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Archives Des Sciences Vol 65, No.

6;Jun 2012
361 ISSN 1661-464X


The effect of conservatism on the usefulness of financial reporting

Mohammad Ali Aghaei

, Hossein Etemadi, Ali Asghar Anvary Rostamy,
& Halimeh Rahmani
Department of Management and Economy, Tarbiat Modarres University, Iran

Abstract
Background: The empirical evidences show that usefulness of financial reporting will decrease
by time. It is claimed that the main reason can be related to an increase in conservatism. Thus, in
this paper we investigated whether the usefulness of financial reporting is downward or not. The
effect of conservatism on the usefulness of financial reporting was also taken into account in this
study.
Method: In order to measure usefulness and conservatism, Ohlson (1995) and Wang (2009)
Models were used respectively. Also, in order to find the downtrend in usefulness of financial
reporting, regression model was used. The sample of this study includes 85 accepted companies
in Tehran Stock Exchange which their data have been analyzed from 1997 to 2010.
Results: Results indicated that usefulness of financial reporting is downtrend in research period
and conservatism is uptrend. Results showed as well that conservatism cannot be regarded as the
reason for a decrease in usefulness during the research period.
Keywords: usefulness of financial reporting, usefulness of income statement, balance sheet
usefulness, conservatism.




Corresponding author: aghaeim@modares.ac.ir
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1. Introduction
The main goal for financial reporting is to give useful data to some users such as
investors, creditors and managers. Usefulness concept originates from Ball and Brown (1968)
and Beaver (1968) researches who investigated accounting data usefulness in users decision
making. The main goal for the accomplished researches about usefulness is to check whether
there is a statistical relationship between accounting and market variables. Majority of those
researches indicate a decrease in usefulness of financial reporting over time ( e.g. Lev &
Zarowin, 1999; King & Langli,1998; Balachandran & Mohanram, 2010; Alali and Sheldon
Foote, 2012). According to researchers, the most important reasons which have caused a
decrease in usefulness of financial reporting over time is conservatism in accounting
(Balachandran & Mohanram, 2010). But, there are different ideas about method of conservatism
effect on usefulness. According to some researchers, conservatism causes a decrease in
usefulness of financial reporting, but many of other researchers believe in opposite that
conservatism causes an increase in usefulness of financial reporting. Experimental witnesses also
confirm the existence of a negative relationships in some cases and positive relationships in some
other cases (i.e. Wendt, 2010; Balachandran & Mohanram ,2010; Paek at al., 2007). In this
study, first we try to study how the flow of usefulness of financial reporting is in Iran, and
second to investigate whether or not accounting conservatism can play role and whether that
effect is negative or positive.
1.1. Usefulness of financial reporting
Theoretically, the usefulness means that data guides the investor in a way so they revise
their beliefs and actions (Scott, 2003). Indeed, it has given different operational definitions
about usefulness. We refer to Kam’s (1990) and Francis and Schipper’s (1999) classification
about definitions of usefulness.
Kam (1990) gives a comprehensive classification about usefulness definitions.
According to him, if investors use the data it means that data are useful. He introduces three
ways to determine usefulness. One method he states is to study the relationship between stock
prices and financial reporting data specially profit. He justifies that a specific item is useful if it
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can influence the investors' beliefs about stock value. Moreover, he describes that there is a
statistical relationship between the item and stock prices. This method has had the most
application among accomplished researches (i.e. Ohlson, 1995; Francis & Schipper, 1999;
Aboody et al.. 2002 ). It is checked whether or not the financial variables can explain market
variable fluctuations. Those variables are considered useful when we consider this issue as
correct.
Also, Francis and Schipper (1999) have introduced four approach points regarding
usefulness including fundamental approach, predictability approach, information approach and
measurement approach.
According to the fourth approach, which is the newest and the most widely used one, we
can infer that if one or some accounting items have a significant relationship with Market
criteria, those items and their sums record and accumulate data which is utilized by market
participant in pricing or stock return determination. Accounting data usefulness could be defined
in this approach as accounting items ability to explain stock price or return.
Also, in current study, this approach is used to evaluate usefulness which matches the
third approach that Kam (1990) has introduced. The reason for utilizing the third approach is
that there is no need to consider market efficiency as default according to the forth. On the other
hand, this approach has been used in many researches and its use is easier and more reliable
(Balachandran and Mohanram, 2010).
A lot of researches done in this area have considered accounting data ability in predicting
stock price and define usefulness as stock price coefficient of determination (R
2
) to accounting
data (Collins, Maydew & Weiss, 1997; Francis and Schipper, 1999; Lev & Zarowin,1999;
Brown, Lo & Lys, 1999).



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364 ISSN 1661-464X


1.2. Conservatism Definition
Conservatism means to utilize a level of care which is needed in judgment for evaluation
in ambiguity conditions so that incomes or assets are not calculated more than real and
expenditures or debts less than real. Applying the care should not result in creating hidden or
unnecessary reserves or estimate assets and incomes less than real and debts and expenditure
more than real intentionally, because it violates neutrality and influences financial data reliability
(conceptual framework of financial reporting).
Accounting conservatism influences both income statement and balance sheet. Actually,
conservatism is a tool to prevent managers' opportunistic actions which potentially might
decrease informationreliability. On the other hand, if the manager decides to be more
conservative in identifying financial statements items, it causes to underestimate the value of the
company and to persuade other companies to acquire and integrate with it. In both situations
(lack of conservatism and excessive conservatism), the given data cannot be correct (Wendt,
2010).
1.3. Reasons for Conservatism
The reasons which have been mentioned in different texts could be categorized in four
following categories (Rahmani et al., 2011):
1. Contracts: In lots of contracts with third parties such as investors, creditors, employees and
other stakeholders, accounting information is used as a basis for decreasing the agent expenses in
relation to the company. Both sides of contract, always want to utilize timely evaluation basis in
it, but a lot of evaluation basis, which can offer timed data, are not easily confirmable by them.
Reliability is one of the principle characteristics of measurement basis or components.
2. Legal claims: According to Stock Exchange laws, legal claims against companies which give
incorrect financial statements items, encourages companies to use conservative accounting.
Disciplinary procedure in accordance with Article 21 includes disqualifying publisher managers,
halting trading temporarily or suspension and cancelation of publisher's securities in Stock
Exchange. The reason is that the legal claim probability in cases which net profit is
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overestimated is more in comparison to the cases in which net income is underestimated. So,
auditors and managers prefer to state net income less than real and it means moving toward
conservative accounting.
3. Tax: Tax incentives have always influenced on how to calculate net income. Thus, in order to
decrease the present value of paid tax , companies intend to postpone their incomes (profits)
identification and rush to their expenses (losses).
4. Standard setting Institutions and Regulators: The political costs of stating assets and income
more than real in comparison to stating expenses less than real are more for editors and
statesmen and it results in using conservative accounting.
1.4. Relationship between usefulness and conservatism
Theoretically, there are two opposite approaches toward the effect of conservatism on
usefulness of financial reporting. In accordance with first approach, by lots of researchers,
conservatism in accounting is one of the most important reasons for usefulness of financial
reporting decrease (Balachandran & Mohanram, 2010). It means that accounting is weak in
identifying intangible assets such as Research and Development and advertisement costs in
balance sheet. Because of conservatism, these kinds of costs are considered as expenses instead
of being capitalized. This increases the book value of a company in comparison to the period
which those capitalized. As well, if market validates these intangible assets correctly, it causes an
increase in difference between the book and market values of the company (Balachandran &
Mohanram, 2010). Researchers have different opinions regarding conservatism role in
decreasing usefulness of financial reporting. In other words, researchers believe that accounting
procedures such as expensing the costs instead of capitalizing themis excessively conservative so
that result in accounting incapability in doing its duty (Stern Stewart, 2002). Moreover,
according to some other researchers' ideas, amount of intangible assets is growing continuously
which can decrease the balance sheet neutrality and usefulness (Lev & Zarowin, 1999).
On the other hand, in second approach, scholars believe that conservatism, in opposite,
increases the usefulness of financial reporting. According to them, conservatism requires high
reliability and verifiability level about data and one of the main advantages of conservatism is to
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increase the reliability of the given data. It minimizes mistakes and so increases reliability. This
growth in reliability can result in usefulness growth (Sterling, 1967; Watts, 2003).
Empirical evidences also are not consistent and in some cases show negative relationship
and in some other cases indicate positive relationship between conservatism and usefulness of
financial reporting. This kind of inconsistency has two reasons. First, most of these researches
have been done in a short-term period which according to Easton and Harris (1991) if we
increase the time of doing research, those inconsistencies will be solved. Second, in some
researches, the income usefulness relationship, in some other researches, usefulness of book
values relationship and in the other researches the total usefulness relationship (income and
book values) have been tested conservatively. Thus, if usefulness criterion becomes uniform,
these inconsistencies might disappear (Wendt, 2010).
So, it is not clear that conservatism whether increases or decreases the usefulness. If
conservatism results in removing useful data from financial statements, it decreases the
usefulness. But, if it prevents to give unreliable data in financial statements, it will increase
usefulness. Therefore, the influence of conservatism on usefulness is obscure. Heretofore,
empirical evidences have also contradictory results about the relationship between conservatism
and usefulness.
2. The research background
2.1. Researches related to usefulness of financial reporting
The first research about usefulness of financial reporting with measurement approach was
done by Amir et al. (1993). Then, Ohlson’s (1995) and Feltham and Ohlson’s (1995) studies
introduced an infrastructure aimed at redefining research goal about relationship between
financial statements and firm value and provided a structure in this regard (FaalQayyuomi,
2007). Ohlson (1995) offered a model to measure usefulness in which the relationship between
profit and share book value with stock price is studied as accounting data index. Then, using
Ohlson model, a large number of researches have been done regarding usefulness of financial
reporting. The researches about usefulness of financial reporting mainly indicate that usefulness
of financial reporting has been uptrend by time. As a sample, Elliot and Jacubson (1991) believe
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that current financial reporting model based on periodic assumption and cost is historical/ancient
and could answer ancient industrial era, but in modern era when data has an important role
cannot be responsible and it may lose its usefulness.
Further , Rimerman (1990) and Jenkins (1994) acknowledge that the main issue is a
decrease in usefulness of financial reporting these days. In example, assets such as data,
innovation capacity and human resources are not reported in financial statements. Hence, as a
part of input data of investors' decision making system, their role is decreasing.
Aboody and Lev (1998) investigated the usefulness of intangible assets regarding
capitalizing expenses for providing software. The result showed that intangible assets are
significantly related to capital market variables and future profit. They concluded that
capitalizing expenses of software give useful information to users.
A research done by Lev and Zarowin (1999) about usefulness of financial reporting in
the USA capital market during 1978 and 1996, indicated that an increase in non-reported
intangible assets importance and financial reporting inability to follow the changes in
professional environments and reporting its effects has caused a decrease in usefulness of
financial reporting. They believe that in current situation in which there are innovation and
competition, financial reporting has somehow lost its usefulness. These scholars suggested that
in order to increase usefulness, intangible assets such as costs spent on making a software,
information technology, brands and human resources should be capitalized instead of being
spotted as expense. According to Lev and Zarowin (1999), if we do not capitalize costs of
making a software, information technology, brands and human resources violates matching
principle. It means that these expenditures spotted as expense when they are created while their
profit will be realized in future years. The calculated R
2
for regression between profit and
efficiency was 6 to 12 percent in the first ten years and was 4 to 8 percent for the second ten
years. They also recommended that because of current uncertainty at the time of publicizing
financial statements, the financial statements should be revised systematically.
Regarding a decrease in the usefulness of book value, Landsman and Maydew (2002)
believe that the traditional economy based on tangible assets and production has changed to the
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modern economy based on intangible assets and data and services, while accounting has not
experienced those changes. Experimental evidences indicate unrecognized intangible assets
which are related to innovative and creative activities. They believe that one of the reasons for
decreasing the usefulness of financial reporting is continuous increase of competition and
communication role - which results in users’ access to timely, inexpensive, and non-accounting
information. As a result, the importance of accounting data as an information resource has
decreased which is similar to other information resources from timeliness point of approach.
Dontoh et al. (2004) believe that the usefulness of balance sheet has decreased because
the traditional capital-based economy has changed to the modern economy based on service and
technology in which the companies are knowledge-based. Such companies usually have
intangible assets which are not recognized in balance sheet whereas it contains valuable
information for users and justifies difference between book values and fair values.
Dahmash et al. (2009) believe that intangible assets are of the most controversial topic
which standard setters are facing. They believe that experimental researches and intangible assets
provide usefulness and useful information for investors respectively. Companies expend millions
of dollars to create and develop new intangible assets.
Balachandran and Mohanram (2010) also acknowledge that usefulness of balance sheet
has decreased because of incapability of financial reporting in recognition and reporting the
increasing expenses of some items such as costs of research and development and advertisement
in balance sheet. The concluded that in companies which conservatism has not increased during
research period, usefulness has had a considerable decrease.
Furthermre, Alali and Sheldon Foote (2012), in their study investigated the data
usefulness in Abudhabi capital market. Resulted indicated that the information usefulness has
been downtrend from 2000.


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2.2. The researches related to the relationship between usefulness of financial
reporting and conservatism
In a research done by Saqafi and Sadidi (2007), the effect of qualitative characteristic of
conservatism on quality of earnings and return on stock has taken into account. Their criterion
for the quality of earnings was earnings stability. In order to measure the qualitative
characteristic of conservatism, the ratio of financial reserve due to applying conservatism
procedures in comparison to other ways has been used to the companies’ operating assets in this
study. Those investigators brought something as control variables in their research model such as
the rate of return on operating assets, profit margin, asset turnover and the rate of stock return.
Their hypothesis model was the multiple regression. The research was done from 1992 to 2005.
The results of hypothesis test showed that a firm can change the conservatism quality by change
in investment amount through selecting conservatism accounting method.
Mashayekhi et al. (2009) studied the relationship between conservatism qualitative
characteristic with earnings stability and the amount of income dividends. Givoly and Hyen
model (2000) was used to measure conservatism qualitative characteristic. According to their
prediction, earnings stability decreases simultaneously with increase in conservatism. But the
study results showed no relationship between these two variables. However, the hypothesis was
accepted in an appropriate significance level when they used the adjusted ratio of net asset value
of the market to their book value for measuring conservatism.
Rahmani et al. (2011) studied the relationship between conservatism qualitative characteristic
and the informational content of financial reporting. Their criterion for usefulness of financial
reporting was net income content which has been measured by easton and Harris model (1991).
They have utilized three models of Basu (1997), Ball and Shivakumar (2005) and Ball et al.
(2000) in order to measure conservatism. Their research period has been from 1998 to 1988.
Results of hypothesis test of this research indicated that conservatism qualitative characteristics
result in decreasing the usefulness of financial reporting and could not lead to an increase in the
investors’ return.
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Collins et al. (1997) investigated the change in usefulness of accounting data in the
period of 1953 to 1993. Using price model, they realized that usefulness of data has not
decreased in that period. Of course, usefulness of accounting earnings has decreased in that
period but usefulness of book value has compensated for it. According to these scholars, when
loss (conservatism in profit recognition) is reported or there are some unexpected items (unusual
or extraordinaty items) in income statement, usefulness of book value increases in comparison to
earnings . As well, increase in economical importance of un-reported intangible assets results in
decrease of balance sheet usefulness. According them, when profit is reported negatively or there
is unexpected items in profit, usefulness of book value increases in comparison to profit.
Penman and Zhang (2002) evaluate the effect of conservatism on usefulness of financial
reporting in their study. The criterion for usefulness of financial reporting is earnings stability
which is introduced as earnings high quality. By them, if a company emphasizes on
conservatism, it results in change the amount of investment and finally influences the earnings
quality. Investment growth causes to profit decrease and reserve increase and vice versa. Their
results states that conservatism yields in earnings quality decrease.
Balachandran and Mohanram (2010) examined the relationship between conservatism
quality characteristics and the usefulness amount of financial reporting. The criterion for
usefulness of financial reporting has been net profit content which was determined by regression
coefficient of determination of net profit and changes. Their reason for choosing the
conservatism was some other researchers' claim who consider conservatism as usefulness
decrease factor. So, these two scholars tried to test that claim. In this study, two models of
Penman and zhang (2002) were used to measure conservatism. This study concluded that
earnings usefulness in high conservative companies is more in comparison to other companies.
Brown et al. (2006) investigated the relationship between conservatism and usefulness of
accounting information in their research among twenty countries. These researchers similar to
Balachandran and Mohanram (2006) were trying to prove usefulness decrease claim by
conservatism increase but these scholars investigated that claim in different countries whereas
Balachandran and Mohanram (2010) investigated it only in one country. They concluded there is
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a positive relationship between conservatism level and usefulness of accounting data in countries
where accruals are high in accounting data.
Paek et al. (2007) studied the effect of conservatism on earnings stability in their
research. By them, regarding that utilizing conservative accounting procedures results in
accelerting loss recognition in current period and recognizing and reporting profits gradually
during future periods thus the probablity of repeating positive profit changes for some periods is
more than the probablity of negative repeating profit changes for some periods.Their study
results indicated that the profit which have been applied by more conservatism are more instable
in comparison to those which have been applied by less conservatism. Therefore, more
conservative profits influence the usefulness of financial reporting negatively because it
decreases profit stability and predictability and deviates investors in making correct economical
decisions.
Wendt (2010), in his thesis, investigates the conservatism effect on usefulness of
financial reporting. He utilized price model to measure usefulness of financial reporting. He used
that model because other models have not been effective enough in measuring usefulness and
their results were incompatible. The study concluded that conservatism does not have negative
effect on usefulness.
2.3. Research questions and hypotheses
A point which is considered in this study is the usefulness trend of financial reporting
during research period. As indicated, the empirical evidences about usefulness trend of financial
reporting expresses that the usefulness of financial reporting has decreased by time. By
considering the above-mentioned purpose, the following research questions were suggested.
Q1: Does the usefulness of financial reporting decrease by time?
H
1
: Usefulness of financial reporting decreases by time.
A lot of scholars consider conservatism in accounting as a reason for decreasing
usefulness. Thus, the effect of conservatism on usefulness of financial reporting is studied in this
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research. As already mentioned, the effect of conservatism on usefulness is not obvious both
theoretically and experimentally. Therefore, the second question and hypothesis of research is:
Q2: How is the effect of conservatism on usefulness of financial reporting?
H
2
: Conservatism influences the usefulness of financial reporting.
3. Methodology
This research is based on quasi-experimental and descriptive research. The research
method is of the correlation type and based on multiple regression analysis in which scholar
takes into account the relationship between variables – based on the current theories and study
results. The data were analyzed by SPSS software.
3.1. Measurement Variables
3.1.1. Usefulness of financial reporting measurement
Ohlson model (1995) is used in this research for measuring usefulness of financial
reporting. The model which introduced by Ohlson (1995) is:

Assuming that:
: earnings before extraordinaty items
: book value of equity per share of firm i at the end of period
: stock market value at the end of period
: usefulness of book value
: earnings usefulness

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3.1.2. R
2
indicates overall data usefulness. The more R
2
is, the more the usefulness is.
Conservatism measurement
Among the different methods which have been expressed for conservatism measurement,
Wang model (2009) was used in this research for conservatism measurement. This is an
adjusted model of one which was introduced by Basu (1997) but it does not have its errors and
discrepancies. This model is known as DAB and is in the following form:




it
NIBI : Net Income before Interest Expense, calculated as Net Income After Tax + Pre-tax
Interest Expense..
1 − it
V
: Firm economical value (including asset and debt) which is calculated using Vit = DEBT
it

+ MVE
it
equation. In this equation, MVE
it
is stock market value and DEBT
it
is the book value of
all debts of the company.
it
TR
: Rate of return on firm value which is calculated using TR
it
= (Vit –V
it-1
-CFF
it
)/V
it-1

equation. In this equation, CFF
it
equals to net cash flow of financing activities.
it
DTR
: Is dummy variable which its value is 1 if
0 〈
it
TR
, otherwise 0 if
0 ≥
it
TR
.
Conservatism criterion is
1
b in this model. The greater this coefficient, the more the conservatism
is.
3.2. Investigating the usefulness process of financial reporting and conservatism
Regression model is uesd to test whether there is an uptrend or downtrend in usefulness
of financial reporting and conservatism:
ܷ

= ߙ

+ ߚ

∗ ܻܧܣܴ + ߝ
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in which:
U

: R
2
as Ohlson model for each study period (for investigating usefulness trend of financial
reporting) or b

VangWang model for each study period ( for investigating conservatism trend)
: The year of the study period. So, it is 1 for 1997 and one will be added to each next year
until 2010 which will be 14.
: Line slope which expresses the process in the usefulness of financial reporting or
conservatism) and its sign indicates the trend direction.
3.3. Hypothesis testing
The four following steps should accomplished in order to test the hypothesis:
Step 1: Investigating the related companies’ usefulness of financial reporting during study period
To investigate the companies’ usefulness of financial reporting, firstly, R
2
of that model
for all companies is calculated using Ohlson model (1995) in each year. Then, usefulness of
financial reporting diagram of each company is drawn according to yearly average R
2
.
Afterward, the trend index of the company is calculated by trend regression model. This index
expresses usefulness uptrend or downtrend. Doing this, the first hypothesis of study is tested.
Step 2: Investigating the conservatism of the companies during study period
Similar to the process done for investigating usefulness trend of financial reporting in
first step, conservatism trend is defined in this step. But, b1 index of Wang model (2009) is used
instead of R
2
of Ohlson model (1995).
Step 3: The classification of the companies according to the amount of conservatism
In this step, the average of conservatism index (ܾ

of Wang model) of each sample firm
is calculated for the whole period. Then, companies are arranged according to this index and
categorized to three groups with equal quantity. First group includes 28 companies which their
index average of conservatism is at the highest level. Second group, as well, includes 28
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companies which their index average of conservatism is at the medium level. Third group
includes 28 companies as well which their index average of conservatism is at the lowest level.
Step 4: Studying usefulness trend of financial reporting for each group
After the companies’ classification in the third step, the usefulness trend of financial
reporting is identified. If change in more usefulness is concentrated in the companies which their
conservatism index amount is at the highest level, it means that scholars claiming conservatism
effect on companies usefulness are acceptable and so, the second hypothesis of research is
proved. But, if change in usefulness of financial reporting is divided among three groups equally,
the hypothesis is rejected.
4. Results
4.1. The study of the companies’ usefulness trend of finacial reporting during
research period
Table 1 shows R
2
of Ohlson model for each period. Usefulness trend of reporting has
been drawn in diagram 1.
Table 1. R
2
of Ohlson model for each period
Perio
d
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
R
2
65.
2
61.
5
63.
8
60.
4
58.
7
64.
2
64.
2
58.
0
56.
3
61.
0
61.
0
56.
0
50.
0
44.
0

Diagram 1: Usefulness trend of financial reporting during research period
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Using trend regression model, the amount of trend index for usefulness of financial
reporting is equal to -1.109 and its p-value is zero which indicates the usefulness of financial
reporting downtrend during research period. Thus, the first hypothsis of research which was "
usefulness of financial reporting will decrease by time" is confirmed by 95%.
4.2. Investigating companies conservatism during study period
Table 2 indicates b
1
of Wang model for each period . Conservatism trend has been drawn
in diagram 2.
Table 2: b
1
of Wang model for each period
Peri
od
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
b
1
0.1
21
0.1
35
0.1
15
0.1
60
0.1
47
0.1
47
0.1
40
0.1
50
0.1
70
0.1
68
0.1
88
0.1
84
0.1
91
0.1
90
Diagram 2: Conservatism trend during research period
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
1 2 3 4 5 6 7 8 9 10 11 12 13 14
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Using trend regression model, the amount of trend index for conservatism is equal to
0.003 and its p-value is 0.01 which indicates the usefulness of financial reporting uptrend during
research period.
Considering that usefulness trend of financial reporting is downtrend while conservatism
trend is uptrend, so it is possible that conservatism might influence usefulness. Therefore,
researcherds' claim about usefulness decrease by conservatism can be confirmed. But, this claim
can not be accepted with confidence. Usefulness downtrend and conservatism uptrend might
have been happened randomly. Thus, two following steps should be done for testing the second
hypothsis.
4.3. Studying usefulness trend of financial reporting of each group
The companies’ usefulness trend of financial reporting of each three groups has been
drawn in Diagram 3 in order to study the relationship between conservatism and usefulness of
financial reporting more precisely. As seen, change trend in usefulness of financial reporting
does not have any considerable difference among those three groups. Thus, change in usefulness
cannot be considered as result of change in conservatism. In fact, these two events - usefulness
downtrend and conservatism uptrend – has been synchronized randomly and there is no
relationship between them.
0.000
0.050
0.100
0.150
0.200
0.250
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Series1
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Diagram 3: Usefulness trend of financial reporting of each group of firm

5. Conclusion
Decrease in usefulness of financial reporting has been emphasized by many researchers.
In one hand, conservatism increase in accounting has been criticized by many people and they
claim that increase in conservatism is a reason for decrease in usefulness of financial reporting.
The accuracy of this claim has been tested in this study. So, the relationship between
conservatism and usefulness has been taken into account in this study. The results of previous
researches are not synchronized in this regard and usually violate each other. As an example,
Penman and zhang (2002), in their study done for evaluating conservatism effect on usefulness
decrease, concluded that conservatism resulted in usefulness decrease, whereas Balachandran
and Mohanram (2010) in a research concluded that conservatism resulted in increasing the
usefulness. Also, Lev and Zarowin (1999) concluded that usefulness of the companies with high
research and development expenses has decreased by time and claimed that it was because of
conservatism increase and not to consider these expenses as capital asset, whilst Francis and
Schippers (1999) did not conclude for these companies.
In this article, Ohlson’s model (1995) and Wang’s model (2009) has been used for
measuring usefulness and conservatism respectively. According to the study results, usefulness
trend of financial reporting has been downtrend during research period. It matches with previous
0
10
20
30
40
50
60
70
80
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
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study results which have claimed that usefulness trend of financial reporting was decreasing (i.e.
Landsman & Maydew, 2001; Aboody & Lev, 1998; Dontoh et al., 2004; Dahmash et al., 2009).
A factor which most researchers consider it as increasing factor for usefulness of financial
reporting is conservatism increase in accounting. So, the effect of this factor on decreasing the
usefulness of financial reporting was taken into account in this study.
Results indicated that there were not considerable evidences which showed that
conservatism increase caused decrease in usefulness of financial reporting. These results confirm
those of Brown et al. (2006), Balachandran and Mohanram (2010) and Wendt (2010). Those
scholars investigated this claim in their study and concluded that conservatism did not cause a
decrease in usefulness.
Moreover, according to the first approach regarding conservatism effect on usefulness,
conservatism results in an decrease in usefulness as it causes to delete a lot of useful data about
assets such as research and development from financial statements. This research results showed
that it could not be true. In one hand, in accordance with the second approach, about the effect of
conservatism on usefulness, conservatism results in usefulness increase as it causes an increase
in data reliability and the capability of investigation. By taking the results of current study into
account, this approach cannot be correct as well. Thus, it is possible to consider the decreasing
trend of usefulness because of other factors such as incapability of financial reporting in
accompanying with changes in professional environment and reflecting its effects, lack of
timeliness of financial reports, profit instability, continuous increase of competition and
communication roles which result in users access to timely, inexpensive and non-accounting data
and using periodical assumption and historical cost.
Consequently, although empirical evidences of this study do not confirm the negative
relationship between conservatism and usefulness, but we should pay more attention in
generalizing it to the whole population, because negative relationship between conservatism and
usefulness has not been discovered due to some limitations throughout this study. Some of these
limitations are industry variety in sample companies, different size of companies, data error
probability and probable unreliability of measurement models.
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Another topic which was studied in this research was conservatism trend. By results,
conservatism trend in this study was uptrend. It means that conservatism in accounting increases
by time. This result matches with reality. At the present time, there are a lot of conservatism
samples in accounting standards which by increase in standards quantity, they increase too. As
an example, we can refer to conditions of income and assets identification. According to
accounting standards, the main condition for income identification is the possibility of
transferring future economic interests related to transaction to business unit. Therefore we should
not try to identify unless we ensure of approaching assets to cash flows . However, if business
unit faces costs which has considerable ambiguity regarding its future economical benefits, it
should spend these costs when it happens. In other word, in order to identify income, stricter
criteria have been developed in comparison to cost and debt. Samples of conservatism use are
seen in accounting standards,9, 11, 8, 15 and 17. (Rahmani et al. , 2011)












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