Exploring the Relationship between Changes in Accounting Policies and Valuation of Australian Banking Firms

The Australian Accounting Standards Board (AASB) and the International Accounting Standards Board (IASB) state in their objectives that they are committed to producing quality accounting standards in the public interest to enhance the decision usefulness of accounting information. Cooperation between the AASB and IASB began in aid of the development of internationally accepted Australian accounting standards after the issuance of Policy Statement 6, ‘International Harmonisation Policy’, in 1996. The AASB adopted a two-pronged approach to changing Australian accounting standards: it introduced changes in accounting standards for issues not covered in international accounting standards, and also adopted international accounting standards to provide decision-useful information to the users of financial statements.\ud The introduction of new accounting standards and changes to the existing standards affected the financial statements of firms, including Australian banking firms. Firms that are affected by the introduction of new accounting standards or changes in accounting standards are required to provide complete disclosure of both quantitative and qualitative information to improve the economic decision making of the users. However, the concept of users in the conceptual framework is narrowly focused on the information needs of investors as the users of accounting information. Investors rely on the recommendations of financial analysts for investment decisions, and financial analysts value firms by using accounting information as input for valuation models to generate recommendations to buy, sell or hold decisions for investors. The objective of this research is to investigate the impact of changes in accounting policies on the forecasted values of Australian banking firms for the period 1997–2007. The objective is not to predict forecasted share prices accurately, but rather to use forecasted share prices generated through the use of various valuation models used by financial analysts to identify whether changes in accounting policies due to the changes in accounting standards have resulted in decreases in forecasting error