China's Convergence with IFRS: Analysis of Dual-listed Companies

This study investigates China's convergence towards International Financial Reporting Standards (IFRS) using generally accepted accounting principles (GAAP) differences data disclosed in AH-share companies’ annual reports from 2006 to 2017. We firstly find that 92% of AH-share companies disclosed GAAP differences in 2006, immediately prior to implementation of converged Chinese accounting standards (CAS). This ratio decreased to 88% in 2007, 58% in 2010, and 38% in 2011, respectively. After 2011, less than one third of AH companies disclosed GAAP differences. Secondly, an increasing number of AH companies (35%) have published CAS-based financial statements in Hong Kong from 2014. Thirdly, except for the first few years after 2007, the disclosed GAAP differences have dropped to a very low level; since 2010 the net profit and net assets GAAP differences ratios have been below 0.5%. Fourthly, reduction of the disclosed GAAP differences appears to be the result of efforts by Chinese standard setters and regulators, work related to the International Accounting Standards Board, or changes in China's special socio-economic environment. Distinct from word-by-word comparison between CAS and IFRS, this research shows that China has achieved its original goal, namely an enterprise applying CAS should produce financial statements that are the same as those of an enterprise that applies IFRS. Our findings provide insights regarding China's institutional evolution in terms of the country's IFRS convergence effort, which are useful for further empirical study.     

Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

With China’s adoption of principles-based international accounting standards and its convergence with International Accounting Standard 39 (IAS 39), Chinese companies have discretion under the original Accounting Standards for Enterprises 22 (CAS 22) as to how they account for the initial measurement, sale, and subsequent reclassification of financial assets. We use a Chinese company (‘Company A’) as a case study to illustrate how earnings are managed to exploit this discretion. We document that the company re-classifies its available for sale equity investments as long-term equity investments to decrease the volatility of the company’s apparent profits. We also make some predictions regarding how the company will handle its financial assets under the new standard, which is the same as IFRS 9. Our research contributes to the continuous improvement of China’s accounting standards and has implications for regulators of the capital market.     

Assessing the Impact of Fair‐Value Accounting on Financial Statement Analysis: A Data Envelopment Analysis Approach

The historical‐cost and prudence principles have guided accounting for financial investments and tangible fixed assets in many jurisdictions around the globe. This situation might change as a consequence of the increasing number of countries adopting International Financial Reporting Standards (IFRS), which, to some extent, permit accounting on a fair‐value basis. It is unclear how such a change would affect the analysis of financial statements and to what extent it could modify analysts' perceptions of companies' condition and performance. This paper attempts to shed some light on this issue by restating the financial investments and tangible fixed assets of a sample of 85 Spanish insurance companies, applying fair value instead of historical‐cost‐based valuations and by simulating analyst perception of these companies' efficiency and profitability for both sets of data using data envelopment analysis (DEA). We find that the numbers on the face of the financial statements change considerably and observe that the magnitude of these changes varies between companies and classes of assets. However, only in a few cases does a change in the valuation basis lead to a relevant change in DEA scores; within our sample, the overall assessment of companies with regard to efficiency and profitability remains largely the same under both valuation bases. These findings seem to indicate that a change from historical‐cost to fair‐value accounting could alter analyst perceptions of a limited number of companies but likely will not have a major impact on the appraisal of the majority of them.     

Transitioning to IFRS in Japan: Corporate Perceptions of Costs and Benefits

This paper examines the ongoing transition to International Financial Reporting Standards (IFRS) in Japan with a particular focus on recent institutional developments and corporate concerns. While Japan has committed to the convergence of Japanese generally accepted accounting principles (J‐GAAP) with IFRS it has not as yet formally adopted IFRS. This paper reports on Japanese corporate perceptions of the likely costs and benefits of adopting and implementing IFRS using survey data collected from senior financial executives of 292 Japanese listed companies in 2013–14. Our findings reveal that Japanese companies identify a number of major areas of general concern with the adoption and implementation of IFRS. Most importantly, uncertainty regarding the interpretation of standards followed by staff training, IT systems, technical knowledge and differences between J‐GAAP and IFRS were reported as major concerns. Our survey also highlights that revenue recognition, depreciation, consolidated financial statements, financial statement presentation and the retrospective application of IFRS were viewed as key IFRS accounting issues. While the large majority of companies expected a moderate degree of benefits to arise from IFRS, substantial benefits were perceived more likely to apply to large and overseas listed companies mainly arising from improvements in the international comparability of financial statements.     

Value relevance of accounting information: Evidence from an emerging market

Without making any distinction of the applicable accounting standards, this paper investigates, firstly, the value relevance of accounting information from 1999 to 2012 in different segments of the Chinese stock market. This investigation includes A-shares, prepared under Chinese Accounting Standards (CAS) for domestic firms; B-shares, prepared under either the International Accounting Standards (IAS) or International Financial Reporting Standards (IFRS) for both domestic and overseas firms; and H-shares prepared under either the IAS or Hong Kong GAAP for Hong Kong and overseas firms. Then, the paper examines whether or not the converged IFRS with CAS, applicable from 2007 onwards, is more value relevant when compared with prior to the 2007's standards (CAS, IAS, Hong Kong GAAP for A-share, B-share, and H-share markets, respectively). Based on 34,020 firm-year observations and after controlling for industry- and year-fixed effects, the findings suggest that accounting information is value relevant with A- and B-share markets, while it is partially relevant with the H-share market. The paper finds that the converged IFRS with CAS is more value relevant in A-shares and B-shares and it is partially more value relevant with the H-share market. These findings have implications for both policymakers and investors since they provide further empirical evidence for the current policy procedure which harmonizes local GAAP with IFRS.     

Convergence with IFRS in an expanding Europe: progress and obstacles identified by large accounting firms’ survey

The International Accounting Standards Board (IASB) acquired greater legitimacy and stature when the European Union (EU) decided to require all listed companies to prepare consolidated accounts based on International Financial Reporting Standards (IFRS) beginning in 2005. This study examines the progress and perceived impediments to convergence in 17 European countries directly affected by the EU's decision. These include: (1) the 10 new EU member countries, (2) EU candidate countries, (3) European Economic Area (EEA) countries, and (4) Switzerland. We utilize data collected by the six largest international accounting firms during their 2002 convergence survey. Additionally, we analyze subsequent events and studies.While all surveyed countries will either require or effectively allow listed companies to prepare consolidated financial statements in accordance with IFRS by 2005, few are expected to require IFRS for non-listed companies. This suggests the development of a “two-standard” system. The two most significant impediments to convergence identified by the survey appear to be the complicated nature of particular IFRS (including financial instruments) and the tax-orientation of many national accounting systems. Other barriers to convergence include underdeveloped national capital markets, insufficient guidance on first-time application of IFRS, and limited experience with certain types of transactions (e.g. pensions).     

LARGE ACCOUNTING FIRMS’ SURVEY REVEALS EMERGENCE OF “TWO STANDARD” SYSTEM IN THE EUROPEAN UNION

Convergence with International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) is receiving great attention. In 2005, all listed companies domiciled in the European Union (EU) will be required to prepare consolidated accounts based on IFRS. Individual EU member states are, however, permitted to decide whether IFRS will be required or allowed for non-listed companies or for listed companies’ individual accounts. Based primarily on data collected by the six largest international accounting firms during their most recent convergence survey, this paper examines each of the 15 EU member states’ convergence plans and their perceived barriers to convergence.The findings indicate that most EU members do not plan to converge national GAAP with IFRS, thereby highlighting the great significance of the large firms’ concerns regarding emergence of a “two-standard” system in the EU. The survey indicates the majority of EU countries will continue to require or allow national GAAP for individual accounts. While Belgium is considering requiring IFRS for all consolidated accounts, other EU countries have decided to allow or are considering allowing non-listed companies to prepare IFRS consolidated accounts.In most EU countries, the link between financial accounting and tax accounting represents a major barrier to convergence. Other frequently cited barriers include disagreement with certain IFRS and the complicated nature of certain IFRS. International requirements for financial instruments are viewed as particularly problematic.     

Have IFRS made a difference to intra-country financial reporting diversity?

According to the International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) are intended to provide a common set of globally applicable accounting standards, having the ultimate aim of reducing international financial reporting diversity. Much previous research on standards harmonisation has been conducted on relatively small samples and in periods which pre-date the introduction of mandatory IFRS in the EU and Australia. Most of these studies have also relied on some form of indexing technique to measure harmonisation (such as the modified C-index) which have since been challenged in the literature. Based on a sample of 81,560 firm years, this study examines whether the mandatory IFRS regime has led to any significant reductions in overall financial reporting diversity by companies within the EU and Australia. Financial reporting diversity is proxied by the variability of several balance sheet, income statement and cash flow statement ratios measured over the pre-IFRS and post-IFRS periods. Variability is measured by the coefficient of variation (CV), a scale neutral measure of dispersion of a probability distribution. This measure avoids many of the methodological problems associated with index techniques. Notwithstanding some mixed findings, the group mean comparisons and multiple regression results indicate some statistically significant reductions in the variability of ratio measures in the post-IFRS period, even after controlling for factors such as firm size, industry and adoption status (whether a country is an IFRS adopter or not). While the results should be viewed as preliminary, they provide some tentative support for IASB’s current policy direction towards global accounting standards convergence (for instance, the IASB-FASB convergence project). The results also have implications for other countries contemplating a shift to IFRS, such as the United States and several Asian nations, including Japan and India. A useful direction for future research is to determine whether the same results hold using a more extensive post-IFRS sample.     

Unconditional conservatism under the Chinese version of IFRS

This study explores the level of unconditional conservatism (UNCC) in accounting after China’s convergence with International Financial Reporting Standards (IFRS). Using the intercept of the Basu (1997) model, an overall reduction is found in UNCC under the Chinese version of IFRS. This study is the first attempt to conduct a comprehensive theoretical comparison between old and new Chinese accounting standards (CAS) in terms of UNCC. Additionally, it is the first study on the impact of convergence with IFRS, not the full adoption of IFRS, on UNCC. Finally, the study covers a relatively more extended period than most previous studies, from 1996 to 2017.     

The Role of Auditing Firms in the Implementation of New Accounting Standards: Evidence from China

This paper explores the impact of auditing firms on the implementation of the new Chinese Accounting Standards for Enterprises 22 (new CAS 22), which converges with IFRS 9. We find that the Big4 firms focus on fair value measurement and application of the expected credit loss (ECL) impairment model, whereas the LocalTop6 firms primarily focus on the classification of financial assets. The results indicate that effective implementation of the new standards mainly depends on standardized procedures and professional techniques of auditing firms, as the Big4 firms exhibit better implementation of the new standards in terms of items that generate greater risk and uncertainty than do local large auditing firms in China. In addition, we further test how cross-listing affects the role of auditing firms in implementing the new standards and find that the Big4 firms play a more significant role for A-share only companies than A + H companies. The findings reveal the challenges associated with implementation of IFRS 9-based new CAS 22 in China.     

The Impact and Implications of International Financial Reporting Standards in the United Kingdom: Evidence from the Alternative Investment Market

This paper investigates the implications of the adoption of International Financial Reporting Standards (IFRS) from the perspective of small and growing companies listed on the United Kingdom's (UK) Alternative Investment Market (AIM). We consider the cost–benefit issues of IFRS adoption and investigate its economic consequences. The results reveal that only a small number of comparatively larger AIM companies have voluntarily adopted IFRS for some anticipated economic objectives. The results also suggest that most of the mandatory adopters have done so for regulation compliance purposes and they would not have adopted IFRS if a choice was available to them. As the existing literature mainly covers the impact of IFRS adoption on large listed companies, the findings of this study will give better insights into extending IFRS to private companies. The findings show an association between the early adoption of IFRS and firm size and conclude that size matters in both the adoption and implications of IFRS. This study also contributes to the debate on the implications of the new IFRS‐based UK GAAP for SMEs‐FRS 102, which will replace the majority of existing UK accounting standards for small and medium enterprises (SMEs) with effect from 2015. Our findings have implications for managers, regulators, market participants, practitioners and other stakeholders.     

Implementing IFRS from the perspective of EU publicly traded companies

This study examines implementation of International Financial Reporting Standards (IFRS) by European Union (EU) companies. All listed EU companies are required to prepare their consolidated financial statements in accordance with IFRS for years beginning on or after January 1, 2005 (Regulation (EC) 1606/2002). The paper provides insight into the IFRS adoption process based on a questionnaire sent to EU-listed companies in 2004. The 112 responses received indicate: (1) a majority of respondents have adopted IFRS for more than just consolidation purposes; (2) the process is costly, complex, and burdensome; (3) companies do not expect to lower their cost of capital by implementing IFRS; (4) the more comprehensive the approach to conversion, the more respondents tend to agree with the benefits and costs of the transition; (5) companies expect increased volatility in financial results; (6) the complexity of IFRS as well as the lack of implementation guidance and uniform interpretation are key challenges in convergence; and (7) a majority of respondents would not adopt IFRS if not required by the EU Regulation. The results of our questionnaire were confirmed by several personal interviews with finance and accounting executives of EU publicly traded companies.     

Adopting International Financial Reporting Standards for Small and Medium‐sized Enterprises

Diverse complications and controversial issues in the adoption of International Financial Reporting Standards (IFRS) for Small and Medium‐sized Enterprises (SMEs) have been reported by many jurisdictions, prompting them not to adopt this set of standards. Conversely many jurisdictions have adopted or are in the process of adopting IFRS for SMEs. This study considers the impetus for successfully achieving accounting convergence with IFRS for SMEs in those jurisdictions. The possible transition issues that may arise when countries adopt IFRS for SMEs are also highlighted. Furthermore, to provide pioneering evidence on the problems accountants encounter when applying IFRS for SMEs, we conduct a survey on accounting practitioners in Fiji – an early adopter of this set of standards. Both the insights provided on the process of embracing IFRS for SMEs in Fiji and the opinions elicited from accountants highlight new dimensions to the inherent problems in IFRS for SMEs. Scant attention has been given to this issue so far; hence the empirical evidence provided by our study informs not only the global convergence of SME accounting but also the quality of the current suite of IFRS for SMEs.     

Mandatory Adoption of IASB Standards: Value Relevance and Country-Specific Factors

The objective of this study is to investigate if the value relevance of European-listed companies increased after the mandatory application of International Accounting Standards (IAS)/International Financial Reporting Standards (IFRS) and how the value relevance of accounting information prepared under IAS/IFRS is shaped by the specific factors of the country in which companies are domiciled. Results show that the value relevance of financial information during the period companies applied mandatory IAS/IFRS is higher than for the period during which they applied local accounting standards. We also found that countries where accounting and tax are clearly separated show more relevant accounting information. Finally, we found that companies from countries with more legal and public enforcement mechanisms disclose less relevant accounting information under IAS/IFRS.     

公允价值具有价值相关性吗?基于金融资产的研究

本文以构成我国证券市场主体的A股上市公司为研究样本,考察了公允价值相对于历史成本以及公允价值自身变动产生的未实现收益的价值相关性问题。实证结果发现:相对于历史成本,公允价值具有增量的价值相关性;金融资产公允价值变动产生的未实现收益具有价值相关性;两种金融资产中,只有可供出售金融资产产生的未实现收益具有价值相关性,交易性金融资产不具有价值相关性。此研究结果不仅为国际会计准则在中国证券市场的应用和实施效果提供了经验证据,同时也能够帮助监管层和实务界正确认识公允价值在股票市场上信息传递方面所起的作用。     

Commentary: IFRS – The SEC's Roadmap and the Contribution of the Academic Community

In November 2008 the US Securities and Exchange Commission issued a roadmap for the possible adoption of International Financial Reporting Standards (IFRS) by US publicly traded companies. A team of distinguished academics and practitioners discussed the issues raised by the roadmap in a panel session at the American Accounting Association meeting in San Francisco in August 2010. This commentary summarises the discussion. Potential obstacles to US adoption of IFRS include concerns about the International Accounting Standards Board's governance, and the consistency of application of IFRS in different countries around the world. Another key issue is to make sure that there is real agreement on the purpose of financial reporting, which in the US is, by law, for the protection of investors. However, research shows the capital market benefits of IFRS adoption, and at least one study shows a high degree of comparability between US GAAP and IFRS.     

IFRS9的实施对中国金融机构的影响及政策建议

中国会计准则与国际会计准则的发展日益同步,备受关注的IFRS9的实施也必将影响到中国的金融机构。中国金融机构持有的金融资产如果根据IFRS9的要求进行调整,将对金融资产的计量和有关损益的确定产生直接影响。本文通过对中国金融机构持有的金融资产情况的分析,发现IFRS9的实施对中国金融机构的影响将集中体现在权益工具的计量和公允价值变动对损益的影响方面。本文认为,中国会计准则制定机构应当通过限制使用计量选择权、提供金融资产计量操作指引等措施来减少转换过程中有可能面临的问题。     

German Reporting Practices: An Analysis of Reconciliations from German Commercial Code to IFRS or US GAAP

This paper presents the results of research analyzing reconciliations of net income and stockholders’ equity from reports prepared according to Germany's Commercial Code (HGB) to either International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (US GAAP). We describe the distribution of the reconciling items and assess their value relevance to firm market values 3 months after the financial statement date. The work helps to identify many issues not apparent from research that focuses only on promulgated accounting standards. Among other things, the research presented in this paper demonstrates that, when reconciling to IFRS or US GAAP, German companies must reverse significant software and film licensing revenue. Other areas of significant difference, not surprisingly, show greater conservatism in reporting under HGB than IFRS or US GAAP, particularly in asset capitalizations and write-offs as well as in accruals of provisions and reserves. The latter category is value relevant to the firms’ market values after controlling for all other categories of reconciling items from HGB to either IFRS or US GAAP, indicating that German markets value these companies’ provisions and accruals under the German reporting system.     

IFRS fair value measurement and accounting policy choice in the United Kingdom and Australia

This study investigates the use of fair value measurement by 228 listed companies in the UK and Australia around the time of adoption of IFRS from 1 January 2005. We test whether within and between country comparability in policy choices (as measured by T indices) has changed in relation to (a) mandatory and (b) optional use of fair value measurement. Mandatory requirements related to financial instruments (IAS 39) and share-based payments (IFRS 2) have increased comparability, with a weaker effect for biological assets (IAS 41). In relation to the optional use of fair value, comparability increased in relation to property (IAS 16) because some companies discontinued fair value measurement. Under IAS 39, the fair value option for other financial assets and other financial liabilities decreased comparability. Options to use fair value in other areas (intangible assets, plant and equipment and investment properties) are not generally taken up, either for on-going measurement or on IFRS adoption (under the ‘deemed cost’ option). The results suggest a conservative approach and/or lack of incentives to use fair value measurement for most companies. Exceptions include some banks and insurance companies (for other financial assets and liabilities) and companies holding investment properties.     

Accounting Policies in the Extractive Industry: A Global and a Turkish Perspective

This paper investigates the influence of accounting standards on financial reporting for companies in the extractive industry. In Turkey, listed firms have prepared their financial reports according to the International Accounting Standards and the International Financial Reporting Standards (IAS/IFRS) since 2005, as has the European Union. The aim of this study is to determine the degree of compliance with IFRS 6, comparing global and Turkish extractive entities. We find that the entities reporting in accordance with IFRS 6 in Turkey are more likely to fail to declare their accounting policies, whereas global companies are more likely to be compliant with IFRS 6.