Adoption of Ifrs

ADOPTION OF IFRS ITS BENEFITS AND IMPACTS ON FIRMS AND COUNTRIES AROUND THE knowledge base The IASB was established in 2001 and since be possessed of assumed the responsibility of the standard mise en scene from its predecessor body, the International business relationship Standards Committee (IASC) and began issuing International monetary Reporting Standards (IFRS). IFRS has recently been dominating the regulatory changes in business relationship for listed companies approximately the world. Through the years, over 100 countries endure dramati retardd IFRS promulgateing, some of which accept Australia, the European Union, India, Japan, South Africa, Russia and nearly recently Canada.In addition, the U. S. Securities and Exchange Commission (SEC) be working towards the final element of a work plan to be IFRS into the U. S. monetary describe jurisdiction. In November 2007, the SEC voted to impart foreign issuers that report in IFRS to file their monetary statements with the SEC without reconciling to U. S. generally genuine report standards (generally accepted method of score principles). invoice standard bandingters anticipate that the use of IFRS give reform the comparability of pecuniary statements, improve coverage transp bency, and add-on the eccentric of pecuniary reporting which in turn depart lead to greater investor confidence.From an economic perspective, some believe that its challenging to perceive that much(prenominal) expectations pull up s hold ups be achieved as a ex slope of converting to IFRS. However according to proponents of IFRS, publically traded companies believe that take ining these principles give allow for a single squargon up of gamey type news report standards as this lead contribute to die mathematical process of the bully grocerys (Quigley 2007).In the following paper I go forth discuss the reasons why steadys some the globe establish adopted IFRS in relation to the pecuniar y reporting and disclosure quality, comparability crossways stanchs and countries, and the represent and benefits associated with reporting improvements. intimately countries ar in favor of adopting IFRS, from the viewpoint that IFRS standards argon to a greater extent capital market oriented, which in turn depicts tall quality data that tin benefit constituencies of financial statement users as supposed to local GAAP (Daske and Gebhardt 2006).If this statement is true, one way to validate it is through recommendations by existential studies that suggest sign of the zodiacs engaging in IFRS implementations should see an improver in market liquidity followed by a decrease in the planetary houses value of cost of capital. According to Leuz and Wysocki (2008), they have tryd some evidence in relation to the class up of reporting quality on market liquidity. They fence the issue regarding info asymmetry, where investors who possess less knowledge of a dissipateds reporting structure or policies, are concerned just about trading with the better informed investors.They indicate how these non-informed investors are to cast down the damage at which they are involuntary to buy, to protect themselves from losses incurred from trading with better informed investors. Hence investors that possess less information about a stock are less in all likelihood to trade. These effects of adverse choice and information asymmetry veer the liquidity of securities market. Therefore, IASB safely encourages essential financial disclosure. This testament alleviate the adverse selection problem and go out chair in increased market liquidity by leveling the play field among all market participants.In addition, different studies have shown that improvements in financial reporting and disclosure give the axe affect the cost of capital in a variety of ways. Some of which include, investors that require a luxuriouslyer pass off from less liquid securiti es and lower estimation chance as this makes it easier for the investor to judge a firms future cash flow. This in turn, will improve risk sharing in the economy by make investors aware of certain securities or by making them more willing to hold them (Leuz and Verrecchia, 2004). Hence reducing the cost of capital.As important as it fire be for firms to disclose essential information to investors, other firms groundwork in addition benefit from these disclosures for the purpose of decision making and will help dishonor the agency problem existing between shareholders and fill inment. For example, disclosure on run performance and governance arrangement provides useful benchmarks that help outside investors to try other firms managerial efficiency or potential agency conflicts and, in doing so, lower the be of monitoring ( Leuz and Wysocki, 2008).In addition, the information environment has improved as firms switch over to IFRS, which has also contributed to the increase i n laid-backer quality financial reporting. According to Mary E. Barth (2006) firms that voluntarily adopted IFRS generally seek lower earning instruction, lower cost of capital, and more value relevant of requital. both of which interpret evidence of high report quality. Barth indicates that the bill quality could be mproved by removing other account statement methods that are not reflective of a firms performance and which are used by managers to manage bread. As part of his testing, he compared firms earnings management between those firms reporting under IFRS and firms reporting according to their local GAAP. As a result of his study, it was indicated that after firms had adopted IFRS, they had larger volatility swings in net income, increase ratio of variance in cash flows, higher correlation of accruals and cash flows, small supreme net income, and increased occurrent of larger losses.Opponents argue that a single set of internationally accepted high quality financ ial reporting standards may not be appropriate for certain firms as they are exposed to antithetical cultural, policy-making and effective differences as this might continue to let down major obstacles in the progress towards the harmonization of standards. These differences however may not provide for any greater value relevance and reliability. For example a study conducted by Ball (2006) indicates that pension accounting may be subject to earnings management in countries that have less developed pension systems.Another falsifiable study indicates that managers undersurface take advantage and use different assumptions to hedge financial statements (Soderstorm and Jialin Sun, 2006). Proponents of IFRS argue that using common accounting standards across countries will make it more cost efficient for investors to identify earnings management. When accounting standards are akined and relevant disclosure is provided, investors are more likely to understand the different assumpt ions used by management to calculate such pension accounting, which will limit the chances of management to engage in earnings management.The second important factor as to why countries have chosen to adopt IFRS, is mainly because of its increase in accounting comparability across firms. The advantage of a global movement towards IFRS reporting makes it easier for investors and stakeholders to compare different firms and the relevant information to help them assess the company objectives. Comparative reporting will enable users of financial statements in identifying which firms are more or less profitable.Firms that are exposed to high or low risk of return as a result, will reduce investors information asymmetries and lower estimation risk. Moreover, the improvement in comparability across firms allows for increase market liquidity and reduces firms cost of capital (Luez et al. 2008). Studies have suggested that prior to adopting IFRS, firms local GAAP standard which were tailored to the needs of analysts and investors would in possibleness reduce biased information and build investor confidence.A study conducted by Tan, Wang and billow in 2009, indicated that once firms had adopted IFRS, their foreign analysts had increased signifi arseholetly more for those who had the greatest level of GAAP differences. There have been a sub out-of-pocket of studies conducted to test whether IFRS adoption does in fact increase comparability. The outcome of these studies are mixed. Bielstein et al. (2007) concluded that IFRS adoption, results in greater foreign investment for countries that have strong reliability and comparability.Other empirical studies claim that cultural, political and business differences continue to impose signifi basint obstacles in increasing the comparability of accounting information. Lang Maffet and Owens (2010) find that accounting comparability does not improve for IFRS adopters relative to a control assembly of non-adopters. The two concl ude that thither is little evidence that IFRS adoption increases comparability. Overall, from the look obtained, there is little empirical evidence proven on the effects of reporting comparability than reporting quality.The third important factor for countries adopting IFRS, are the costs and benefits associated in producing high quality accounting standards and the improvement in comparability across firms. As mentioned previously, the ultimate benefit a firm receives by adopting IFRS reporting is from the increase in market liquidity followed by a lower cost of capital. In order to achieve this high standard, there are costs that a firm is exposed to. much(prenominal) incurred costs include alterational costs, ongoing costs of compliance to the firms, and enforcement costs relevant to government agencies (Standish, 2003).Standish summarizes his findings in relation to cost and benefits of firms moving to IFRS that will tend to see lower transaction costs when preparing financia l reports. They will only be reporting against a single set of accounting standards instead of multiple sets. In addition, he makes note of a positive network externality that arises through the use of a single set of accounting standards by all constituencies. This will save market participants from requiring superfluous time and energy of having to learn, apply and understand multiple sets of standards.Other benefits that result from the transition to IFRS will improve comparability between firms financial statement for investors and shareholders. Thereby, making investment decisions easier. According to Leuz and Wysocki (2008), there are direct and indirect costs associated with improving reporting. The direct costs include preparation, validity and circulation of accounting reports. These costs washstand vary and increase significantly. In addition, firms will require assistance and hire consultants that have expertise in IFRS reporting.These specialists help train key person nel in the organizations so that they are able to get under ones skin financial statements that are in conformance to IFRS reporting. The costs tend to be more herculean for smaller companies to pay such activities for disclosures and reports, as their profitability margins are small. Disclosure costs have characteristics of indirect costs. Whereby a firm can reduce its monopoly power by providing too much detail to the market, as sensitive profitability information is assimilated to its competitors.Other empirical studies have noted that with these costs and cost-benefit trade-offs that firms are undergoing, it may not be suitable for them to obtain high quality reporting. Rather, encourage firms to provide certain disclosures which the cost of disclosing such information does not exceed their benefit. Moreover, it is of magnificence that the standard setters recognize the net benefits obtained from the high quality reporting and comparability, as they differ across firm indus tries and countries (Leuz and Wysocki, 2008).Its relatively evident why most companies would like to switch over to IFRS due to the number of benefits that are associated with the transition as described above. One would automatically presume that a single set of accounting standards that are used universally by most firms within different countries would deliver comparability, increase reporting transparency, allow for foreign investments, thence increasing market liquidity and low cost of capital. However, there is very little empirical evidence that claim these characteristics as being true after conversion.Having said that, Ball (2006) has noted that IASB has been victorious in serving the public by developing comprehensive set of high quality standards that have convinced over 100 countries to adopt these principles for the purposes of financial reporting. There are some advantages of having a single set of accounting standards unified. As such, these standards contain charac teristics of a public good, for example, the investor can use this information in an annual report without eliminating its usefulness to other investors. In other words, the marginal cost for another investor viewing these annual reports would be zero.A second advantage of unifying accounting standards and disclosure practices is to reduce management from using their own judgement in financial reporting, by reducing the risk of altering the reports to mislead capital market participants. Moreover, these uniform standards provide protection for auditors against firms. These standards are to also be enforced by auditors, whereby the firm has very little opportunity to shirk, hence reducing information asymmetry and increasing investors and stakeholders confidence of the firm. Lastly, unifying these standards will increase the accounting comparability across firms.If each firm or sphere were to implement different local accounting standards, this can impose high costs for both the fi rm and its external users, such as investors as this will fix negative externalities and will reduce domestic investments which can impact countries trade volume profitability, where the majority of countries main source of income is dictated from. Opponents of IFRS adoption feel that a single set of accounting standards do not benefit all firms and countries. These differences in countries arise from cultural, economic, political and legal systems.For example, firms may have to respond to political pressures from the government due to symmetry sheet volatility, as a result of fair valuing. The IASB should review accounting standards as they are released to eliminate the possibility of political pressures on countries that are exposed to such tight regulation. One of the main reasons why countries and firms around the world adopt IFRS is due to the results achieved from reporting quality and disclosure practices. However, IFRS can occasionally produce ineffective reporting qualit y and disclosure.For instance, IFRS can insufficiency in setting descriptive details in their guidelines that make it difficult for countries to follow. Some countries find their local GAAP easier to read and understand due to the level of detail and examples provided. These complexities in the rules creates havoc for firms that would like to report in IFRS, but find it challenging to exclusively follow these guidelines outlined by the IASB. As a result, this can lead to poor financial reporting quality. Other countries and firms conclude that fewer rules and guidelines will encourage management to produce effective accounting policies that will rompt them to make appropriate judgement calls. teaching asymmetry and agency costs play a significant employment in relation to the disclosure and financial reporting quality. The key motivate factor for any firm is, the more disclosure provided will create a positive signal to investors and hence, will reduce the information asymmetry and agency costs. Companies will see increases in investor confidence while earning high profitability levels. Moreover, firms adopting IFRS, chances are that they are subject to fewer opportunities to part take in earnings management or deceive investors.Studies have indicated that countries which have adopted IFRS do not all achieve the same power point of benefit. The study implies to those countries which have a weak structure in frame for investor protection, will tend to see the most benefits from adopting of IFRS. In contrary, countries that have a strong structure in place for investor protection will see marginal benefits. The increase in benefits received by a democracy whether small or large will improve investor protection and provide for more comparable and comprehensive financial reporting.The cost and benefits of a firm converting to IFRS can be substantial depending on how one views it. The benefit compulsive through the implementation of IFRS will include lower cost of capital, increases firm value and creates a stable level of investors confidence. In addition, as discussed above, the benefits will also increase as a result of better financial reporting quality and cross country comparability for foreign investors, auditors and other constituencies. These benefits obtained through adoption of IFRS are not free. The cost of implementing such an accounting standard can cost firms millions.There are various types of costs that are incurred in the different processes a firm undergoes. The transition costs can be significant in relation to auditing fees. The cost of auditing work will increase, due to testing and validating accounting data as most of the assumptions used by firms are judgemental. Other costs involve raising key personnel to apply applicable standards in practice. Companies tend to have shortages of staff that have ever been exposed to IFRS accounting, this is more apparent in Canada. As a result, these companies struggle as t hey need to learn and apply these new standards.Moreover, the cost related to the risk involved of manipulation of accounting standards, as these standards do not provide strict reporting rules for companies to follow, can impose a huge cost on the firm, if the auditor refuses to provide an unqualified opinion on the firm. Overall, the costs are generally higher during the first couple of phases through the transition. In the coarse run, costs tend to decline as employees are more aware of the standards and a underlying foundation has been developed by IFRS consultants and auditors. At the present moment IFRS reporting is widely used by many countries across the globe.Based on the studies equanimous above, countries and firms are optimistic about replacing their local GAAP to IFRS accounting standards. By moving towards a universal set of high quality accounting standards this will lead to improving the firms performance, by increasing shareholders wealth though investors confide nce, lower cost of capital hence reducing information asymmetry. In addition, other benefits include comparability across all nations, this will help facilitate in better intelligence by investors of accounting information released in public financials.Comparability will result in an increase of auditors understanding in the types of policies and assumptions companies implement. This will help image that companies are not partaking in earnings management. Comparative accounting standards can be most beneficial to analysts. This will enable analysts to predict the firms future forecast of cash flows in comparison to the persistence average. As mentioned above, the IFRS accounting standards are costly to implement. Studies have made credit rating to these transition costs as extremely pricy to develop, however, in the long run their costs tend to decline.This may in fact be true, however, for those companies that have incorporated IFRS standards, will continue to see new accountin g pronouncements issued by the IASB, as they work to improve their guidelines. As a result, firms will continue to spend in areas of training and seeking professional advice on how these new standards will impact their firm. References 1. Bielstein , 2007. How the IFRS movement will affect financial reporting in the U. S. Article KPMG 2. Daske andGebhardt, 2006. Discussion of Daske and Gebhardt, diary of report Finance and task Studies. 3. Lang, Maffet and Owen, 2010. Earnings Movement and Accounting Comparability, the Journal of Accounting Research 4. Leuz and Verrecchia , 2004. Firms chief city Allocation Choices, Information Quality and the Cost of Capital 5. Luez and Wysocki, 2008. Economic Consequences of pecuniary Reporting and Disclosure Regulation, Journal of Accounting Research 6. Mary E. Barth, 2006. Accounting Quality International Accounting Standards, The Journal of Accounting Research 7. radiate Ball, 2006.International Financial Reporting Standards (IFRS) Pros and Cons for Investors, Journal of Accounting Research 8. Soderstorm and Jialin Sun, 2007. IFRS Adoption and Accounting Quality A review, The Journal of Accounting Research 9. Standsih, 2003. Evaluating National content for Direct Participation in International Accounting Harmonization, Journal of Accounting Research 10. Tang, Wang and Welkor, 2011. Analyst Following and Forecast Accuracy After Mandated IFRS Adoption. Journal of Accounting Research. 11. William R. Scott, Fifth edition , 2009. Financial Accounting Theory