Mandatory International Financial Reporting Standards Research Articles

International trade, mandatory IFRS adoption and financial reporting quality

Purpose This study examines how bilateral international trade among mandatory International Financial Reporting Standards (IFRS) adopter countries moderates the relation between IFRS adoption and firms’ financial reporting quality. Design/methodology/approach The authors use data from 2007 to 2015 and focus on publicly listed firms from non-European Union countries that adopted IFRS on a mandatory basis. Findings The authors find that the interaction between mandatory IFRS adoption and a country’s bilateral trade with other countries using IFRS is negatively and significantly related to accruals-based earnings management, which is an inverse measure of financial reporting quality. This result is driven by firms in less developed countries. The improvement in accounting quality is for firms located in countries that both fully and partially adopt IFRS. The authors also find a significant and negative coefficient for the relation between real earnings management and the interaction between mandatory IFRS adoption and a country’s bilateral trade with other IFRS countries in the post-global financial crisis period. Originality/value Overall, the authors’ results are consistent with the notion that the mandatory adoption of IFRS creates a positive externality where firms improve their accounting quality because increased financial statement comparability means that foreign customers and suppliers can monitor the quality of earnings more easily.

Does mandatory IFRS adoption improve risk disclosure quality? Evidence from the European insurance industry

Purpose This study aims to investigate the effect of mandatory international financial reporting standards (IFRS) adoption on the risk disclosure quality by listed European insurers. Design/methodology/approach The study used a content analysis of the annual reports and consolidated accounts of 13 insurance companies listed in the European market between 2002 and 2007 based on two regulatory frameworks, Solvency and IFRS. Findings The results showed a significant effect of the mandatory adoption of IFRS and a clear improvement in the quality of risk disclosure. Moreover, risk disclosure is positively associated with the size of the company. Research limitations/implications The authors can consider the relatively limited size of the sample as a limitation of this study. Moreover, the manual content analysis used to be considered subjective. Practical implications The findings of this study provide useful insights to professional and regulatory bodies about the consequences of IFRS adoption to enhance transparency and particularly risk disclosure. Originality/value The research contributes to the existing literature. First, the authors have shown that companies are improving in the quality of risk disclosure even before 2005. Second, the authors have shown that the year 2005 is distinguished by a marked improvement in disclosure trends, with companies aligning themselves with coercive and mimetic regulatory forces. Third, the authors highlight the significant effect of mandatory IFRS adoption even in highly regulated industries, such as the insurance industry.

Financial Transparency, Labor Productivity, and Real Wages: Evidence from Mandatory IFRS Adoption

ABSTRACT Financial transparency can affect labor markets directly by mitigating information asymmetries and optimizing the matching of heterogeneous firms and employees (matching efficiency channel) and indirectly through the effect of transparency on firms’ capital inputs (capital utilization channel). Exploiting the increase in financial transparency following the mandatory International Financial Reporting Standards (IFRS) adoption by European Union countries, we perform a battery of tests that indicate subsequent increases in labor productivity and real wages for manufacturing industries in member countries. More importantly, we find evidence that both channels are economically relevant in explaining gains in labor productivity and real wages following the mandatory IFRS adoption. Collectively, our results underscore that the benefits of an increase in transparency go beyond the effects on capital markets and corporate investments, with implications for the allocation of human resources across corporations.

Impact of mandatory IFRS adoption on economic growth: the moderating role of Covid-19 crisis in developing countries

Research Question: Does Covid-19 crisis moderate significantly the relationship between mandatory International Financial Reporting Standards (IFRS) adoption and economic growth in developing countries, especially in the MENA (Middle East and North Africa) region and SSA (Sub-Saharan Africa) countries? Motivation: Two sources of motivation are behind this study. First, research works on the impact of mandatory IFRS adoption on macroeconomic indicators such as economic growth are still scarce. Second, studying the impact of mandatory IFRS adoption on economic growth before and during the Covid-19 crisis allows to better understand this relationship in times of crisis. Idea: This article aims to investigate the moderating role of Covid-19 crisis in the relationship between mandatory IFRS adoption and economic growth in developing countries. Tools: The study was conducted based on panel data from 30 developing countries (15 MENA countries and 15 SSA countries) during the period 2017–2020. Collected data were analysed by using the Generalized Least Squares (EGLS/weighted cross-section) with fixed effect estimation technique. Findings: The main results of the study show that mandatory IFRS adoption has a positive impact on economic growth of the full sample, and that this positive impact is reduced during Covid-19 crisis. Contribution: The study results are very useful to policymakers and regulators in developing countries, especially in crisis periods.

The implications of IFRS on the credit market: Evidence from the emerging market

Banks are usually assessed credit risk based on borrowers’ financial statements to monitor credit risk over the life of the lending contract (Beatty, 2008; Golubeva, 2020). Thus, this research examines the implications of mandatory International Financial Reporting Standards (IFRS) implementation on the rational investment decisions of lenders and borrowers in the emerging market (e.g., the Iraqi credit market). Quantitative data were collected, nearly 137000 credit/loan contracts and 500 debenture contracts of almost 750 individual companies. We separate the dataset into two periods, earlier and later IFRS implementation using interaction variables to extract other economic factors’ impact on loan contract stipulation. Even though enhancing the quality of financial statements is the most rational objective of IFRS adoption and implementation, the results show insignificant improvement. IFRS implementation has a limited effect in enhancing financial statements’ quality during the conversion period. This finding supports the view that economic advantages do not essentially contribute to the application of IFRS but depend on other considerations and the level of disclosure practices

Measuring the Impact of Social Responsibility on the Effectiveness of the Mandatory International Financial Reporting Standards (IFRS) Adoption According to The Price Crash Risk

Demand for information on corporate social responsibility (CSR) and international financial reporting standards (IFRS) has progressively increased in tandem with the growing interest in sustainable investments. Numerous studies have established that the adoption of IFRS has often improved the information quality offered to many users through providing highly relevant, reliable and understandable information, as well as allowing companies’ accounting data to be compared to that of other companies for various periods. Crash risk is a major concern for investors and may result in higher compensation for holding higher-risk securities. This research seeks to examine the impact of corporate social responsibility on the effectiveness of adopting mandatory international financial reporting standards according to the price crash risk. To achieve this, the descriptive approach and a systematic review of previous studies, research, and literature related to the research topic and its variables were used. The results confirmed the existence of a correlation between CSR and IFRS in the financial market. Finally, the research recommended the necessity of conducting more research, analytical and empirical studies with regard to measuring the correlation among CSR and IFRS.

Does analyst coverage enhance or curb earnings management The impact of mandatory IFRS adoption

This study aims to investigate the effect of external corporate governance mechanisms on earnings management decisions. In particular, this study examines the effect of analyst coverage on the magnitude of discretionary accruals in the UK context. In addition, this study examines the moderating role of mandatory International Financial Reporting Standards (IFRS) adoption on the relationship between analyst coverage and earnings management. By using a sample of 9,165 observations collected from 1,401 specific UK firms from 1994-2013, it is found that a high level of analyst coverage can be considered as an external governance mechanism that controls managers' behaviours. The results suggest a significant negative effect of analyst coverage on earnings management. I also find some evidence that the mandatory adoption of IFRS does lead to lower earnings management levels. Contrary to expectations, IFRS fails to enhance the monitoring role of financial analysts in detecting and deterring earnings management.

The Dark Side of Mandatory IFRS Adoption: Does IFRS Adoption Deteriorate Accrual Reliability?

We examine a potential informational cost of adopting the International Financial Reporting Standards (IFRS). Using a difference-in-differences approach, we find that mandatory IFRS adoption leads to a significant decrease in accrual reliability. We also find that this negative relation between IFRS adoption and accrual reliability is more pronounced for firms (a) holding more financial instruments and (b) domiciled in jurisdictions with weak institutional features. The above findings are robust to alternative sampling and an extended sample period. Further analysis shows that reduced accrual reliability reflects a trade-off with increased value relevance and that outside investors fail to understand the IFRS-induced reductions in accrual reliability.

IFRS convergence and international trade: evidence from China

Using a comprehensive dataset of firm-level export transactions from China Customs, this paper investigates whether mandatory International Financial Reporting Standards (IFRS) convergence promotes Chinese firms’ export activities. We find that compared with private firms which were not immediately required to comply with the new accounting standards in 2007, listed firms experienced a significant increase in their exports after converging with IFRS. The positive effect of IFRS convergence on exports only occurred when firms traded with IFRS countries and when they were non-state-owned enterprises. The findings are robust to a battery of sensitivity tests. We contribute to the literature on the real economic effects of IFRS harmonisation by documenting its role in enhancing international trade and global product market integration.

Do Accounting Standards Matter for Productivity?

In this study, we examine whether productivity shifts when accounting standards change. Using mandatory International Financial Reporting Standards (IFRS) as a shock to the accounting regime, we examine the changes in country‐level productivity. We find that mandatory IFRS‐adopting countries experience significant increases in total factor productivity (TFP) and labor productivity. The post‐adoption productivity improvements are greater for countries without IFRS convergence. Further, TFP increases more for countries that experience a larger increase in industry comparability. Taken together, the evidence suggests that the new IFRS accounting regime increases economic productivity via improving information environments and facilitating internal firm decisions.

Credit relevance after mandatory IFRS adoption in deposit money banks of Nigeria

PurposeCredit relevance of financial reporting can be influenced by change in financial reporting framework. This study aims to examine the effect of mandatory international financial reporting standards (IFRS) adoption on credit relevance quality of financial reporting of deposit money banks (DMBs) in Nigeria.Design/methodology/approachThis study uses difference-in-differences (D-in-D) design for its modelling. Panel data regression analysis based on the D-in-D model is used in analysing the data collected from secondary sources.FindingsThe findings of this study are that based on the D-in-D approach, there is a significant and positive effect of mandatory IFRS adoption on credit relevance quality of financial reporting of DMBs in Nigeria, and that there is also a significant difference in the credit relevance quality of financial reporting of mandatory adopting banks in the post-mandatory IFRS adoption period compared to pre-mandatory IFRS adoption period.Research limitations/implicationsTo the best of this study's review, there is inadequacy of literature within the credit relevance research in Nigeria. In the light of this, this study intends to fill the gap.Practical implicationsThis study is specifically important to regulatory authorities, both primary and secondary regulators. Specifically, this study has implications in the regulatory roles of Central Bank of Nigeria (CBN) and Financial Reporting Council of Nigeria (FRC). However, the study recommends that regulatory authorities should encourage DMBs to avail their financial reports annually to credit rating agencies (local and international) for proper evaluation for subsequent ratings.Originality/valueThe peculiarities in this study, that is the utilisation of the D-in-D design and the use of credit relevance metric as the dependent variable, made this study important and novel to push the frontier of existing knowledge.

The Effect of Fair Value Adjustments on Dividend Policy Under Mandatory International Financial Reporting Standards Adoption: Australian Evidence

Using a sample of firms from the financial sector of the Australian Securities Exchange, we examine the effect of the fair value adjustments of financial instruments on firms’ dividend distributions in the context of mandatory International Financial Reporting Standards (IFRS) adoption. We find a positive relationship between the fair value adjustments of financial instruments and firms’ dividend payouts, suggesting that the frequent use of fair value adjustments of financial instruments by financial firms following mandatory IFRS adoption has the potential to increase the proportion of transitory earnings in reported earnings and cause changes in dividend policies. Our results add to the ongoing debate on the unintended economic consequences of fair value accounting (FVA) and provide empirical support for regulators’ concerns that unrealized FVA gains from asset revaluation during booms may encourage the distribution of those unrealized gains.

The family business in new EU countries: the spread and agency conflicts they face

Capital financing is vital for the development of the new EU countries. Investors base their economic and financial decisions on the information available in the financial reports that listed EU companies must prepare following International Financial Reporting Standards (IFRS). Studies show that the majority of listed companies worldwide are family owned and face Type II agency problem - the conflict between minority shareholders and large controlling shareholders (family), i.e. controlling family may seek to extract private benefits at the expense of minority shareholders and disclose information in financial reports for self-interested purposes to avoid minority contests. The research of Type II agency conflict effects on mandatory IFRS disclosure levels in the new EU countries is limited, however, with the reference to existing research literature and legal systems in the new EU countries, we find that minority protection is strongest in Malta, and weakest in Latvia. The biggest number of family controlled firms are in Poland and Romania, whilst family business in Poland, Estonia, Croatia, Cyprus, Romania and Bulgaria enjoy the largest market capitalisation. Nationally, the highest market capitalisation of family controlled firms are in Estonia, Cyprus, Latvia and Poland. This paper shows, that due to moderate minority protection in the new EU countries Type II agency conflict is important, and therefore, it is suggested further the research related to mandatory IFRS disclosure levels.

IFRS adoption, value relevance and conditional conservatism: evidence from China

PurposeThis study sought to evaluate the relationship between value relevance of financial information and conditional conservatism of non-financial companies listed in China.Design/methodology/approachUsing panel data comprising of 28,723 firm years, the authors determine the value relevance of financial information before and after mandatory International Financial Reporting Standards (IFRS) adoption while incorporating the relationship with conditional conservatism. The authors further examined how this relationship varies between state and non-state owned companies.FindingsConditional conservatism is positively (negatively) related to value relevance prior (post) to mandatory IFRS adoption while it makes no difference as to whether a company is state or non-state owned, as IFRS has a positive and significant effect on value relevance. Conservatism, on the other hand, has a negative and insignificant relationship with market value of both state and non-state owned firms during the pre- and post-IFRS period.Originality/valueBy exploring an emerging economy, the authors provide evidence on the variations in value relevance amongst state and non-state owned firms. In particular, the authors establish the positive effect of IFRS on the value relevance of non-state firms as compared to state-owned institutions.

Bank earnings smoothing during mandatory IFRS adoption in Nigeria

PurposeThe purpose of this paper is to examine the extent of bank earnings smoothing during mandatory International Financial Reporting Standards (IFRS) adoption in Nigeria, to determine whether mandatory IFRS adoption increased or decreased income smoothing among Nigerian banks.Design/methodology/approachThe authors employ panel regression methodology to estimate the association between loan loss provisions (LLPs) and bank earnings.FindingsThe authorse find that the mandatory adoption of IFRS is associated with lower earnings smoothing among Nigerian banks, which implies that Nigerian banks do not use LLPs to smooth reported earnings during the mandatory IFRS adoption period. The authors find evidence for earnings smoothing via LLP during voluntary IFRS adoption. Earnings smoothing is not significantly associated with listed and non-listed Nigerian banks during voluntary and mandatory IFRS adoption. Overall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of LLPs estimate by discouraging Nigerian banks from influencing LLPs for earnings smoothing purposes during the mandatory IFRS adoption. The findings of this paper are relevant to the debate on whether IFRS reporting improves the quality of financial reporting among firms in Nigeria.Practical implicationsOverall, the findings indicate that mandatory IFRS adoption improves the informativeness and reliability of LLPs estimate by discouraging Nigerian banks from influencing LLPs estimates to smooth earnings during the period of mandatory IFRS adoption.Social implicationsThe implication of the study is that IFRS has higher accounting quality than local GAAP in Nigeria as it improves the quality and informativeness of accounting numbers (LLPs and earnings) reported by Nigerian banks during the period examined.Originality/valueThis study is the first attempt to focus on income smoothing during mandatory IFRS adoption in Nigeria.

Does Mandatory Adoption of IFRS Have Similar Economic Consequences across Country Classification? A Cross-Sample Comparison of Developed Versus Developing Countries

This study examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) adoption from firm and country level perspective, and across country classification (developing vs. developed economy). Using a global sample of firms from 59 countries spanning from 1993-2016, and applying difference-in-differences design, we analyze the induced changes in the cost of equity/debt capital following IFRS adoption. We find that mandatory adopters in developing countries are more likely to experience significant decreases in the cost of capital in the post-adoption period than firms in developed countries. Furthermore, we find that this is also the case if the firms are located in countries that exhibit low governance quality. In developed countries, IFRS adoption seems most beneficial to firms which are located in strong shareholder protection regimes, whereas high governance quality does not show positive effects. On country level, however, we do not find evidence that mandatory IFRS adopters experience a decrease in the cost of debt in the post adoption period, neither for developing nor for developed countries. Overall, our findings suggest positive economic consequences of mandatory IFRS adoption for firms in developing countries, even if these countries exhibit weaknesses in institutional settings.

CEOs’ accounting-based attributes and earnings management strategies under mandatory IFRS adoption

PurposeThe purpose of this paper is to focus on the moderating effect of mandatory International Financial Reporting Standards (IFRS) adoption on the relationship between chief executive officer (CEO) experience/education and earnings management in European companies.Design/methodology/approachData from a sample of 302 European firms listed on Stoxx Europe 600 index and 596 CEOs from 2000 to 2014 are used to test the moderation model using moderation regression analysis.FindingsEvidence reveals that CEO’s accounting-based attributes are negatively associated with accruals-based earnings management and positively associated with real earnings management (REM). Further, mandatory IFRS adoption significantly moderates the impact of CEO’s accounting-based traits on earnings-management activities.Research limitations/implicationsA small number of European firms were studied and, given the long study period, many firms with missing data were eliminated. To avoid a small sample size, countries with few observations were included, which leads to an uneven distribution between observations per country.Practical implicationsFindings from this paper can help: European firms to consider demographic traits when recruiting or promoting executives; the IASB to improve enforcement mechanisms and make IFRS implementation mandatory; and audit committees to effectively monitor REM.Originality/valueThis study is unique in providing European evidence for the moderating effect of mandatory IFRS adoption on the relationship between CEOs’ accounting experience/education and earnings management activities. This paper is also relevant as it addresses the effectiveness and efficiency of accounting literates.

Mandatory IFRS Adoption and Analyst Coverage: Evidence from the UK

This study investigates whether the mandatory adoption of International Financial Reporting Standards (IFRS) enforce financial analysts to cover the firms with their EPS forecast. After examining a large sample of 10,953 firm year observations from 1,467 distinct UK listed firms for the period between 1990 and 2013, the results suggest that, mandatory IFRS adoption attract more analysts to follow the firms. Where we find the number of financial analyst who cover the IFRS adopters is significantly higher than that for non-adopter firms.

Mandatory IFRS Adoption and Analyst Coverage: Evidence from the UK

This study investigates whether the mandatory adoption of International Financial Reporting Standards (IFRS) enforce financial analysts to cover the firms with their EPS forecast. After examining a large sample of 10,953 firm year observations from 1,467 distinct UK listed firms for the period between 1990 and 2013, the results suggest that, mandatory IFRS adoption attract more analysts to follow the firms. Where we find the number of financial analyst who cover the IFRS adopters is significantly higher than that for non-adopter firms.

Does the Mandatory Adoption of IFRS Improve the Association between Accruals and Cash Flows? Evidence from Accounting Estimates

SYNOPSIS We investigate the effect of mandatory International Financial Reporting Standards (IFRS) adoption in the European Union on the association between accounting estimates and future cash flows, a key concept of accounting quality within the International Accounting Standard Board conceptual framework. We find that the predictive value of accounting estimates improves after IFRS adoption. This improvement is largely driven by specific types of accounting estimates, such as accounts receivable, depreciation, and amortization expense. We also find that the improvement is concentrated in countries with larger differences between pre-IFRS domestic GAAP and IFRS. Our findings suggest that IFRS allow managers to exercise their judgment to provide information about future cash flows through the more subjective/judgmental portion of accounting accruals. JEL Classifications: M16; M49; O52. Data Availability: The data used in this study are from public sources identified in the study.