Effects of Accounting Choices and Estimates on the Value Relevance Inferences

Abstract

Accounting choices and estimates allowable within a given accounting standard lies somewhere between aggressive or conservative approach and each has short-term effect of increasing or decreasing firm’s accounting earnings and book values. Thus, posing challenges to both preparers and users of accounting information. More challenging to the users and preparers is preparing financial statements using the International Financial Reporting Standards (IFRS) that focused more on fair-value measurement. Recent evidence indicates that fair-value measurements allow opportunistic behaviour due to professional judgments at the option of executives and accountants required in the measurements process. These nexus in measurements has built up a huge concern over the practices of regressing market value of equities on accounting numbers without sufficient prove on the measurements sources. This paper proposes a framework that shows how investors’ reliability judgment of accounting choices and estimates influences the relationship between accounting numbers and market value of equities. Highlights of the paper has important implication of providing fresh insight to researchers, users, financial reporting agencies and preparers on the effect of accounting choices and estimates on value relevance inference.