A review of the current debate on the determinants and consequences of mandatory IFRS adoption

• DOI: https://doi.org/10.1108/IJAIM-03-2017-0034
• Pages: 413-442
• Date: 06 August 2018
• Published date: 06 August 2018
• Author: Noor Houqe
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

A review of the current debate on

the determinants and consequences

of mandatory IFRS adoption

Noor Houqe

School of Accounting and Commercial Law, Victoria University of Wellington,

Wellington, New Zealand

Abstract

Purpose –This paper aims to analyzethe economic and financial reporting consequences of International

FinancialReporting Standards (IFRS) adoption.

Design/methodology/approach –Literaturereview.

Findings –The survey of the IFRS adoption literature shows that the implementation of IFRS has been

successful in reducing information asymmetry, improving the quality of information for users, enhancing

transparency and comparabilityand positively influencing capital markets. In general, the positive effectsof

IFRS are associatedwith firms in strong enforcement regimes that have incentives to comply.The survey find

enforcementof IFRS to be a recurringtheme throughout the literature reviewed and is therefore an area which

requiresdevelopment.

Practical implications –In particular, there is a need to develop a mechanism for the enforcementof

accounting standards internationally. Hence, there is a need for collaboration between the International

Accounting Standards Board and regulatory bodies around the world to maximize the effectiveness of

internationalaccounting standards.

Originality/value –Given the considerable discussion about mandating IFRS for US firms by the

Securitiesand Exchange Commission, this study’s results are both importantand well-timed.

Keywords Enforcement, Accounting conservatism, Earnings management, IFRS adoption,

Capital market effects, Firm performance

Paper type Literature review

1. Introduction

The widespread adoption of InternationalFinancial Reporting Standards (IFRS), especially

since 2005, has arguably been one of the most important developments in the history of

accounting. As of April 22, 2016, 131 jurisdictionsaround the world either permit or require

IFRS for domestic listed firms (Deloitte, 2016). Certainly, governments, investors, auditors,

accountants, business entities and others have shown a great deal of interest in

understanding IFRS. Hence, the purpose of this paper is to review the literature on the

determinants and consequences of IFRS adoption[1]. A Google Scholar search on April 22,

2016 using the term “IFRS adoption”alone produced 23,800 results of which 1,250 papers

had the search term IFRS adoption in the title. It is a daunting task to review such a vast and

still growing body of literature,so this survey do not review every single paper publishedin

journals (or available in electronic form), but rather, restrict our focus to the key issues

identified to have effectson IFRS adoption.

As the economic consequences of adopting a new set of accounting standards (such as

IFRS) are intertwined with the institutionalsetting of the adopting country, any analysis of

the economic consequences of IFRS adoption would require knowledge of the institutional

Mandatory

IFRS adoption

413

Received13 March 2017

Revised7 July 2017

Accepted18 August 2017

InternationalJournal of

Accounting& Information

Management

Vol.26 No. 3, 2018

pp. 413-442

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-03-2017-0034

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

www.emeraldinsight.com/1834-7649.htm

backgrounds of the countries which adopted the IFRS (Judge et al.,2010). Thus, before

reviewing the literature on economic consequences, we briefly outline the key country-

specific characteristics associated with IFRS adoption. Economic consequences are also

related to the intendedpurpose or expected benefits of IFRS adoption, given that this is what

researchers have exploredin identifying and recording economic consequences[2].

Despite wide-spread adoption of IFRS, accounting and financial reporting continues to

remain diverse across countries. Differences in accounting practice stem from the fact that

each country has a diverse set of informationneeds because of unique legal, economic, social

and political contexts (Ball, 2001;Brown, 2011;Brown and Clinch, 1998), and these resultin

different accounting standards being prepared (Zeff, 2007). Disparate financial reporting

and accounting practices make it very difficult for usersof accounting and financial reports

to consolidate such information and make comparisons of firms that are listed in different

countries (Prather-Kinsey, 2006). In addition, as financial markets become ever more

interdependent,there is a greater need for the development of internationally recognizedand

accepted standards dealing with capitalmarket regulation. Mirza et al. (2006) find that IFRS

represents a useful instrument designed to create and promote a stable and more secure

internationalregulatory environment[3].

Over the past quarter of a century,there have been robust debates on the desirability and

viability of a global single set of accounting standards. While the aim of such debates is to

aid users and preparers of financial statements in making more informed decisions in an

increasingly globalized economy, there has been some disagreement on the practical use of

such an accounting framework[4]. Those in favor argue that a single set of harmonized

accounting standards will reduce information asymmetry (Armstrong et al., 2010;Choi and

Meek, 2005), enhance capital market efficiency (Horton et al.,2013) and ensure greater

transparency and consistency in financial reporting across national boundaries

(Platikanova and Perramon, 2012). Those in oppositionargue that the underlying nature of

transactions may be lost in translation as communication and interpretation barriers

obstruct the process of conveying accounting information according to the requirements

detailed by the International Accounting Standards Board (IASB) (Soderstrom and Sun,

2007). Despite the debates, the increasedinternational interaction in the global economy has

led to “complications for preparing, consolidating, auditing, and interpreting published

financial statements”(Gyasi, 2010, p. 27). Such complications, along with an increase in

cross-border financial activity, have made capital markets more dependent on each other

and have sparked awareness and appreciation that there needs to be a unified accounting

language, so in 2001, the IASB responded by developing IFRS (Jermakowicz and Gornik-

Tomaszewski, 2006)[5].

The advent of globalization has resulted in a stronger level of impact on international

organizations, as well as a stronger influence for large multinational firms than previously.

Globalization has also brought about the growth of international financial markets. The

forerunner in the global economy, the USA (USA), has multinational firms earning more

than 50 per cent of their revenue from foreign sales (Fosbre et al.,2009). This reflects not

only the growing globalization of US businesses but also the rapidly changing economic

environment of global interactions. Over 3,200 firms worldwide are listed on stock

exchanges outside of their home country. As of March 31, 2016 there are also nearly 506

foreign firms from 46 countries listed on the New York Stock Exchange (www.nyse.com),

while the NASDAQ 110 foreign firms (www.nasdaq.com)and London Stock Exchange Main

Board 273 foreign firms both list over 350 foreign firms (www.londonstockexchange.com).

As per the World Trade Organization (2015) report, the annual value of cross-border debt

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