Abstract

This study investigates how voluntary International Financial Reporting Standards (IFRS) adoption impacts information asymmetry in the stock market. We analyze data from firms in Japan, where local accounting standards have substantially converged with IFRS but are more rules-based than principles-based IFRS. These different implementation approaches allow us to investigate how increased accounting flexibility influences recognition and measurement practices, attenuating the effects of accounting standard differences on the level of accounting rule existence or non-existence. We find that information asymmetry increases after voluntary IFRS adoption, which is driven by small- and medium-sized IFRS adopters’ decrease in earnings quality after voluntary IFRS adoption. Additional analyses reveal that firms’ reporting incentives and accounting resources influence these changes. These results suggest that IFRS’s increased accounting flexibility in recognition and measurement practices worsens the information environments of firms with weak incentives to commit to transparent financial reporting or fewer accounting resources (i.e., small- and medium-sized firms).

Introduction

As International Financial Reporting Standards (IFRS) are intended to provide investors with information that enables them to make better investment decisions, information asymmetry in stock markets is a critical potential consequence of IFRS adoption. IFRS adoption worldwide is either voluntary or mandatory. Since the 2005 mandatory adoption for firms listed in EU countries, extensive research has been conducted on the effects of mandatory IFRS adoption. However, voluntary IFRS adoption effects are relatively under-researched, especially in recent years (De George et al., 2016, Leuz and Wysocki, 2016). Understanding the effects of voluntary adoption is also important because a non-trivial number of countries either allow voluntary IFRS adoption or prohibit IFRS adoption (Song and Trimble, 2022). As of 2019, 11 % (22) of 195 countries/territories permit IFRS adoption and 6 % (11) presently prohibit it, although the latter could permit voluntary adoption in the future. This study attempts to further our understanding of how voluntary IFRS adoption affects information asymmetry in stock markets.

Prior research provides mixed evidence on the stock market consequences of voluntary IFRS adoption. Early studies on this topic focus on Germany, where local accounting standards are substantially different from IFRS. These studies provide evidence suggesting that voluntary adopters exhibit lower information asymmetry in the stock market compared to non-adopters (Gassen and Sellhorn, 2006, Leuz and Verrecchia, 2000). However, in international comparisons, Daske et al. (2008) use two proxies for differences between local accounting standards and IFRS and report inconsistent liquidity effect results. Specifically, they observe no change in liquidity after voluntary IFRS adoption in countries with small differences between local generally accepted accounting principles (GAAP) and IFRS, but a decrease in liquidity in countries with IFRS convergence processes. Therefore, how voluntary IFRS adoption affects information asymmetry in stock markets in countries whose accounting standard differences from IFRS are relatively small remains unclear. This study aims to extend this line of research.

Conclusions

Prior research suggests that voluntary IFRS adoption positively affects information asymmetry in stock markets when local accounting standards significantly differ from IFRS and is viewed as a commitment to transparent financial reporting. However, other research obtains inconsistent results for voluntary IFRS adoption effects on information asymmetry in countries with small accounting differences between local standards and IFRS. We looked closer at Japan, where local accounting standards have been converged to IFRS but have a different implementation approach (i.e., small accounting rule differences but large implementation approach differences). We investigated the effect of voluntary IFRS adoption on the stock market (i.e., changes in information asymmetry in the stock market proxied by bid-ask spread) as well as its potential reason (i.e., changes in earnings quality proxied by the absolute value of discretionary accruals). We also examined whether this effect varies according to firm size, which represents firms’ reporting incentives and accounting resources. Our study’s findings and incremental contributions to the literature are as follows.

First, we find an increase in the bid-ask spread after voluntary IFRS adoption. This result suggests that, on average, voluntary IFRS adoption worsens information asymmetry in Japan’s stock markets. Second, we observe deterioration in bid-ask spread only for smalland medium-sized voluntary adopters. Third, we examine changes in IFRS adopters’ earnings quality before and after IFRS adoption to explore a reason for the increased bid-ask spread. We find that small- and medium-sized firms report larger discretionary accruals after voluntary IFRS adoption. These results suggest that the increase in information asymmetry in the stock market results, at least partially, from the decreased earnings quality of small- and medium-sized firms after voluntary IFRS adoption. Finally, we provide some evidence suggesting that firms’ reporting incentives and limited accounting resources deteriorate earnings quality and information asymmetry at the time of voluntary IFRS adoption.

Abstract

This paper presents the first empirical test of a hypothetical classification of financial reporting in Africa based on de facto or actual practices as opposed to de jure rules. Three multivariate techniques (principal component analysis, cluster analysis, and multidimensional scaling) were used to analyze the accounting policies of large, listed companies in Africa that are required by law to adopt International Financial Reporting Standards (IFRS). It was found that there is a dichotomy between the IFRS policy choices of companies in Francophone and Lusophone countries, on the one hand, and those in common law jurisdictions, on the other, thus, confirming the two-group classification schemes proposed by Elad (2015) and Nobes (1983). These findings have important policy implications, particularly in the context of recent recommendations of the World Bank and the International Monetary Fund that large entities in Africa adopt IFRS.

Introduction

Several studies have suggested that there are opportunities for systematic differences of practice to exist within International Financial Reporting Standards (IFRS) usage (Nobes, 2006; 2013) and that different national versions of IFRS practice have emerged in some jurisdictions as a new feature of comparative international accounting. In particular, Nobes (2006, 2011, 2014) developed and tested some hypotheses on the persistence of national differences under IFRS in industrialized countries and invited other researchers to investigate this issue further, thus, opening up a new research agenda. The present study is a direct response to Nobes’ call for further research.

This paper seeks to contribute to the international accounting literature in two ways. First, unlike earlier accounting classification studies, this paper attempts to classify accounting systems in Africa using data on actual practices as opposed to rules and regulations. This is important because several recent studies have painted a somewhat misleading picture of the extent to which IFRS have been adopted in some national settings simply because they relied solely on accounting rules and regulations. One classic example is a paper by Khlif et al. (2020), which concluded that the extent of convergence with IFRS in Algeria is higher than in Morocco and Tunisia. Contrary to this claim, the level of adoption of IFRS appears to be higher in Morocco than in Algeria or Tunisia because Morocco is the only North African country that allows listed companies to use IFRS in consolidated financial statements. IFRS are currently prohibited for statutory reporting purposes in Algeria and Tunisia (Deloitte, 2022). In addition, IAS (International Accounting Standard) 1 (paragraph 16) makes it clear that an entity shall only describe financial statements as complying with IFRS if the financial statements comply with all the requirements of IFRS. Khlif et al. (2020) inadvertently convey the impression that Algeria, Morocco, and Tunisia have adopted international standards, whereas IFRS have only influenced (to some extent) the development of national generally accepted accounting principles (GAAP) in these countries. Khlif et al. used data from the PricewaterhouseCoopers (PwC, 2011) survey of accounting regulations to support their key arguments. The survey report states on page 202 that IFRS are ‘‘required for consolidated and standalone/separate financial statements” in Algeria. However, the 2015 edition of the report now states unequivocally that IFRS are ‘‘neither required nor permitted in Algeria.” (PwC, 2015, p. 229). This point is re-emphasized in the most recent (2017) edition, which also states that ‘‘IFRS are neither required nor permitted in Algeria” (PwC, 2017, p. 205).

Conclusion

The three multivariate analyses in this study (principal component analysis, cluster analysis, and multidimensional scaling) all lead to the same conclusion that a two-group classification (Anglo-American School and Franco-German School) can be discerned in the IFRS practices of listed companies in Africa, thereby supporting H1. These results also support H2, that pre-IFRS national rules influence IFRS policy choices, and H3, that there are systematic national differences in the accounting policy choices of listed companies in Africa.

Unlike earlier work by Elad (2015), which tested the classification in Fig. 2 using only data on de jure regulations from the PwC (2011) survey, this paper presents the first classification of financial reporting in Africa based on de facto practices. Classifications based on statutory rules rather than accounting practices could mislead researchers if the rules are not followed in practice. This paper shows that many recent studies use erroneous data on the adoption status of IFRS in African countries simply because they relied solely on statutory accounting rules and regulations.

Highlights

Abstract

Keywords

1. Introduction

2. Building a critical lens for translation research in accounting: Venuti, translation, hegemony

3. Empirical illustration: Finnish-language IFRS translation

4. Discussion

5. Conclusions

Acknowledgments

References

Abstract

     Translation research in accounting has in the past decades recognized the significance of translation for international accounting communication, but only recently started to discuss the relevance and legitimacy of the approaches in which translation is used and studied. Generally, translation in accounting has been seen as a technically challenging task that serves an assumedly neutral functional purpose. This perception is problematic in that it neglects the multifaceted cultural, political and societal implications of translation. In order to expand the theoretical repertoire of translation research in accounting, this paper introduces a critical lens that questions the seemingly neutral use of translation in various contexts. Drawing on the influential work of translation theorist Lawrence Venuti, it is argued that translation both reveals and factors in intercultural hegemonies, imbalances and asymmetries. To explore the relevance of Venuti’s theorizing for accounting, the context of IFRS translation is examined. Attempting to become a global institution across cultures and languages, the IFRS indeed depend on translation in their diffusion. The IFRS context is, however, embedded in current linguistic and cultural hegemonies: the dominant position of the English language and the canonical role of Anglo-American accounting. Combining a critical theoretical conceptualization and empirical data from the translation work of Finnish-language IFRS, this paper illustrates how translation in accounting is not a technical exercise but can entail linguistic and cultural conflicts between dominant and marginal(ized) concepts, traditions and values. Above all, this paper shows how applying a different theoretical lens to translation can yield critical insights.

Introduction

     Translation is vital for international accounting communication. It plays a pivotal role in multilingual corporate reporting (e.g., Nobes & Stadler, 2018), in the diffusion of international reporting frameworks (e.g., Kettunen, 2017, IFRS Foundation, 2018), and in conducting and reporting research (e.g., Andrew et al., 2020, Kamla and Komori, 2018). Crossing both linguistic and cultural borders, translation is a multifaceted phenomenon with cultural, political and societal implications (Bassnett and Lefevere, 1990, Robinson, 1997, Tymoczko, 2009, Evans, 2018). Still, accounting research has mainly perceived translation as a technical issue in need of practical solutions that would somehow create assumedly neutral communication and correspondences between different languages and accounting traditions (e.g., Aisbitt and Nobes, 2001, Doupnik and Richter, 2003, Doupnik and Richter, 2004, Nobes and Stadler, 2018). What this approach has neglected is the “ethical obligation to be mindful of [translation’s] implications” (Evans, 2018, p. 1863). There is indeed a pressing need for more critical research agendas (Evans, 2018, Evans and Kamla, 2018) and for theoretical approaches on which to build them.

Conclusions

     Despite the regnant approaches in extant studies, accounting is not a neutral, technical area of translation. Instead, ethical questions, such as the fate of linguistic and cultural diversity exist. Following Evans’ (2018) proposal of a paradigm shift in translation research, this study has presented and provided an exploratory application of a critical research framework, demonstrating how translation theory originally developed in eminently culturally-embedded literary translation can in the supposedly technical field of accounting make us see translation anew. It interrogates the questionably neutral view on the nature of translation adopted by the majority of prior accounting research, posing questions such as who translation serves, which structures it upholds or opposes, and how choices in different parts of translation processes affect the languages and cultures involved. In essence, it challenges the unproblematized, hegemonic perception that assumes either translation has no implications beyond its technical task or that the implications are irrelevant—as long as they do not affect the English-speaking constituents. Thus, this paper has shown that it is vital to minoritize research approaches and escape ethically limited ones so that they would not become canonized as a way of doing translation research in accounting.

Abstract

Keywords

1. Introduction

2. Related literature and hypotheses development

3. Research methodology

4. Sample and descriptive statistics

5. Main results

6. Conclusion

Declaration of Competing Interest

Acknowledgements

Data availability

References

Abstract

     This paper compares the informativeness of discretionary research and development (R&D) capitalization under IAS 38 with non-discretionary “as-if” R&D capitalization. While prior research consistently demonstrated capital market benefits of “as-if” capitalization, prior evidence for reported R&D capitalization are less favorable due to earnings management concerns. Because “as-if” studies are based on adjusted data assuming R&D capitalization, the resulting numbers are free from such concerns and may be more informative. We find that reported capitalized R&D is not associated with lower information asymmetry but positively associated with forecast errors. While market values are not associated with reported capitalized R&D, they are strongly associated with “as-if” capitalized R&D. Also, actual capitalization of development expenditures under IAS 38 is only as value relevant as when expensing all R&D. Our results are consistent with the notion that market participants undo actual capitalization and use the information on expensed R&D to develop their own estimates of R&D value. Our findings lend support to the proposition by Barker and Penman (2020) that deficiencies of the balance sheet that result from the uncertainty inherent in expenditures such as R&D, should be supplemented by more detailed information on the nature of the related expenses in the income statement.

Introduction

     The accounting for intangibles such as research and development (R&D) remains an unresolved question and a major discrepancy between International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP) (Lev, 2019). We use the German setting with highly R&D-intensive firms applying IFRS1 to compare the informativeness of discretionary R&D capitalization under IAS (International Accounting Standard) 382 with non-discretionary “as-if” R&D capitalization derived from additional disclosed information. Whereas prior research has consistently demonstrated capital market benefits of “as-if” capitalization (e.g., Lev & Sougiannis, 1996), such benefits are questionable for reported capitalized R&D under IFRS due to earnings management concerns (e.g., Dinh et al., 2016, Jones, 2011, Mazzi et al., 2019). However, actual and “as-if” capitalization have not yet been compared within the same setting. Because “as-if” studies are based on adjusted data where the actual accounting for R&D is undone and capitalization is assumed, the resulting numbers are free from earnings management and may hence be more informative.

Conclusion

     This paper compares the informativeness of actual capitalization under IAS 38 with “as-if” capitalization. While prior research consistently demonstrated benefits of “as-if” R&D capitalization, the results of studies that examine reported R&D capitalization are less favorable. Because the IASC’s decision to prescribe partial R&D capitalization was largely based on “as-if” studies, our analysis aims at resolving the conflicting evidence between studies of reported capitalized R&D vs. “as-if” capitalized R&D. Prior studies of actual R&D capitalization have found that reduced informativeness may be due to earnings management concerns. “As-if” studies are free from such concerns because they are based on adjusted data assuming R&D capitalization. Hence, the resulting numbers may be more informative.

     Whereas prior literature has focused on R&D reporting on the balance sheet, Barker and Penman (2020) argue that such expenditures inevitably lead to mismatching and, hence, deficiencies of the balance sheet due to the uncertain nature of intangibles. They propose that such deficiencies of the balance sheet be supplemented by more detailed information on the nature of the related expenses in the income statement. Market participants can use this information to develop their own estimates of the value of R&D ventures. This approach is consistent with that of “as-if” studies which use the information on expensed R&D to develop estimates of the value of R&D ventures independent from information provided on the balance sheet. Hence, our study provides evidence for testing the proposal in Barker and Penman (2020).

This study evaluates the potential indicators of tangible asset impairments (TAI) and their interaction with legal enforcement, using an international sample of 38 countries that follow International Financial Reporting Standards. Consistent with expectations, specific economic and opportunistic indicators demonstrate a significant relationship with TAI, and these are further affected by legal enforcement. In particular, empirical findings suggest that in weak enforcement countries, besides economic indicators, the opportunistic indicators of earnings smoothing and debt pressure are significantly related to TAI. In strong enforcement countries, the importance of economic indicators increases substantially, while the effect of the opportunistic debt-related indicator attenuates and the indicator of earnings smoothing is immaterial. This evidence suggests that legal enforcement constitutes a beneficial institutional attribute, but does not restrain all aspects of managerial opportunism.

1. Introduction

Asset impairments have been of particular interest to practitioners, regulators, and accounting researchers for decades. This is not surprising for several reasons. First, asset impairments often constitute material amounts in financial statements that signal managers’ perceptions about the future performance of assets.2 There is ample empirical evidence suggesting that investors incorporate this information into security prices (Bartov, Lindahl & Ricks, 1998). Second, asset impairments represent a formal manifestation of conditional conservatism (Ryan, 2006; André, Filip, & Paugam, 2015).3 Conditional conservatism is generally perceived as a salient attribute of accounting quality because it enhances stakeholders’ monitoring and facilitates efficient contracting (Watts, 2003). Finally, although there are clearly prescribed impairment guidelines in the sets of accounting standards that currently prevail, (i.e. United States Generally Accepted Accounting Principles [US GAAP] and International Financial Reporting Standards [IFRS]), evidence of flexibility in the magnitude and timing of asset impairments recognition still exists. For example, several studies find that asset impairments recognized under US GAAP are significantly related to opportunistic indicators (Hong, Paik, & Smith, 2018). Therefore, there is justifiable interest in examining the potential causes of asset impairments, and their interaction with other factors that affect the managers’ reporting behaviors.

This study investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) has affected the long-term cost of equity and debt in Latin America, where the enforcement of accounting standards and investor protection mechanisms are weak in comparison to developed nations. Analyzing a sample of firms from Argentina, Brazil, Chile, Mexico, and Peru, we show that mandatory IFRS adoption led to reduction in the cost of equity even after controlling for firm-level reporting incentives. Test results also show that the cost of debt was reduced significantly after the IFRS adoption. Our results suggest that enhanced disclosure and comparability stemming from IFRS in comparison to previous domestic accounting standards helped to mitigate the information asymmetry problem, and resulted in positive economic consequences for Latin American firms.

Introduction

The movement towards mandating the adoption of International Financial Reporting Standards (IFRS) is considered the most widespread global financial reform in accounting history (Daske, Hail, Leuz, & Verdi, 2008). The premise of these standards is to improve the transparency and reliability of financial statements across the globe and facilitate cross border investments. As a result of this global dimension, determining the economic consequences of the accounting standards as part of financial regulatory reforms is both more challenging and important as more countries with diverse levels of development adopt IFRS (Zeff, 2012). A considerable body of literature investigates the economic effects of IFRS adoption in developed nations (Barth, Landsman, & Lang, 2008; Daske et al., 2008; Houqe, Monem, & Zijl, 2016) 1 . They report the consequences of the adoption of IFRS on several different users, including accountants, investors, analysts, governments and international regulators. However, few studies have investigated these effects in the Latin American context (Pelucio-Grecco, Geron, Grecco, & Lima, 2014; Rodríguez, Cortez, Méndez, & Garza, 2017). Examining these effects have significant potential economic and social implications for emerging countries, which can impact both national and international users of accounting information. Therefore, regulators are interested in whether adopting IFRS may have contributed toward reducing the cost of capital and consequentially signalling an increase in market efficiency and market liquidity (Han et al., 2016).

This study aims to analyse, within the scope of publicly listed Spanish companies, whether the mandatory implementation of International Financial Reporting Standards (IFRS) has had an effect on financial analysts’ earnings forecasts and investments in non-cross-listed Spanish companies (those only listed on the Spanish capital market). A sample of 369 observations for companies listed on the Spanish securities market for the period 2004–2007, of which 84 are cross-listed, was used to perform the analysis. The results show that the transition from domestic to international accounting standards has had positive effects for non-cross-listed Spanish companies, leading to the improved accuracy of financial analysts’ earnings forecasts and an increase in investments.

Introduction

The wide range of financial reporting standards used around the world is an important factor that impacts data processing costs for investors who wish to diversify their investment portfolios on an international scale (Khurana & Michas, 2011). The use of domestic accounting standards make it more expensive and difficult to assess investment opportunities due to the complexity of comparing financial reports of companies listed on different international markets. Owing to this complexity, companies seeking to invest in other countries are obliged to reconcile their financial results to the host country’s financial reporting standards to ensure comparability. As of 1 January 2005, Regulation (EC) No. 1606/2002 of the European Parliament and of the Council requires all listed companies to prepare their consolidated financial reports in accordance with International Financial Reporting Standards (IFRS). The aim of simultaneously adopting IFRS in all listed companies in different countries is to achieve the greater uniformity, transparency, reliability, and comparability of financial data on capital markets (Alon & Dwyer, 2014; Barth, Landsman, & Lang, 2008). In the case of listed Spanish companies, the mandatory adoption of IFRS in 2005 has facilitated the comparability of financial data with respect to other listed European companies. The literature on the consequences of IFRS adoption is mixed. However, numerous studies have highlighted the benefits, including White (2007), Armstrong, Barth, Jagolinzer, and Riedl (2010), Daske, Hail, Leuz, and Verdi (2008), Johnson (2009), Zhou, Xiong, and Ganguli (2009), and Barth, Landsman, Lang, and Williams (2012), who report a positive impact of IFRS in terms of greater uniformity, transparency, and comparability of financial data, thus reducing data preparation and processing costs. The availability of more uniform and transparent data also reduces information asymmetries between investors and increases market liquidity (Abad, Cutillas-Gomariz, Sánchez-Ballesta, & Yagüe, 2018). As regards securities trading, Daske et al. (2008), Daske, Hail, Leuz, and Verdi (2013), Li (2010), and Christensen, Hail, and Leuz (2013) observed that IFRS adoption increases market liquidity. This increase is greater in countries with stronger enforcement mechanisms where companies have greater incentives to be more transparent.

This paper adds to the literature on the role of financial economics in accounting standard-setting by analyzing the co-performation of an economic theory e the Efficient Market Hypothesis (EMH) e in the construction of a new approach to accounting for credit losses in financial reporting. Inspired by actornetwork theory and its notions of performativity and translation, the paper draws on interview data and documents to reconstruct the process by which the devalued “incurred loss” impairment model was replaced with a more forward-looking “expected loss” approach under IFRS in response to the 2008 financial crisis. These actions comprised of a series of experiments and negotiations, including an unsuccessful effort to establish an “ideal”-type model and the failure of a joint initiative between the IASB and the FASB. Alongside extensive considerations over how to make the approach operational, the influence of the EMH regarding the relationship between loan pricing and initial expectations of credit losses is elucidated. We show how a standard-setting objective grounded in financial economics is translated through a process of approximation as it forges linkages with other matters of concern. This process sheds light on the transformations involved in finding tolerable solutions when utilizing financial economics in the setting of accounting standards.

Introduction

As the preceding quote exemplifies, accounting standard-setters are often influenced by a desire to accurately reflect the underlying economics of business activity. Drawing on the precepts of financial economics, standard-setters are equipped with potentially powerful tools which aim to propel the standard-setting process towards its “correct” conclusion (Himick & Brivot, 2018). As Hopwood (1992) posits, “Economics … is seen as a means for helping accounting to become what it should be, but what currently it is not” (p. 128). Along these lines, previous research highlights the increasing influence of financial economic thought on accounting standards (Bougen & Young, 2012; Ravenscroft & Williams, 2009; Young, 2014) and conceptual frameworks (Erb & Pelger, 2015; Pelger, 2016; Power, 2010; Young, 2006). Nevertheless, as Power (2010) points out, the application of financial economics in financial accounting remains “partial, impure and pragmatic” (p. 209). One explanation for this is that the theories of financial economics, such as the Efficient Market Hypothesis (EMH) stimulated by Fama (1965), are both abstract and empirically uncertain (Whitley, 1986). In addition to challenges to the notion of market efficiency from within the discipline of economics (e.g., Shiller, 1981), pragmatism in the realm of financial accounting often generates obstacles to the application of the doctrine (Power, 2010). In light of this and the dearth of research on the operationalization of financial economic theory in standard-setting, we propose that the manner in which the EMH co-performs accounting standards is an important empirical question.

1. Introduction

2. Research design

3. Empirical results

4. Conclusions

References

Abstract

As switching from GAAP to IFRS causes changes to accounting quality, predictability, and crash risk, this paper empirically investigates whether firms involved in corporate social responsibility (CSR) performed better under IFRS adoption. Our sample is broken down into three sub-periods (2002-2005, 2010-2012, and 2013-2015) to meet the EU mandate IFRS in 2005 and Taiwan in 2013, respectively. We find mandatory IFRS adoption results in reducing earnings management, improving in forecast accuracy leading to enhanced earnings predictive ability, and mitigating crash risk. Furthermore, CSR firms behave responsibly in constraining earnings management and increasing financial reporting transparency through interaction with IFRS. Following IFRS adoption, crash risk is significantly improved in Over-The-Counter (OTC) companies and the enhanced transparency attracts increased foreign investment to the OTC market. Finally, the results on IFRS and CSR interaction provide reference for global capital markets, especially for major capital markets without mandatory IFRS adoption, e.g., the US and Japan.

Introduction

In 2005, the European Union mandated adoption of the International Financial Reporting Standards (IFRS), and other countries have since followed suit. The switch from Taiwan Generally Accepted Accounting Principles (TGAAP) to IFRS is a major regulatory accounting reporting change in Taiwan. Previous studies have examined the effect of IFRS adoption on analyst forecasts (Byard et al., 2011; Garrido-Miralles and Sanabria-García, 2014; Pathiranage and Jubb, 2018; Demmer et al., 2019), capital markets (Horton and Serafeim, 2010; Kim and Ryu, 2018; Franzen and Weißenberger, 2018; Castro and Santana, 2018; de Moura and Gupta, 2019; DeFond et al., 2019; Gu et al., 2019), financial reporting (Callao et al., 2007; Hung and Subramanyam, 2007; Trimble, 2018; Chen and Gong, 2019), cost of debt (Moscariello et al., 2014; Downes et al., 2018), earnings management (Amidu and Issahaku, 2019), and information comparability (Yip and Young, 2012; Mita et al., 2018; Liu et al., 2018)1. Corporate social responsibility (CSR) has emerged as an increasingly important topic, and corporations are under mounting pressure to behave responsibly. Furthermore, CSR performance has been found to be related to financial performance (Lin et al., 2009; Surroca et al., 2010; Oyewumi et al., 2018; Lin et al., 2019; Jang et al., 2019; Bhattacharyya and Rahman, 2019; Chahine, et al., 2019; Kao et al., 2018), firm leverage (Sheikh, 2019), and firm market value (Lo and Sheu, 2007; Sheikh, 2018).

While financial reporting standards under U.S. GAAP and IFRS are fundamentally similar, differences do exist that may affect our analysis of company financial statements. This is particularly true when comparing a U.S. company following U.S. GAAP to a firm that uses IFRS. To illustrate, we compare research and development (R&D) accounting methods under both sets of standards and illustrate how they affect the analysis of financial results of firms in a specific industry–—automotive manufacturers. Our results provide insight into settings in which differences in R&D accounting may have the greatest impact on financial analysis.

Using a different accounting standard affects financial statements

While there are numerous standard setters in the accounting world, the majority of leading companies now use either U.S. GAAP or International Financial Reporting Standards (IFRS). For a short while around 2008, it looked as though the Securities and Exchange Commission (SEC) planned to move the U.S. toward the adoption of IFRS but now convergence of the two, rather than adoption, seems to be the more likely path. James Schnurr (2015), chief accountant of the SEC, in his speech at the Baruch College Financial Reporting Conference, stated that collaborations were currently the only way for convergence. In a different speech that year at the Brooklyn Law School, SEC Commissioner Kara M. Stein (2015) said that she was “not convinced of a need to abandon U.S. GAAP in favor of IFRS.” During these collaborations, however, each body has adjusted the resulting standards to fit the perceived needs of its constituents. For example, while the standards on leases and revenue recognition both have many things in common, the differences are still very important. Understanding the differences is crucial. Even within U.S. GAAP and IFRS, there are choices that each company needs to make: what inventory flow system to adopt or what depreciation method to use. Both of these choices, as well as differing regulations, may affect the classic financial ratios that analysts and investors use to evaluate a company.

1- Introduction

2- Theoretical context

3- IFRS in Jordan: multi-level institutional aspects

4- Method

5- Analysis: IFRS and the accounting domain

6- Additional discussion and conclusion

References

Abstract

This study highlights how the implementation of International Financial Reporting Standards, in a context of minimal readiness, induces power imbalance between corporate accounting and audit, and changes acceptable accounting practices, and roles. Using the concept of institutional work, I analyze data from interviews and secondary sources, focusing attention on the practices of issuing financial statements. I find that the technical dependency of corporate accounting on audit blurs the boundaries between the two fields. I argue that this generates conditions for implicit negotiations, in which both groups (corporate accountants and auditors) engage in institutional work. Two subtypes of institutional work are identified as corporate accountants relinquish some of their traditionally institutionalized activities to the ‘expert’ auditors, to maintain field stability, while auditors encroach on the corporate accounting field, to remove obstacles during the implementation of IFRS. While there is no shortage of research documenting the economic outcomes of the adoption of IFRS, there is hardly any examination of how this technical disruption, has affected practices and relations within the accounting domain. Incorporating views and actions from the much-ignored corporate accounting field enables a more holistic view of how responses to IFRS are constructed, especially in contexts where IFRS are adopted for legitimacy.

Introduction

The interpretive stream of research argues that the adoption of International Financial Reporting Standards (IFRS) across many countries is motivated by seeking the legitimacy from powerful states and transnational organizations, within a context of increased institutional complexity and the interconnectedness of national and global forces (e.g. Arnold, 2005; Chand & White, 2007; Gallhofer, Haslam, & Kamla, 2011; Guerreiro, Rodrigues, & Craig, 2012; Irvine, 2008; Mir & Rahaman, 2005). Prior research explains developing countries’ decisions to adopt IFRS with economic dependence, pressures from the World Bank and the International Monetary Fund (IMF), absence of national accounting standards, and a perception of the neutrality of IFRS, (Annisette, 2004; Chua & Taylor, 2008; Judge, Li, & Pinsker, 2010; Mir & Rahaman, 2005). In one example, Al-Akra, Jahangir Ali, & Marashdeh (2009) argue that Jordan’s economic and political dependency is critical in explaining the wholesale adoption of IFRS. Institutional theorists suggest that, in light of legitimacy-seeking acts, we can expect at least loose coupling between the formal processes, and subsequent technical activities (Bromley & Powell, 2012; Meyer & Rowan, 1977). Abd-Elsalam and Weetman (2003) point to the lack of familiarity with international accounting standards, and the linguistic challenges involved in producing compliant financial statements, in Egypt.

1- Introduction

2- Background and related literature

3- Research design

4- Data, sample selection, and descriptive statistics

5- Empirical results

6- Additional analyses and robustness tests

7- Conclusions

References

Abstract

This study tests whether firms seek to mitigate the adverse effects of Financial Reporting Complexity (FRC) by investing in accounting expertise. We develop a measure of FRC based on the complexity of accounting standards that govern annual disclosures. We find that FRC is positively related to the accounting expertise on a firm’s board of directors and audit committee. We also find that accounting expertise mitigates the relation between FRC and negative reporting outcomes. Collectively, this study increases our understanding of the actions firms take to mitigate the negative consequences of FRC, and the role of accounting expertise in this setting.

Introduction

The U.S. Securities and Exchange Commission’s (SEC) Advisory Committee on Improvements to Financial Reporting defines financial reporting complexity (FRC) as: “the difficulty for…preparers to properly apply generally accepted accounting principles in the U.S. (U.S. GAAP) and communicate the economic substance of a transaction or event and the overall financial position and results of a company…” (SEC 2008, p. 18).1 Prior literature documents a growing trend in FRC (Dyer et al. 2017) and examines its consequences. Generally, firms with high FRC have a less favorable information environment (e.g., Li 2008; You and Zhang 2009; Lehavy et al. 2011; Peterson 2012) and increased financial misstatement risk (e.g., Filzen and Peterson 2015; Hoitash and Hoitash 2018) relative to firms with low FRC. Extant literature generally attributes these findings to high FRC levels reflecting the intentional choice of firm managers to obfuscate financial reports (e.g., Li 2008; Lo et al. 2017). Recently, some studies have argued that FRC primarily captures the complexity of firms’ business operations and accounting standards rather than the intention to obfuscate (Guay et al. 2016; Bushee et al. 2018; Dyer et al. 2017). If high FRC is not an intentional choice, one could expect firms to seek to diminish the adverse effects of FRC on their information environment and financial reporting risk. However, there is little evidence on whether and how companies mitigate the negative effects of FRC. One exception is a study by Guay et al. (2016) documenting that firms increase voluntary disclosure as financial reporting complexity increases. Their findings are consistent with firms balancing complex mandatory financial reporting and voluntary disclosure to achieve an optimal information environment.

1- Introduction

2- Literature review

3- Institutional background

4- Hypothesis development

5- Empirical tests

6- Firm-level cross-section analyses

7- Effects of foreign investors’ home country institutions and IFRS experience

8- Robustness tests

9- Conclusion

References

Abstract

We examine the effectiveness of China’s IFRS adoption from the perspective of an important set of financial report users, foreign institutional investors. We find that foreign institutional investment does not increase after China’s IFRS adoption, and some evidence that it actually declines, particularly among firms with weaker incentives to credibly implement IFRS, or with greater ability to manipulate IFRS’s fair value provisions. We also find that the association between earnings and returns generally declines after IFRS adoption, consistent with reduced earnings quality. In addition, we find that foreign institutional investors’ returns decrease after China’s IFRS adoption. Finally, the decline in foreign institutional investment is greater among investors from countries with weak institutions that have also adopted IFRS. Taken together, our evidence suggests that the weak institutional infrastructure in China’s transitional economy impairs IFRS’s intended goal of attracting institutional investment through improved financial reporting quality. Further, financial information users’ home country institutions and IFRS adoption experience affect the effectiveness of IFRS adoption.

Introduction

In an effort to improve financial reporting quality and attract foreign investment, China’s domestic capital markets now use International Financial Reporting Standards (IFRS) (MOF, 2006; IASB, 2006).1 Advocates of IFRS claim that it reduces information acquisition costs, thereby increasing investors’ willingness to invest across borders (e.g., SEC, 2008; Tweedie, 2008). IFRS, however, is modeled on developed economies with strong institutions, and little is known about the effects of IFRS adoption in large transitional economies such as China, where institutions are weak. Further, foreign institutional investors’ home country institutions and IFRS adoption experience may affect the ability of IFRS to attract foreign investment. The purpose of our study is to test whether China’s IFRS adoption has achieved its intended goal of attracting foreign institutional investment and whether foreign investors’ home country institutions and IFRS adoption experience influence the association between IFRS adoption and foreign institutional investment. The stated goal of the International Accounting Standards Board (IASB) in formulating IFRS is to create a single set of high quality accounting standards that ‘‘take into account the financial reporting needs of emerging economies” (IFRS, 2011). As a result, many developing countries have adopted or are planning to adopt IFRS in the near future. Consistent with this trend, China mandated IFRS adoption for all publicly traded firms beginning in 2007. A primary goal of China’s IFRS adoption is to attract greater foreign investment (MOF, 2006). Prior research has generally found positive capital market consequences following mandatory IFRS adoption (Daske et al., 2008; Li, 2010; Tan et al., 2011; DeFond et al., 2011). Much of this research, however, is based on evidence from the European Union (EU), where economic and legal institutions tend to be stronger than those in China. In settings where IFRS is unlikely to be credibly implemented, the benefits of IFRS adoption tend to be weak or non-existent, consistent with the notion that the effectiveness of high quality accounting standards depends critically on managers’ reporting incentives (Fan and Wong, 2002; Ball, 2006; Ball et al., 2003; Leuz, 2003). Characterized by poor investor protection, weak rule of law, and poor audit quality, China’s institutional setting creates weak incentives for managers to produce high quality financial statements (DeFond et al., 2000; Chen and Yuan, 2004; Wang et al., 2008; He et al., 2012). In addition, IFRS’s principlesbased standards and a greater use of fair value accounting provide more opportunities for Chinese managers to misreport (He et al., 2012). Therefore, we predict that IFRS adoption in China is unlikely to result in increased financial reporting quality that will attract greater foreign investment.