Do IFRS Promote Transparency? Evidence from the Bankruptcy Prediction of Privately Held Swedish and Norwegian Companies

Akarsh Kainth,Ranik Raaen Wahlstrøm

doi:10.3390/jrfm14030123

Abstract

The purpose of our paper is to investigate whether any differences between International Financial Reporting Standards (IFRS) and local Generally Accepted Accounting Principles (GAAP) impact the transparency of financial reporting of non-listed companies through bankruptcy prediction. This contributes to extant research that has focused on the effects of IFRS adoption in the context of listed companies. For our investigation, we used logistic regression, well-established accounting-based predictors, and a sample of financial statements from privately held Swedish companies using IFRS, and Norwegian companies using Norwegian GAAP. The results indicate that financial statements made under IFRS may be better suited for bankruptcy prediction than those made under Norwegian GAAP. Our findings suggest that the use of IFRS could aid in increasing the informativeness of financial reports by promoting transparency and prevent managers of firms facing insolvency from engaging in creative accounting practices. Our results should, however, be applied with caution, as they may be due to the differences in characteristics across firms that are not captured by our research design. We leave this issue open to future research.

Highlights

The use of International Financial Reporting Standards (IFRS) can prevent managers from engaging in creative accounting practices in order to mask the credit risk of their companies (Bhat et al 2014; Bodle et al 2016). All of this should make financial statements based on IFRS more relevant to stakeholders than those based on local Generally Accepted Accounting Principles (GAAP). We evaluate this by investigating whether the use of IFRS relative to local GAAP improves the transparency of financial reporting through bankruptcy prediction
Our findings suggest that financial statements based on IFRS yield better bankruptcy prediction models, compared to those based on Norwegian GAAP (NGAAP), both in terms of in-sample fit and out-of-sample performance
This paper examined the impact of using IFRS on the transparency of financial reporting through bankruptcy prediction models using accounting-based input variables

Summary

Introduction

Predicting company bankruptcy is at the core of credit risk management and important for academics, regulators and practitioners (Bărbută-Misu and Madaleno 2020). The use of IFRS can prevent managers from engaging in creative accounting practices in order to mask the credit risk of their companies (Bhat et al 2014; Bodle et al 2016). All of this should make financial statements based on IFRS more relevant to stakeholders than those based on local GAAP. We evaluate this by investigating whether the use of IFRS relative to local GAAP improves the transparency of financial reporting through bankruptcy prediction

Objectives

Results

Conclusion