Introduction
The European Commission adopted Regulation No. 1606/2002, which made
International Financial Reporting Standards (IFRS) mandatory for listed firms
in all European Union (EU) countries. Since 1st January 2005, for companies
traded in EU stock exchange IFRS was adopted. By 2008, more than 113 countries
around the world either require or permit listed companies complying with IFRS.
However, switching from local general accepted accounting principles (GAAP) to
IFRS brought certain effects to the way how financial information is reported.
This article tries to outline the issues mentioned in several articles and
analyse the contribution provided by these articles listed below:
●
The Effect of Mandatory IFRS
Adoption on Financial Analysts' Information Environment (BYARD, D, LI, Y, &
YU, Y, 2011)
●
An analysis of the effect of
mandatory adoption of IAS/IFRS on earnings management (Daniel, Z, Sonda, C,
& Yosra Mnif, S, 2011)
●
The Economic Consequences of
IFRS: The Impact of IAS 32 on Preference Shares in the Netherlands (De Jong, A,
Rosellón, M, & Verwijmeren, P, 2006)
●
The Adoption of IFRS 3: The
Effects of Managerial Discretion and Stock Market Reactions (Hamberg, M, Paananen,
M, & Novak, J, 2011)
●
The Effect of IFRS Adoption and
Investor Protection on Earnings Quality Around the World (Muhammad Nurul, H,
Tony van, Z, Keitha, D, & A.K.M. Waresul, K, 2012)
●
Adoption of IFRS in Spain:
Effect on the comparability and relevance of financial reporting (Susana, C,
José I., J, & José A., L, 2007)
Background
It took a great amount of time for any potential investors around
the world readjusting the financial statements of firms from other countries in
order to make comparison. To reduce the costs of reading and comparing foreign
financial statements for investors, the need for universal financial reporting
standards arose. As Epstein, B (2009) mentioned, having uniform, high-quality
standards not only facilitated cross-border capital flows but also lowered the
cost of capital. Corresponding different local EU GAAP to a single standard of
IFRS was intended to help member firms compete in the world’s capital markets
(Aubert & Grudnitski, 2011). Although globalization increase, most political
and economic influences still remained local (Ball, 2006). There are many
issues emerged after adoption of IFRS under such circumstances, especially when
the results didn’t match with the aims. This article mainly focuses on whether
IFRS adoption met its goals and concerns about them.
Effects in General
According to Ball (2006), IFRS are designed to achieve these goals
(partial) :
■
reflecting economic substance
more than legal form;
■
making earnings more
informative; and
■
lowering the capacity for managerial
manipulation.
These points are explained below:
Substance over form
In Netherlands, after adopting IAS 32[1], preference
shares had to be reclassified from equity sector to liability sector, which
resulted debt ratio to increase 35% on average (De Jong, Rosellón &
Verwijmeren, 2006). In order to cope with such transition, companies issued
preference share either chose to buy back their preference share or negotiated
new terms with preference shareholders to make preference share stay in equity
sector. Preference shares were common used in Netherlands due to tax exempt.
Simply by adopting a new accounting standards, companies’ capital structure
changed and a certain type of financial instruments limited. From companies’
point of view, one way to finance themselves without increasing debt ratio is
gone; from investors’ point of view, preference shares are a predictable
investment with tax benefit.
With the example above, it’s sure to say that IFRS does try to
classify financial instruments by their nature. Changing accounting standards
was not just about the information presentation, but managerial behaviors.
Make earnings more informative
Muhammad Nurul et. al. (2012) examines the effects of mandatory IFRS
adoption and investor protection on the quality of accounting earnings in
forty-six countries around the world , and the results suggest that earnings
quality increases if a country's investor protection regime provides stronger
protection. So it is obvious that investor protection is crucial to financial
reporting quality. For some countries with no increase in earnings quality,
regulators should consider to build up strong mechanisms to limit or constrain
earning management by companies managers and therefore attain better earnings
quality.
In Spain, after adopting IFRS, local comparability has worsened and
the gap between book and market values got wider (Susana, José I. & José
A., 2007). There were many changes in treatments of accounts, both in income
statement and financial position statement. A huge part of liabilities changed
the way of valuation and accordingly altered the criteria of consolidation.
Thus, it affected equity sector with those adjustments. As for income
statement, the methods differed in determining revenues and expenses, even some
accounts needed to reclassify due to IFRS adoption. The benefit of IFRS
adoption was too soon to tell, Susana, José I. & José A. (2007) suggested
that improved usefulness might be fulfilled in the medium to long-term.
Less managerial manipulation
In Sweden, after adopting IFRS 3[2], reported
earnings increased as goodwill amortizations was abolished and carry-on
goodwill impairments decreased (Hamberg, Paananen & Novak 2011). Goodwill
has increased considerably because a higher acquisition activity took place and
the removal of goodwill amortizations. By how many percentage of the
acquisition had is unknown, the impairment part is falling back to managerial
decisions. Because impairment expenses affect operating income directly, the
famous issue about income smoothing will then come up. Judging by the
conclusion made by Hamberg, Paananen & Novak (2011), investors tended to
take the increased earnings as a good sign due to good company performance.
‘How economic incentives drive the decision to impair goodwill, and the –
increasingly important – role auditors play in verifying something almost
unverifiable‘(Hamberg, Paananen &
Novak 2011).
In Frence, after adopting IFRS, earnings management level decreased
for companies with good corporate governance and those that depend on foreign
financial market (Daniel, Sonda & Yosra Mnif, 2011). According to Daniel,
Sonda & Yosra Mnif (2011), their results confirmed that high quality
standards are effective in weak investor protection countries. As concluded,
IFRS does increase transparency of accounting information and usefulness of
financial statements.
Conclusion
In sum, the adoption of a single set of accounting standards
worldwide is a milestone in accounting history. The goals IFRS set out to do
are done. However, there are still unsolved questions for standards setters,
regulators and auditors to think about. For example, requests for stronger
investor protect regimes, sensible valuation of intangibles which not yet to be
verified, this list can go on as long as business keep developing.
Documents selected for analysis
BYARD, D, LI, Y, & YU, Y 2011, 'The Effect of Mandatory IFRS
Adoption on Financial Analysts' Information Environment', Journal Of Accounting
Research, 49, 1, pp. 69-96.
Daniel, Z, Sonda, C, & Yosra Mnif, S 2011, 'An analysis of the
effect of mandatory adoption of IAS/IFRS on earnings management', Journal Of
International Accounting, Auditing And Taxation, 20, pp. 61-72.
De Jong, A, Rosellón, M, & Verwijmeren, P 2006, 'The Economic
Consequences of IFRS: The Impact of IAS 32 on Preference Shares in the
Netherlands', European Accounting Review, 15, pp. 169-185.
Hamberg, M, Paananen, M, & Novak, J 2011, 'The Adoption of IFRS
3: The Effects of Managerial Discretion and Stock Market Reactions', European
Accounting Review, 20, 2, pp. 263-288.
Muhammad Nurul, H, Tony van, Z, Keitha, D, & A.K.M. Waresul, K
2012, 'The Effect of IFRS Adoption and Investor Protection on Earnings Quality
Around the World', International Journal Of Accounting, 47, pp. 333-355.
Susana, C, José I., J, & José A., L 2007, 'Adoption of IFRS in
Spain: Effect on the comparability and relevance of financial reporting',
Journal Of International Accounting, Auditing And Taxation, 16, pp. 148-178.
Other references
Aubert, F, & Grudnitski, G 2011, 'The Impact and Importance of
Mandatory Adoption of International Financial Reporting Standards in Europe',
Journal Of International Financial Management & Accounting, 22, 1, pp.
1-26.
Ball, R 2006, 'International Financial Reporting Standards (IFRS):
pros and cons for investors', Accounting & Business Research (Wolters
Kluwer UK), 36, pp. 5-27.
Epstein, B 2009, 'The Economic Effects of IFRS Adoption', CPA
Journal, 79, 3, pp. 26-31.
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