IFRS adoption and financial statement readability: Korean evidence

Abstract

Accounting is often called a language of business and the grammar of the language is now under transition to a new one – the IFRS. Does the IFRS regime help make accounting a better business language than do other accounting regimes? That is our research question, and to answer the question we examine the effect of IFRS adoption on readability of firms’ financial disclosures. As a global accounting regime, the IFRS puts greater emphasis on understandability in financial reporting than do any other existing accounting standards. In many countries, however, adopting the IFRS involves the process of translating the original IFRS into local non-English languages, and apparently, the IFRS Foundation sticks to word-for-word or literal-translation policy to ensure an adopter country’s complying with the original IFRS. Understandability and literal translation, however, might be less than a good match. It is, therefore, timely and relevant to examine whether financial statement understandability has improved under the IFRS regime in non-English speaking settings. Korea serves as a real-world setting for research on readability of accounting information because Korea has two concurrent accounting regimes for two years before her complete IFRS adoption. We compare the 57 IFRS adopter firms and 943 non-such firms for readability of their disclosed financial statement footnotes. The univariate and multivariate results indicate that the IFRS-based financial statements have significantly lower, not higher, readability than those based on the local accounting standards. Results also show that minority shareholder population and firm age have significantly positive influence on the association between IFRS adoption and financial statement readability. The findings of this study have both academic and policy implications.