Measurement Income and Earnings Quality under IFRS 9, IAS 28, IFRS 3 and IFRS 16: Evidence from the Population of Listed Investment Companies on the Muscat Stock Exchange

In listed investment holding companies, reported profit is shaped to a large degree by accounting measurement rules rather than by operating margins. This study examined the complete population of ten investment holding companies listed on the Muscat Stock Exchange (MSX) over fiscal years 2021–2025, a census of 49 firm-years drawn from MSX XBRL annual filings. Reported profit was decomposed into core earnings and transitory items. Transitory items were defined as realised and unrealised fair-value gains (including IAS 40 investment-property revaluations), impairment charges and reversals, and named one-off gains arising under IAS 28, IFRS 3 and IFRS 16. Fair-value changes on equity instruments designated at FVOCI, which bypass profit or loss, were measured separately. The analysis used earnings-persistence regressions, dividend regressions, NAV-based price regressions and a Sloan-type next-year return test, with firm-clustered and wild-cluster-bootstrap inference. Transitory items account for 42% of aggregate reported profit, exceed half of profit in 22 of 49 firm-years (45%), and reverse the sign of earnings in 9 (18%). A further RO 40.1 million of fair-value gains on equity instruments designated at FVOCI never reach profit or loss. In regressions of next-year return on assets on current core and transitory return on assets, core earnings persist approximately one-for-one (coefficient 1.08, cluster-robust s.e. 0.23), whereas the transitory component does not (0.18, s.e. 0.21); a Wald test rejects equality of the two coefficients (p = 0.004). Cash dividends per share respond to core earnings per share (coefficient 0.146, p < 0.001) but not to transitory earnings per share (0.063, p = 0.34). The median transitory share is 0.55 for the ten firm-years in which managers chose stock, perpetual bonds, or convertible bonds instead of cash, compared with 0.09 for firm-years with cash-only dividends. Share prices load on net asset value per share; neither earnings component adds significant explanatory power once NAV is controlled for. Next-year market-adjusted returns are negatively related to current transitory return on assets (coefficient −3.6, p = 0.03). This pattern is consistent with partial mispricing in a thin market, although risk, illiquidity and information-asymmetry explanations cannot be excluded. The results show that the IFRS 9 prohibition on recycling FVOCI equity gains, combined with IAS 28 reclassification gains that do pass through profit or loss, makes reported profit depend on the classification path of the same holding. This is relevant to standard-setters and to GCC rules that base distributable profit and directors’ remuneration on unadjusted net profit.

earnings quality; earnings persistence; fair value

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