 
international accounting standards, U.S. GAAP has become more conservative (i.e., more 
timely loss recognition) over time.
Unlike Barth et al. (2008) and Ahmed et al. (2010), I do not include in my study 
firms that were allowed to voluntarily adopt 
IFRS
and I examine EU firms only in the 
pre- and post-
IFRS
periods. In addition, I examine timely loss recognition for 
PPE
by 
exploiting a setting where firms have changed their accounting treatment for 
PPE
from 
one that is less conservative (fair-value accounting or historical cost accounting with 
loose impairment rules) to another that is more conservative (historical cost accounting 
with strict impairment rules).
For measuring 
PPE
, 
IFRS
offers two alternative treatments: historical cost or fair 
value (revaluation). Under historical cost accounting, assets are recognized at acquisition 
cost and then tested for impairment (write-down). Under fair-value accounting, assets are 
recognized at acquisition cost and then revalued to fair value both up and down.
4
Christensen and Nikolaev (2010) show that after mandatory adoption of 
IFRS
in United 
Kingdom (UK) and Germany, most firms chose historical cost accounting with 
impairment testing for 
PPE
. They also find more historical cost accounting with 
impairment testing (i.e., less fair-value accounting) for 
PPE
in the post-
IFRS
period 
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IFRS
defines fair value as the amount for which an asset could be exchanged, a liability settled, or an 
equity instrument granted could be exchanged, between knowledgeable, willing parties in an arm’s length 
transaction (
IFRS
2.A).

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relative to the pre-
IFRS
period among UK firms that had the option to use fair-value 
accounting for 
PPE
in the pre-
IFRS
period. Furthermore, in its report to the European 
Commission in 2007, the Institute of Chartered Accountants in England and Wales 
(ICAEW) documents that the majority of firms in the EU elected to use a historical cost 
model rather than a fair-value model to measure non-financial assets following 
mandatory 
IFRS
adoption.
IFRS
, under IAS 36 (
Impairment of Assets
), requires regular impairment testing 
for 
PPE
and provides detailed procedures for determining when asset impairment occurs 
and for measuring the amount of impairment. Further, 
IFRS
requires impairment testing 
procedures be disclosed in the notes to the financial statements. On the other hand, most 
EU countries’ domestic GAAP did not have detailed impairment testing procedures for 
PPE
during the pre-
IFRS
period and impairment testing procedures were less transparent 
to investors and outside shareholders. In addition, given that EU firms are subject to the 
same impairment rules after 
IFRS
mandatory adoption, impairment testing is more 
comparable among EU firms and managers have less discretion in measuring and 
reporting impairment losses. Overall, 
IFRS
, under IAS 36, has more informative, more 
transparent, and more comparable impairment rules (i.e., strict impairment rules) for 
PPE
relative to EU countries’ domestic GAAP that had loose (i.e., less strict) impairment 
rules.
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Therefore, I predict that firms that used historical cost accounting with impairment 
testing in the post-