Mandatory International Financial Reporting Standards Adoption Research Articles

Mandatory Financial Reporting Environment and Voluntary Disclosure: Evidence from Mandatory IFRS Adoption

This study examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) on voluntary disclosure. Using a difference-in-difference analysis, we document a significant increase in the likelihood and frequency of management earnings forecasts following mandatory IFRS adoption, consistent with the notion that IFRS adoption alters firms’ disclosure incentives in response to increased capital-market demand. We find the increase to be larger among firms domiciled in code-law countries, suggesting a catching-up effect among firms facing low disclosure incentives pre-adoption. We then propose and test three channels through which IFRS adoption could alter firms’ disclosure incentives: improved earnings quality, increased shareholder demand, and increased analyst demand. We find evidence consistent with all three channels.

The Impact of Mandatory IFRS Adoption on Accounting Quality: Evidence from Australia

ABSTRACTFollowing the mandatory implementation of International Financial Reporting Standards (IFRS) in Australia as of January 1, 2005, this study examines its impact on accounting quality by focusing on three perspectives: (1) earnings management, (2) timely loss recognition, and (3) value relevance. Using four years of adoption experience since the mandate was first made effective in Australia for a wide range of accounting-based metrics and market-based information, we find that the mandatory adoption of IFRS has resulted in better accounting quality than previously under Australian generally accepted accounting principles (GAAP). In particular, the findings indicate that the pervasiveness of earnings management by way of smoothing has reduced, while the timeliness of loss recognition has improved post-adoption. Additionally, the value relevance of financial statement information has improved, especially for non-financial firms. This is despite the fact that there is evidence to suggest that financial firms are engaged in managing earnings toward a small positive target after the mandatory adoption of IFRS in Australia.

Mandatory IFRS Reporting and Changes in Enforcement

In recent years, reporting under International Financial Reporting Standards (IFRS) became mandatory in many countries. The capital-market effects around this change have been extensively studied, but their sources are not yet well understood. This study aims to distinguish between several potential explanations for the observed capital-market effects. We find that, across all countries, mandatory IFRS reporting had little impact on liquidity. The liquidity effects around IFRS introduction are concentrated in the European Union (EU) and limited to five EU countries that concurrently made substantive changes in reporting enforcement. There is little evidence of liquidity benefits in IFRS countries without substantive enforcement changes even when they have strong legal and regulatory systems. Moreover, we find similar liquidity effects for firms that experience enforcement changes but do not concurrently switch to IFRS. Thus, changes in reporting enforcement or (unobserved) factors associated with these changes play a critical role for the observed liquidity benefits after mandatory IFRS adoption. In contrast, the change in accounting standards seems to have had little effect on market liquidity.

DISCUSSION OF The Determinants and Consequences of Heterogeneous IFRS Compliance Levels Following Mandatory IFRS Adoption: Evidence from a Developing Country

ABSTRACT Bova and Pereira (2012) investigate two important and interesting research questions: (1) why do firms comply with International Financial Reporting Standards (IFRS) in a developing country where enforcement is weak, and (2) do firms benefit from IFRS compliance in a developing country where enforcement is weak? Using data from Kenya, Bova and Pereira (2012) find that public firms appear to have a higher level of IFRS compliance than private firms. They also find a positive and significant association between foreign ownership and the level of IFRS compliance, consistent with the reporting incentive hypothesis, and between share return and the level of IFRS compliance, consistent with the economic benefit hypothesis. This study contributes to the literature by providing preliminary evidence on the extent to which reporting incentives play an important role in IFRS compliance, and the economic benefit of IFRS compliance in a developing country where enforcement is weak. The implication of the findings of this study should be interpreted with caution because the empirical evidence provided is based on some restricted data from a single developing country. Future research should provide more comprehensive evidence on the economic effects of adopting IFRS in developing and less developed countries.

Mandatory IFRS adoption and its impact on analysts' forecasts

This paper examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) on financial analysts' ability to translate accounting information into forward looking information. In particular, we investigate whether the switch to IFRS has an impact on (1) the ability of analysts to forecast earnings accurately and (2) the agreement among analysts regarding forecasted earnings. The study is set in the European Union, in the year preceding the switch to IFRS and the first year after the switch. We document increased forecast accuracy and agreement after the switch to IFRS. These findings are robust to changes in model specifications. Overall, our results are consistent with the notion that the adoption of IFRS has improved the quality of financial reports and, more specifically the quality of earnings. Our results contribute to the understanding of the effect of the use of a uniform, high quality accounting language on the usefulness of financial information to financial market participants.

The persistence of earnings and earnings components after the adoption of IFRS

PurposeThis paper seeks to examine the persistence of earnings and earnings components after the adoption of International Financial Reporting Standards (IFRS).Design/methodology/approachThe study analyses two years before and two years after the adoption of IFRS in order to examine whether the adoption of IFRS materially affects the persistence, as well as the explanatory power of earnings and earnings components.FindingsThe results confirm that disaggregating reported earnings into operating income, non‐operating income and extraordinary charge and credit, captures differences in the information content of the underlying events. Consequently, earnings disaggregation can be used to improve prediction of future profitability. The results suggest that IFRS measurement and reporting guidelines do not seem to improve the persistence of earnings and earnings components.Originality/valueThis is the first study that examines whether the mandatory adoption of IFRS has an impact on the information content of earnings components for future profitability.

Impact of Mandatory IFRS Adoption on the Financial Sector

We examine the effect of mandatory International Financial Reporting Standards (IFRS) adoption on the cost of equity and liquidity of European banks and insurance companies. We find a statistically and economically significant decrease in cost of equity and a statistically and economically significant increase in liquidity of banks and insurance companies after IFRS adoption. In additional analyses, we find an increase in earnings volatility and a decrease in the risk-taking behavior of financial institutions after 2005. Further, we find that IFRS adopters with higher exposure to fair value accounting show a lower cost of equity.

Accounting Integration and Comparability: Evidence from Relative Performance Evaluation Around IFRS Adoption

We study a sample of Continental European firms for changes in the sensitivity of their CEO turnover to their foreign peers’ accounting performance around the mandatory adoption of International Financial Reporting Standards (IFRS). We find a post-adoption increase in the use of Relative Performance Evaluation (RPE) based on foreign peers’ accounting information, consistent with greater financial reporting comparability associated with mandatory IFRS adoption. These findings cannot be explained by changes in foreign ownership or changes in foreign operations around mandatory IFRS adoption. Furthermore, we find stronger results for firms in more competitive industries and when peers are from highly correlated economies, consistent with the economic theory of RPE.

The transition from the Greek accounting system to IFRS: evidence from the manufacturing sector

Over the past few decades, globalisation and the expansion of business investments and capital markets have led to a demand for high quality accounting information. Regulation (EC) No. 1606/2002 was applied in line with the process of internationalisation, involving the mandatory adoption of International Financial Reporting Standards (IFRS) by all listed European companies from 2005 onwards. The primary objective of this study is to examine whether the mandatory adoption of IFRS in the EU has affected the structure of a specific set of Greek companies reporting under IFRS and under the Greek accounting system (GAS). We therefore conducted our investigation on a sample of 38 Greek manufacturing firms reporting under the GAS and under IFRS for the same year 2004, which also traded on the Athens Stock Exchange (ASE) during the above-mentioned period. The study is based on their balance sheet and income statement figures prepared both under the GAS and IFRS model. We then analysed the quantitative effects of IFRS adoption on key accounting financial ratios in relation to the Greek accounting system. The results indicate that the adoption of IFRS affects the magnitude of accounting ratios, such as the asset turnover ratio, the ratio of owner's equity to total assets, the ratio of total liabilities to total equity, and the ratio of owner's equity to total liabilities.

Firm-Specific Factors Influencing the Selection of Accounting Options Provided by the IFRS: Empirical Evidence from Spanish Market

It is generally accepted that International Financial Reporting Standards (IFRS) promote a true and fair presentation of financial statements. The improvement of the quality of financial reporting helps investors, bankers and regulators make better decisions. Spanish GAAP, on the other hand, are based on a prudent approach for asset and liability recognition and valuation, with the goal of protecting stakeholders. Adjustments introduced as a consequence of IFRS adoption may result in (i) the recognition (or derecognition) of assets and liabilities for the first time (i.e. derivative financial assets and liabilities) and (ii) the application of accounting criteria that differs from those recognised under local GAAP (i.e. cost vs. revaluation model). The main objective of this study is to examine the financial statements of the firms listed on the Spanish Continuous Stock Market that have been using IFRS since 2005 to determine the accounting policy options they apply under IFRS and, most importantly, to provide evidence of the factors driving these choices. Since there are significant differences in reporting quality between countries as a consequence of different accounting regimes and institutional frameworks, mandatory IFRS adoption provides an opportunity to assess the economic consequences of these differences. The main finding of this paper is that companies apply the most conservative criteria to reduce the number of discrepancies between the two standards, particularly in regards to presentation and measurement practices. Nevertheless, the evitacion from Spanish GAAP has a significant impact on reported equity and net income. Firms in Consumer services, Consumer goods, Oil and Gas, and Basic Materials, Manufacturing and Construction industries experience the largest adjustments. Additionally, we find that firm-specific factors such as industry, size, auditor’s opinion and capital structure influence the choice of accounting policy used to prepare financial statements. The findings reported in this paper provide a basis for debate about the quality of financial disclosure and reporting regulation and their impact across countries.

Mandatory Adoption of IFRS and Analysts’ Forecasts: How Much Does Enforcement Matter?

Differences in countries’ institutional settings are believed to impact on the extent to which benefits can be achieved from the adoption of International Financial Reporting Standards (IFRS). We investigate seven proxies that have been used to distinguish between institutional settings, including two self-constructed indexes that focus specifically on auditing and accounting enforcement (AUDIT and ENFORCE). Our measures are developed for 51 countries and three years: 2002 (that is, three years before IFRS were widely adopted in 2005); 2005; and 2008. To assess the merits of the proxies we focus on benefits manifest in firms’ information environments, as reflected in two properties of analysts’ earnings forecasts, namely their accuracy and the dispersion among them. Based on a sample of 357,034 firm-month observations available for 37 of the 51 countries, we find AUDIT and ENFORCE and the more general legal measure ‘rule of law’ of Kaufmann et al. (2010) have the strongest association with these two properties of analysts’ forecasts. We also find that AUDIT and ENFORCE provide additional explanatory power relative to ‘rule of law’. When our proxies and rule of law are included, both our measures are significant but the ‘rule of law’ proxy has explanatory power only in models based on dispersion. Thus we provide evidence of the importance of accounting enforcement in securing favourable capital market outcomes, which has not been demonstrated in the prior literature because researchers commonly use more general legal proxies for enforcement. The new AUDIT and ENFORCE proxies may be more useful than other proxies found in the literature when seeking to distinguish between countries according to the strength of their enforcement of accounting requirements.