Intellectual Contribution by Su-Jane Hsieh

Contribution Title

The Impact of Accounting Choices on Earnings, Book Value and Total Firm Value-The Case of Transition Obligation under SFAS No. 106

Conference

Western Region American Accounting Association Meeting

Year

2005

Description

This study examines the impact of accounting treatments of transition obligation under SFAS 106 on the value relevance of earnings, book value and total firm value. Our results show that in the adoption year of SFAS 106, investors tend to ignore earnings and rely mostly on book value in firm valuation when applying the immediate recognition method. However, in the year following the adoption, earnings under the immediate recognition method regain its value relevance. On the other hand, both earnings and book value are value relevant in the adoption and the subsequent years when applying the prospective recognition method. Despite this weight shift from earnings to book value under the immediate recognition method in the adoption year, we find that the choice of accounting method has no significant effect on the total firm value. These findings are consistent with the theory posited by Ohlson and Zhang (1998). Moreover, by comparing the value relevance of earnings and book value for the years prior to and after the implementation of SFAS 106, our results indicate that SFAS 106 improves the value relevance of financial reporting, and in particular, enhances the quality of earnings. This finding provides empirical support on the superiority of the accrual basis over the cash basis on the earnings measurement.

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