Conclusions Journal Modern Accounting & Auditing 2010-5.

The IASIFRS application on the intangible assets of non-listed companies 18 sign of the attention of the regulator. There is also an IASB project that aims to analyze the current requirements in IAS 38 with significant limitations in recognizing intangible assets and their subsequent remeasurement. In fact, IAS 38 does not allow the recognition of assets arising from research as well as those internally generated. In addition, only minimal requirements for the disclosure on intangibles that could compensate the limitations in recognizing and measuring them are specified. “The measurementremeasurement and recognition andor disclosure of intangible assets in accordance with the principles in the Framework would arguably improve the relevance and reliability of information in general purpose financial reports. Furthermore, the removal of the current difference in the treatment of intangible assets acquired in a business combination and internally generated intangible assets and between internally generated tangible and intangible assets would lead to consistent accounting for circumstances that are economically very similar.” IASB In accordance with this IASB project, Australian Accounting Standards Board 2008 has published a discussion paper that represents a proposal in recognizing internally generated intangible assets. In particular, it takes into consideration a cost-based model and a valuation-based model. The former considers only planned internally generated intangibles. The latter uses a technique based on a hypothetical business combination and accordingly, all internally generated intangible assets that would be recognised if acquired in a business combination under IFRS 3 should be recognised. The board highlights that if an internally generated intangible asset does not meet the relevant recognition criteria, in the interest of providing useful information to users, entities should be required to disclose a description of the asset and the reason why it fails to meet the relevant recognition criteria. This confirms that an improvement in financial reporting could be a wide and standardised disclosure template Lev, 2008 capable of offsetting the “loss of information” due to the adoption of IAS 38, that requires firms to write-off many types of intangible assets. In the notes, in fact, information on investment cost and its fair value could allow the safeguarding of the prudence principle from an accounting point of view and the true and fair view of the intangible contribution to the future profitability and cash flow generating capacity. The evidence of the authors’ study is a contribution to the empirical literature based on the broad consensus that the treatment of intangibles in current accounting systems is not appropriate Cañibano, 2000 and presents an inter-country disharmony Stolowy Jeny-Cazavan, 2001. Even if accounting research has not an immediate impact on accounting practice, the authors’ analysis is a further confirmation that a revision process on behalf of the standard setter is necessary Lev, 1997. Intangibles, in fact, are one of the determinants of the financial performance of firms and, therefore, they should be reported in the financial statement. In the meanwhile, a wider disclosure about intangibles could be the first step towards a recognition-based approach. References: Alfredson, K., Leo, K., Picker, R., Pacter, P., Radford, J. Wise, V.. 2007. Applying international financial reporting standards enhanced edition . Wiley. Alijarde, I. B. López, V. C.. 2002, May. 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Report prepared for the Commission of the European Communities Enterprise Directorate General. Edited by Linda and Mary May 2010, Vol.6, No.5 Serial No.60 Journal of Modern Accounting and Auditing, ISSN 1548-6583, USA 22 The impact of European firms’ economic conditions and financial performance on accounting quality Cláudia P. Lopes 1 , António M. Cerqueira 2 , Elísio Brandão 3 1. Accounting School, Institute Polytechnic of Porto, S. Mamede de Infesta 4465-004, Portugal; 2, 3. Faculty of Economics, University of Porto, Porto 4200-464, Portugal Abstract: In this study the authors analyse the possible effect of firms’ economic conditions and financial performance on accounting quality. Bradshaw, et al. 2004, Gelos WEI 2005 stated that financial reporting quality is fundamental for investors and it affects international capital movements. Following Schipper Vicent 2003, the authors estimated accounting quality by abnormal accruals and earnings persistence. The authors’ contribution consists of investigating a huge number of firms from 17 European countries using unbalanced panel data. The authors found evidence that economic conditions affect accounting quality: big firms and those with high current earnings exhibit better financial information. These results are robust because they do not depend on the accounting quality proxy, even when the authors estimated regression with economical and financial factors alone or together. Financial performance does not seem to affect accounting quality. However, this relation is not linear because in high leveraged firms, the capital structure becomes determinant. Key words: accounting quality; abnormal accruals; firms’ economic performance; capital structure

1. Introduction

In this study the authors analyse whether European firms’ economic conditions and financial performance affect their accounting quality. Several economic agents use financial reports in their decision-making processes. Investors decide whether to purchase a firm’s capital by analysing its financial reports because the capital market is not efficient in a strong way Fields, et al., 2001. Financial reports are crucial even in international capital movements Bradshaw, et al., 2004; Gelos Wey, 2005. Creditors decide to lend or not and they establish contractual conditions, namely interest rates, considering accounting numbers, as shown by Gopalakrishan 1994, Beatty Weber 2003. In addition, Francis, et al. 2005 stated that poor accounting quality leads to higher costs of debt and equity. Foster 1986 proposed that financial reporting decisions affect and are affected by other firms’ decisions. Acknowledgement: The authors would like to thank Francisco Vitorino Martins from Faculdade de Economia da Universidade do Porto for his suggestions. The authors appreciate comments from Chihchien Chiu discussant at the Fifty-Eighth Annual Meeting of the Midwest Finance Association. The authors also gratefully acknowledge the financial support from the Instituto Superior de Contabilidade e Administração do Porto and from Fundação para a Ciência e Tecnologia. Claudia Lopes, assistant professor, Accounting School, Institute Polytechnic of Porto; research fields: financial accounting, corporate finance. Antonio Cerqueira, associate professor, Faculty of Economics, University of Porto; research fields: corporate finance, financial markets and information. Elísio Brandão, professor, Faculty of Economics, University of Porto; research fields: corporate finance, financial accounting. The impact of European firms’ economic conditions and financial performance on accounting quality 23 Accountants face a trade-off between relevance and reliability of the accounting measurement. Richardson, et al. 2005 were concerned about the reliability. Therefore, intensive research has been done to investigate what factors affect earnings quality. Fields, et al. 2001 stated that financial information would be more accurate if investors understood managers’ motivations and their influence on a firm’s performance. These authors emphasized the importance of regulating managers’ behaviour, but noted the impossibility of eliminating the existence of accounting choices. Although many studies have been developed, the impact of firms’ size and performance on accounting quality is not consensual. Gopalakrishnan 1994 find that to avoid political costs firms above a certain size made income-decreasing choices. However, Demerjian, et al. 2006 Bradshaw, et al. 2004 concluded that huge American firms and those with good a performance are pressured to improve their accounting quality. By contrast, Astami Tower 2006 found evidence that size was not significant in accounting choice for Asian countries. In regards to the financial performance, the results of previous studies indicated a negative relation between leverage and the quality of financial reports. Beatty Weber 2003 stated that managers are more likely to make income-increasing accounting choices when debt-contracting calculations are affected. Gopalakrishnan’s 1994 results indicate that accounting policies are defined in order to avoid debt covenant constraints. This work adds to prior research the relevance of firm’s economic conditions and financial performance to explain the accounting quality for a large sample of European countries 17 and industries 40 using unbalanced panel data. This is an important contribution, especially given the conflicting evidence regarding the economic influence on accounting quality in non-European countries. In addition, the authors investigate whether those factors are significant, or not, regardless of the way accounting quality is estimated. Several methodologies have been developed to investigate earnings quality: 1 Accounting choice followed by Bradshaw, et al. 2004, Astami Tower 2006 using conformity ratios. 2 Income increasingdecreasing using a binary dependent variable and a logit model as done by Christie Zimmerman 1994, Beatty Weber 2003. 3 Abnormal accruals which are the residuals from a regression of total accruals depending on investments and sales. This methodology was introduced by Jones 1991 and modified by Dechow, et al. 1995. 4 Accruals map cash from Dechow Dichev 2002, Schipper Vicent 2003 based on the assumption that an abnormal accrual driven from errors in estimation or earning management will not turn into cash. 5 Earnings persistence discussed by Shipper Vicent 2003, Dermerjian, et al. 2006 which consists of estimating a regression of earnings as a function of past earnings. In this study, the authors use abnormal accruals and earnings persistence methodologies because the authors have data collection limitations and because they have been extensively used to assess accounting quality. The remainder of this study proceeds as follows. In section 2, the authors define the hypotheses to be tested based on the literature review. In section 3, the authors identify the data and methodology used in the empirical work. Several statistics are included and the econometric models are defined. In section 4, the authors present the evidence found in the empirical tests, which are then analysed. Some tests are performed to verify the robustness of the results in order to assure that they are not driven by some statistical problems. In the final section, the authors have some conclusions from the results obtained.

2. Hypotheses to test and literature review