Abstract
<p>The worldwide adoption of International Financial Reporting Standards (IFRS) is affecting many countries around the globe as it has become widely spread. Since 2007 the United States (US) allows foreign issuers to voluntarily adopt IFRS. This paper investigates the effect of IFRS adoption on earnings quality after voluntary IFRS adoption was allowed to foreign issuers in the US. More precisely, the discretionary accruals and the small positive earnings are tested for a sample of foreign issuers in the US that are registered and reporting with the SEC, comparing a pre-period from 2002 to 2006 with a post-period from 2008 to 2011. The results from the difference-in-differences regression analysis suggest that in terms of discretionary accruals there is no statistical difference between the pre-IFRS and the post-IFRS period, therefore the earnings quality remains the same. For small positive earnings it is found that, when foreign issuers incorporate IFRS, these are lower, indicating higher earnings quality.</p>
Highlights
In recent years the number of companies in the world adopting International Financial Reporting Standards (IFRS) as their main financial reporting standards has rapidly increased (AICPA, 2012)
This paper investigates the effect of IFRS adoption on earnings quality after voluntary IFRS adoption was allowed to foreign issuers in the United States (US)
A significant negative, but low, correlation is found between the absolute value of discretionary accruals and foreign issuers that are IFRS users, indicating they have a higher accruals quality (Sun et al, 2011)
Summary
In recent years the number of companies in the world adopting International Financial Reporting Standards (IFRS) as their main financial reporting standards has rapidly increased (AICPA, 2012). As the process towards making a decision about IFRS adoption for all publicly listed companies is continuing in the US, the SEC approved a new reconciliation rule earlier on November 15, 2007, which allowed foreign issuers in the US to file in accordance with IFRS and without reconciliation to US GAAP (Cascini & Rich, 2008; Yu, 2011; Sun et al, 2011; Sridharan & Soonawalla, 2011). Conducting research in a US context can be useful to the current debate on mandatory IFRS adoption for all publicly listed companies in the US and contribute to the decision-making of the US for joining the rest of the world in their implementation of a single set of high quality uniform reporting standards. Our paper concludes with a discussion of our findings, limitations of our work and areas for future research
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