Mandatory IFRS Adoption, Fair Value Accounting and Accounting Information in Debt Contracts

Abstract

A significant reduction in accounting-based debt covenants follows mandatory IFRS adoption, consistent with reduced contractibility of accounting information. We describe several properties of IFRS that could reduce contractibility, including increased flexibility given managers when selecting among and applying accounting rules, increased rule-making uncertainty, and increased emphasis on fair value accounting. The reduction in accounting covenant use is associated with measures of the difference between prior domestic standards and IFRS, defined in terms of both general and fair value accounting standards. Because IFRS adoption changed financial reporting in many ways simultaneously, it is difficult to trace the decline in accounting covenant use to individual IFRS properties, though we report larger declines in accounting covenant use in banks, which have a higher proportion of assets and liabilities that are fair-valued. Overall, IFRS rules appear to sacrifice debt contracting usefulness for objectives such as complying with an accounting measurement model focused on valuation uses.