Abstract
This study examines the role of International Financial Reporting Standards on financial reporting quality and the global convergence. The IFRS adoption is already an issue of global relevance across countries of the world due to the quest for uniformity, reliability and comparability of financial statements of companies. The adoption of IFRS in Europe is an example of accounting quality across-borders with different institutional frameworks and enforcement rules. This allows investigating whether, and to what extent accounting regulation per se can affect the quality of financial reporting and leads to convergence in financial reporting. Specifically, the study review how the change in the recognition and measurement of firms operating accrual item, the loan loss provision, affects income smoothing behaviour and timely loss recognition. The study found that the IFRS convergence reduces the scope for earnings management, is related to more timely loss recognition and leads to more value relevant accounting measures. Thus, the study reviews background and guidance on the change in financial reporting quality following extensive IFRS adoption around the world countries. The study found that a difference in accounting quality is related to country’s overall infrastructure setting. The study also highlights the importance of investor protection for financial reporting quality and the need for regulators to design mechanisms that limit managers' earnings management practice. The study found from different literatures that the adoption of IFRS leads to higher quality of accounting numbers and improve foreign direct investment across countries.
Highlights
Diversity in the preparation of international accounting practice attracts much attention
The European Union (EU) Parliament passed a regulation that requires all companies listed in the EU to adopt International Financial Reporting Standards (IFRS) for fiscal years starting after 1 January 2005
Benefits of Convergence to IFRS Globalization has prompted many countries to open their doors for foreign investment and as business themselves expand across borders, both the public and private sectors are expected to recognize the benefits of having a common understanding of financial reporting framework supported by strong globally accepted auditing standards
Summary
Diversity in the preparation of international accounting practice attracts much attention. Daske, Hail, Leuz, and Verdi (2008) reveal that economic benefits of IFRS adoption are limited to firms with incentives to be transparent and where legal enforcement is strong This is consistent with La Porta et al (1998) provide the first investigation of the legal system’s effect on a country’s financial system. Van Tendeloo and Vanstraelen (2005) address the question of whether the adoption of IFRS is associated with lower earnings management They examine whether German companies that have adopted IFRS engage significantly less in earnings management compared to firms reporting under German GAAP. Their result reveals that the adoption of IFRS cannot be associated with lower earnings management. Adoption of IFRS has increased the quality of financial reporting among companies across the world as reveal in some extensive studies such as (Ezeani & Oladele, 2014; Van Adiba, et al 2013; Thomas, 2012; Rahman, et al, 2010)
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