infonet-economy

This study examines whether the adoption of International Accounting Standards and International Financial Reporting Standards by German firms in 2005 improved earnings' predictive power with regard to forecasting future operating cash flow. We consider earnings' predictive power as one dimension of accounting quality. We use a data sample of German DAX and MDAX firms ranging from 2001 to 2011. The sample is split into two distinct subsamples (time period before and after 2005, the year of the adoption of International Accounting Standards) to test whether earnings' predictive power has changed. We employ a disaggregated cash flow forecasting model in which earnings are split into the components cash flow and accruals. Accruals are further decomposed into individual accrual measures. We predict that the adoption of International Accounting Standards affected accruals differently and that the model's overall predictive power improves after the adoption. Our results do not support the IASB's claim that International Accounting Standards are superior to German-GAAP and have a significantly positive impact on earnings' predictive power.