Study on the Relationship between the Normalised Accounting Model and Financial Risk

• Author: Cristian Florin Gheorghe
• Position: PhD in progress, University 'Valahia' Targoviste, Romania
• Pages: 417-428

ISSN: 2067 – 9211 The Youth of Today - The Generation of the Global Development

417

Study on the Relationship between the

Normalised Accounting Model and Financial Risk

Cristian Florin Gheorghe1

Abstract: The adoption o f International Financial Reporting Standards in 2005 by listed European firms, and

accompanied by similar regulatory action across the globe, represents one of the most influential changes of

accounting rules in the history. The transition from a set of own accounting principles to a single common set of

accounting standards has affected thousands of companies that differ in terms of size, management structure, capital

structure, culture, legal environment and other characteristics2. These changes had a great influence on decision-

making processes and risk management thereby increasing the managers’ concern about the predictive value of the

financial statements3.

Keywords: IFRS; accounting model; financial risks; financial statements; fair vakue; sensitivity analysis

JEL Classification: M41; G32

1. Introduction

IASB “was born from the desire and the need to share at international level the accounting experience

specific to various countries, to harmonize cultural differences and socio-economic characteristics”

that “load” “national accounting systems and to develop a conceptual model consistency of financial

statements”.2 In the General Conceptual Framework for Financial Reporting, the IASB acknowledges

and states, as a limitation of general financial reporting purpose, that it “does not provide and cannot

provide all the information that existing and potential investors, lenders and other creditors need”.

Regarding the relevance of information, as a fundamental qualitative feature, the IASB states: “The

Relevant financial information must have the capacity to generate a difference in decisions taken by

users [..]3. Financial information would have this capacity if “they have predictive value, confirmation

value, or both of them”. By definition, they have the predictive value of whether “can be used as

entries in processes applied by users to predict future results”, and do not in themselves represent a

forecast or forecast. Also by definition, financial information has confir mation value if it “provides

feedback on previous assessments”.

The study conducted in 2010 and revised in 2012 namely “Does mandatory IFRS adoption improve

the information environment?” shows that, the accuracy of the estimates and other measures of the IT

environmental quality has been significantly improved as a result of the transition to International

Financial Reporting Standards, especially for companies obliged to adopt IFRS than either for those

who have voluntarily adopted or those who have not still adopted. The same study showed that the

1PhD in progress, University “Valahia” Targoviste, Romania, Address: Blvd. Regele Carol I 2, Targoviste 130024, Romania,

Tel.: 0245 206 101, Corresponding author: florin.gheorghe@energie.gov.ro.