The global institutionalization of financial reporting: The case of the United Arab Emirates

Almost 100 countries have agreed to adopt or work towards convergence with the International Accounting Standards Board's international financial reporting standards (IFRS). Applying an institutional theory framework at a nation state level, and using publicly available data about the emerging economy of the United Arab Emirates (UAE) as a case, this paper identifies some of the global coercive, normative and mimetic pressures which have contributed to this widespread adoption. The challenge for emerging economies such as that of the UAE is whether the reality of IFRS implementation can match the image of IFRS adoption.     

Forces Leading to the Adoption of Accrual Accounting by the Canadian Federal Government: An Institutional Perspective*/ LES FORCES AYANT MENÉ L'ADMINISTRATION FÉDÉRALE CANADIENNE À ADOPTER LA COMPTABILITÉ D'EXERCICE: UNE PERSPECTIVE INSTITUTIONNELLE

In 1995, the federal government of Canada announced that it would adopt full accrual accounting. The change was fully implemented at the department level in 2001 and for government‐wide financial reporting in 2003. Using the perspective of institutional theory, we examine several factors that had the potential to influence the federal government's decision to adopt full accrual accounting, including two royal commissions, the Office of the Auditor General of Canada, the Canadian Institute of Chartered Accountants, credit markets, and the practices of other national governments. We find that the decision to change to accrual accounting can be largely attributed to coercive and normative influences of the Office of the Auditor General of Canada (supported by the normative influence of the Canadian Institute of Chartered Accountants' Public Sector Accounting Board) and mimetic isomorphism with other members of the federal government's organizational field.     

The adoption of International Financial Reporting Standards in a non-colonized developing country: The case of Nepal

The purpose of this paper is to provide a systematic and rigorous analysis of the accounting environment in Nepal. Based on the accounting ecology framework developed by Gernon and Wallace (1995) and interviewing selected key stakeholders, it critically examines issues related to the adoption of International Financial Reporting Standards (IFRS) in Nepal. It contributes to the literature by examining issues associated with the adoption of IFRS in a non-colonized developing country. This study finds that the decision to adopt IFRS in Nepal is not driven by the needs of local organizations and is rather imposed by donor organizations such as the Asian Development Bank, International Monetary Fund and World Bank. The findings of this study provide evidence that the adoption of IFRS is likely to be problematic due to the country's contextual environment. Specifically, there is a severe lack of qualified accountants in Nepal and the accounting profession is not ready to adopt IFRS. The study also finds that social problems such as widespread corruption and fraud are likely to cause problems for the adoption of IFRS.     

The Role of National Culture in International Financial Reporting Standards Adoption

Prior research shows that the development of national accounting systems follows different patterns in different countries over the world. This was recently supported by the staggered manner in which countries adopt IFRS. Extant evidence shows that IFRS adoption decisions at the country level are determined by institutional and economic factors. In this context, cultural factors have not been considered. This paper examines the relationship between five cultural dimensions and countries’ decisions to adopt International Financial Reporting Standards (IFRS) around the world during the period 2003-2014. We find that countries with higher levels of uncertainty avoidance are more likely to adopt IFRS. Additionally, they are more likely to commit to early adoption largely on a mandatory rather than voluntary basis. On the other hand, countries with higher values of masculinity are more likely to adopt IFRS early, but the extent (whether voluntary or mandatory adoption) of adoption is not significantly related to masculinity. Finally, we show that countries with higher power distance (long-term orientation) are more (less) likely to adopt IFRS on a mandatory basis. The results are in line with Gray’s theory of cultural influence and suggest that differences in national culture had a significant role in countries’ reaction to the introduction of IFRS as a set of unified accounting standards targeting the harmonization of accounting standards adopted across different jurisdictions.     

Adoption of the International Financial Reporting Standards by Greek non-listed companies: The role of coercive and hegemonic pressures

In this paper, we examine the motivations for preparers in Greek non-listed companies to adopt International Financial Reporting Standards (IFRS). Previous literature has focused on listed companies and assessed the effect of IFRS on market efficiency to justify its adoption. Using data from a cross-sectional survey and from interviews with senior managers, our analysis indicates that the motivations to adopt IFRS in Greece are not primarily related to the technical competence of the standards. We draw insights from literature on institutional theory and hegemony based on the Selections from the Prison Notebooks of Gramsci, and show that the decision to comply with IFRS can also be motivated by coercive and hegemonic pressures, which are exerted by powerful institutional constituents as they interact with organisations’ strategic interests at the international and national level. The adoption of IFRS is driven predominantly by the pressures exerted by parent companies on their subsidiaries and by the legal requirements of the state, but also through borrowing and debt-contracting requirements as enforced by civil society actors, such as financial institutions. This mobilisation of power plays a pivotal role in supporting the establishment of IFRS among non-listed companies.     

Countries’ adoption of the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) – early empirical evidence

The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is increasingly being adopted in a number of jurisdictions. Despite the economic importance of non-publicly accountable entities, little is known about what factors influence countries' decisions to adopt IFRS for SMEs. In a unique sample of 128 countries, we find that countries that are not capable of developing their own local generally accepted accounting principles are more likely to adopt IFRS for SMEs. We also provide evidence that in jurisdictions where full IFRS have been applied to private firms, the likelihood of adoption of IFRS for SMEs increases, suggesting that jurisdictions reduce the financial reporting burden on SMEs. Moreover, in line with prior literature, there is evidence that countries with a relatively low quality of governance institutions are more likely to adopt this new set of accounting standards. The results also hold under alternative measures and different estimation approaches. Overall, our results are helpful in understanding the worldwide diffusion of IFRS for SMEs. Standard setters and regulators might consider our study in the future development of accounting harmonisation of non-publicly accountable entities.     

Disincentives to exchange customized local GAAP for IFRS

The global adoption of International Financial Reporting Standards (IFRS) resulted in the loss of local Generally Accepted Accounting Principles (GAAP). Some local GAAPs were tailored to capture the adopting jurisdictions' economic nuances, which IFRS may not address. One example is our setting, where, unlike IFRS, Canadian GAAP allowed the recognition of regulatory claims (i.e., assets and liabilities). Given this disparity, Canadian regulators granted rate-regulated entities the choice to opt out of Canada’s mandatory adoption of IFRS. Leveraging this unique setting, we test whether the loss of allowances under local GAAP is costly enough to deter companies from adopting IFRS. We find evidence that utilities with a history of capitalizing regulatory assets under Canadian GAAP are significantly less likely to adopt IFRS. This relation is more pronounced when a company has higher regulatory assets recognized under local GAAP, engages with the US capital markets, and has a high perceived cost of raising future capital. However, we find that the future cost of capital is lower for entities that adopt IFRS after historically capitalizing regulatory assets. Our results identify a new cost of adopting IFRS largely unexplored in the literature: the cost of losing jurisdictionally tailored accounting standards not included within IFRS.     

IAS/IFRS and financial reporting quality: Lessons from the European experience

This paper discusses the effects of the adoption of IAS/IFRS in Europe on the quality of financial reporting. In doing so, it adopts the perspective of stock market investors and focuses on value-relevance research. The adoption of IAS/IFRS in Europe is an example of accounting standardization among countries with different institutional frameworks and enforcement rules. This allows investigating whether, and to what extent, accounting regulation per se can affect the quality of financial reporting and leads to convergence in financial reporting. This is a key issue for standard setting purposes as IAS/IFRS have been adopted in very diverse countries all over the world, and many others are likely to adopt them in the near future.     

Voluntary adoption of International Financial Reporting Standards by large unlisted companies in Portugal – Institutional logics and strategic responses

Common explanations for the voluntary adoption of International Financial Reporting Standards (IFRS) have been based on economic efficiency arguments. This paper introduces new theoretical arguments to explain how institutional pressures influence decisions to adopt IFRS voluntarily. Through recourse to an institutional theory context, we combine the analytical framework proposed by Oliver (1991) with the concept of institutional logics, and apply this framework to the financial accounting field for the first time. This combined model shows how multiple forms of rationality constrain company responses to pressures to adopt a new accounting regime.     

Analyst Following and Forecast Accuracy After Mandated IFRS Adoptions

This study investigates how accounting harmonization affects one particular group of financial statement users—financial analysts. We find that mandatory International Financial Reporting Standards (IFRS) adoption attracts foreign analysts, particularly those from countries that are simultaneously adopting IFRS along with the covered firm's country and those with prior IFRS experience. We also find that mandatory IFRS adoption improves foreign analysts’ forecast accuracy. The change in analyst following increases with the distance between prior local Generally Accepted Accounting Principles (GAAP) and IFRS and with the extent to which IFRS adoption eliminates GAAP differences between the firm's country and the analyst's country. IFRS adoption also attracts more local analysts, particularly those with prior IFRS experience and with an international portfolio prior to mandated IFRS adoption in their home country. Local analysts’ forecast accuracy is not affected by IFRS adoption. Overall, our results suggest that accounting harmonization brings comparability benefits that enhance the usefulness of accounting data.     

The impact of national GAAP and accounting traditions on IFRS policy selection: Evidence from Germany and the UK

The adoption of IFRS in the European Union in 2005 aimed to increase the comparability of publicly traded companies’ consolidated accounts. However, previous literature questions whether IFRS are applied consistently across countries with differing institutional environments, and therefore, whether de facto harmony has been achieved. We further examine this question by investigating IFRS accounting policy choices of listed companies in Germany and the UK between 2005 and 2009. We find that most firms, when choosing IFRS options, tend to retain accounting policies required by national rules. We also investigate national accounting traditions in the case of options under national GAAP and find that most companies continue these after adopting IFRS. Moreover, there appears to be little significant change in accounting choices over time from 2005 to 2009. Given the differences in accounting rules and practices that exist across countries, our results suggest that international differences in financial reporting are likely to continue under IFRS.     

The Differential Impact of IFRS Adoption on Aspects of Seasoned Equity Offerings in the UK and France

We examine the potential for IFRS to influence the market for SEOs in the UK and France. The divergence between the UK domestic accounting standards and IFRS is minor (low-divergence firms) whereas domestic accounting standards in France differ materially from IFRS (high-divergence firms); however, both countries have similar legal enforcement and institutional settings that might confound the effect of IFRS adoption. We argue that IFRS adoption serves to mitigate information asymmetry and improve accounting quality. Accordingly, we find that, following IFRS adoption, earnings management activities decrease among high-divergence firms prior to issuing SEOs. As a result of the lower levels of earnings management and information asymmetry, we predict and find that the market reaction to issuing SEOs improves significantly for high-divergence firms following IFRS. Given that equity financing becomes less costly, we find that the propensity to issue new SEOs increases among high-divergence firms after IFRS adoption. We find no similar changes among low-divergence firms. The results persist after running a matched-sample analysis and controlling for potential self-selection bias.     

The adoption of internet banking: An institutional theory perspective

Several models have been proposed in the literature to understand technology acceptance in which social environmental factors are not primarily addressed. Drawing upon the social contagion theory and institutional theory, this study proposes a model to examine three social environmental factors of normative, coercive and mimetic pressures within the internet banking (IB) context. The model is tested using survey data from 124 respondents. The results reveal that normative and coercive pressures significantly influence the attitude and intention of adopting IB, while mimetic pressures appear not to. Attitude plays a mediating role between institutional pressures and IB adoption. This study spearheads an institutional analysis at the individual level within the IB context. The findings also provide valuable insights for bank managers to manage the IB services.     

Effects of the Adoption of IFRS on the Credit Market: Evidence from Brazil

Based on a sample of approximately 6500 credit ratings and 137,000 loan contracts, this paper analyzes the effects of mandatory IFRS adoption on the Brazilian credit market. We find that the IFRS adoption effects were limited to firms displaying improved accounting information quality at the time of transition, lending support to the notion that economic benefits do not necessarily flow from the publication of financial reports in IFRS but, rather, depend on how earnestly firms adopt the recommended disclosure practices.     

Mandatory IFRS adoption and executive compensation:Evidence from China

This study investigates how the mandatory adoption of International Financial Reporting Standards(IFRS) affects the contractual benefits of using accounting information to determine executive compensation in China. After controlling for firm and corporate governance characteristics, we find strong evidence supporting the positive role of mandatory IFRS adoption on the accounting-based performance sensitivity of executive compensation. Subsample analysis suggests that improvements in accounting-based performance sensitivity after IFRS adoption differ across regions with various levels of institutional quality and across firms that are affected to a different extent by the adoption. Additional analysis supports the argument that the positive effects of IFRS adoption on the use of accounting performance in executive compensation are driven by the reduction in accounting conservatism associated with IFRS adoption.     

IFRS adoption in China and foreign institutional investments

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.     

Institutional theory and accounting rule choice: an analysis of four US state governments' decisions to adopt generally accepted accounting principles

In this study, we use institutional theory to explore how institutional pressures exerted on four state governments (New York, Michigan, Ohio, Delaware) influenced the decision of these governments to adopt or resist the use of generally accepted accounting principles (GAAP) for external financial reporting. We identify resource dependence as a potent form of coercive institutional pressure that was associated with early GAAP adoption. We identify three factors that may lead to initial resistance to institutional pressures for change. First, if accounting bureaucrats are not active in professional associations that promote GAAP adoption, they may miss the educational process that we believe is important to early adoption of GAAP. Second, organizational printing may impede GAAP adoption. Third, powerful interests may impede GAAP if the proposed GAAP legislation is expected to alter the existing power relationships. We found that key accounting bureaucrats in New York and Michigan used “compromise” as an initial strategic response to institutional pressures to adopt GAAP, Ohio's key accounting bureaucrat adopted a “defy” strategy, although the political leadership endorsed an “acquiesce” strategy. While Delaware initially employed a “manipulate”strategy with some success. Delaware did not adopt GAAP for external reporting until a political entrepreneur for GAAP emerged in the early 1990s. Our study suggests that all strategic responses to resist institutional pressures for GAAP adoption will ultimately fail because of the potency of the institutional pressures that result from the well organized professional accounting and governmental institutional fields.     

Mandatory IFRS adoption and the cost of debt in Italy and UK

This paper analyses the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) within the EU on the cost of corporate debt. In order to avoid the imprecision involved in a large-scale cross-country study, we examine the impact of IFRS in two very clearly different institutional settings, the UK and Italy. The UK is a common-law country characterised by strong enforcement and national generally accepted accounting principles (GAAP) which are equivalent to IFRS. Italy is a typical European code-law country, characterised by a weak outside investor protection system, and national GAAP significantly different from the IFRS model. No IFRS effect is observed in the UK, consistent with it having standards which are close to IFRS. During the post-IFRS period, in Italy more weight is placed on the accounting numbers to assess the cost of debt. We also find that accruals quality improves in Italy, thus suggesting that public financial reporting data are enhanced relative to privately held information about borrowers' credit ratings.     

IFRS Adoption in Emerging Markets: The Case of Jordan

The aim of this study is to research the adoption of International Financial Reporting Standards (IFRS) in Jordan, which was one of the first Middle Eastern emerging economies to adopt IFRS. The paper investigates the related factors that pressure and prevent such adoption over time, and illustrates the developmental aspects of such adoption. An interpretive methodology is employed, and perceptions of the study's participants are analysed regarding the adoption of IFRS in Jordan, which is an area that is under researched. Semi‐structured interviews were undertaken to collect Jordanian experts’ perceptions. Based on the empirical data analysis and prior theoretical and empirical literature, an adoption model was developed, which can serve future studies as well. The model illustrates the paradox of accounting changes in emerging economies, in which the actual conditions that pressure IFRS adoption are also the conditions that prevent full adoption. The model also provides an explanation of the implementation process of IFRS in emerging economies at both country and corporation levels. It combines practical features and related theories in an integrative model seeking to explain the phenomenon of IFRS as a new accounting regulation change.     

Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences

This paper examines the economic consequences of mandatory International Financial Reporting Standards (IFRS) reporting around the world. We analyze the effects on market liquidity, cost of capital, and Tobin's q in 26 countries using a large sample of firms that are mandated to adopt IFRS. We find that, on average, market liquidity increases around the time of the introduction of IFRS. We also document a decrease in firms' cost of capital and an increase in equity valuations, but only if we account for the possibility that the effects occur prior to the official adoption date. Partitioning our sample, we find that the capital‐market benefits occur only in countries where firms have incentives to be transparent and where legal enforcement is strong, underscoring the central importance of firms' reporting incentives and countries' enforcement regimes for the quality of financial reporting. Comparing mandatory and voluntary adopters, we find that the capital market effects are most pronounced for firms that voluntarily switch to IFRS, both in the year when they switch and again later, when IFRS become mandatory. While the former result is likely due to self‐selection, the latter result cautions us to attribute the capital‐market effects for mandatory adopters solely or even primarily to the IFRS mandate. Many adopting countries make concurrent efforts to improve enforcement and governance regimes, which likely play into our findings. Consistent with this interpretation, the estimated liquidity improvements are smaller in magnitude when we analyze them on a monthly basis, which is more likely to isolate IFRS reporting effects.