Financial statement effects of adopting IFRS: the Canadian experience

• Published date: 01 October 2018
• Pages: 466-491
• Date: 01 October 2018
• DOI: https://doi.org/10.1108/IJAIM-08-2017-0096
• Author: Eva K. Jermakowicz,Chun-Da Chen,Han Donker
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Financial statement

effects of adopting IFRS:

the Canadian experience

Eva K. Jermakowicz

Department of Accounting, College of Business, Tennessee State University,

Nashville, Tennessee, USA

Chun-Da Chen

Department of Economics and Finance, Lamar University,

Beaumont, Texas, USA, and

Han Donker

College of Business and Public Policy, University of Alaska Anchorage,

Anchorage, Alaska, USA

Abstract

Purpose –The purpose of thisstudy is to examine the effects of adopting InternationalFinancial Reporting

Standards (IFRS) on financial statementsof the largest Canadian firms (S&P/TSX 60) listed on the Toronto

Stock Exchange(TSX).

Design/methodology/approach –This study investigates the financial statement effects of 46

companies fromthe S&P/TSX 60 index which report under IFRS in2011 and switched to IFRS from CGAAP.

This study used panel data analysis, which can be considered as more powerful when conducting cross-

sectional and in time analysis among companies.Because of weakness of Cramer statistic on R-square, the

authors usedinteraction terms as suggested by Hope (2007).

Findings –Consistent with the authors’perceptions, this study finds that significant effects of adopting

IFRS are associatedwith industry practices. The empirical resultsshow that the adoption of IFRS in Canada

created morerelevant financial reporting for book value of equity and net income in the post-adoptionperiods.

Originality/value –This study should be of interestto the US regulators considering IFRS adoption by

US publicly traded companiesas well as to regulators, standard setters and listed companies in all countries

worldwidethat are in transition to IFRS.

Keywords IFRS, Earnings management, Value relevance, Institutional ownership,

Financial disclosure

Paper type Research paper

1. Introduction

The widespread acceptance of International Financial Reporting Standards (IFRS) has been

remarked upon and studied at great length, and many investigations have confirmed, in

general, that IFRSadoption does result in more meaningful financial reporting,as evaluated,

variously,by improved transparency and higherquality reporting, with the lattercommonly

being gaugedby the relevance of equitybook value and earnings for companyshare prices.

Prior studiessuggesting the beneficent consequencesof IFRS adoption have, of necessity,

contrastedreporting under pre-changeregimes that were significantlyat variance with IFRS,

often because those were regimes established under code-law legal frameworks

IJAIM

26,4

466

Received8 August 2017

Revised15 August 2017

21August 2017

Accepted21 August 2017

InternationalJournal of

Accounting& Information

Management

Vol.26 No. 4, 2018

pp. 466-491

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-08-2017-0096

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

(Christensen et al., 2007;Barth et al., 2008). Those frequently featured requirements were

designed to provide strong creditor protections, but were less pertinent to the concerns of

owner-shareholders, as are those financial reporting systems that evolved in common law

settings. The current study attempts to correct this unavoidable bias by examining the impact

of IFRS adoption by large Canadian public companies, which was mandated effective 2011, and

which might more reliably presage the effects of voluntary or mandatory adoption by US

public companies, were that to become permitted or required, as has long been debated.

We document that the adoption of IFRS leads to capital market benefits even in a

setting having few ex ante differences between domestic standards, that is, Canadian

Generally Accepted Accounting Principles (CGAAP) and IFRS. The findings may be

useful to companies in transition to IFRS and regulators and policy-makers reviewing

financial reporting requirements.

2. Related literature review

Prior studies dealing with the impacts of IFRS adoption have provided somewhat mixed

results, with some being notable for positive findings (Ashbaugh and Pincus, 2001;Ball

et al.,2003;Barth et al., 2008; and Landsman et al., 2012;Dayanandanet al.,2016)and other

being neutral or negative regarding changes in accounting quality (Ahmed et al., 2013a;

Burnett et al.,2015; and Liu and Sun, 2015). Dayanandan et al. (2016) suggest that the

adoption of high quality standards, such as IFRS, reduces income smoothing and earnings

management. In addition, the study finds that earnings management has decreased in the

post-IFRS period in particular for French and Scandinavian civil law countries, but not for

German civil law countries and common law countries. The latter can be explained by the

fact that common law countrieshave strong investor protection laws, strict law enforcement

and high disclosure levels of financial information. The study also finds empirical evidence

that the adoption of IFRS reduces earnings management in countries with high levels of

financial disclosure. Overall, the study shows that the adoption of IFRS improved the

quality of financial reporting. Brochet et al. (2013) and Horton et al. (2013) provide evidence

to support the expectation that even moving from otherwise shareholder-oriented financial

reporting regimes to IFRS will provide significant improvements in decision usefulness to

equity investors.

The adoption of IFRS in Canada has prompted studies on the effects of implementing

IFRS. Burnett et al. (2015) and Liu and Sun (2015) found no evidence of improvement after

the Canadian IFRS adoption. Prior research also documents that differences between

individual IFRS and CGAAP values can be large,particularly on the balance sheet, and the

volatility of financial statement figures is in most cases higher under IFRS than under

CGAAP (Blanchetteet al., 2013;Blanchette and Desfleurs, 2011;Salman and Shah, 2011).

Several studies addressed the effects of adopting IFRS on the value relevance of

accounting information that are related to the adoption of IFRS at different times and in

different countries. These findings are mixed, with some studies showing that adopting

IFRS improves value relevance(Bartov et al.,2005;Chalmers et al.,2011) and others showing

that it worsens value relevance (Callao et al.,2007), while yet others find no conclusive

evidence either way (Horton and Serafeim, 2010). Research conducted by Cormier (2013),

based on a sample of 184 Canadian companies composing S&P/TSX index indicates that

implementing IFRS enhances the value relevance of earnings but only for companies with

good governance.

The present work is intended to extend priorresearch on the effects of adopting IFRS in

Canada by focusing on the impact of the 2011, or earlier, adoption of IFRS financial

Financial

statement

effects

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