Trabeck prepares for IFRS: An IFRS case study

The growing acceptance of International Financial Reporting Standards (IFRSs) as a basis for US financial reporting represents a fundamental change for the US accounting profession. IFRS and US generally accepted accounting principles (GAAPs) both are based on principles; however, US GAAP largely uses rules to apply the principles. In contrast, IFRS relies heavily on the use of judgment in deciding how transactions should be recorded. This fictional case is designed to help students identify some fundamental differences between US GAAP and IFRS and apply this knowledge to general-purpose financial statements.     

Monitoring Compliance with IFRS: Some Insights from the French Regulatory System

European Union Regulation 1606/2002 is aimed at improving the quality of financial reporting and developing a single capital market in Europe. Nevertheless, these goals cannot necessarily be achieved solely by making a requirement for EU companies to use International Financial Reporting Standards (IFRS), and the EU has sought to create a mechanism to oversee the appropriate application of these standards. In this paper, we describe and comment on the methods used by the French stock exchange regulator, the Autorité des Marchés Financiers (AMF), for monitoring compliance with the national reporting rules as this bears upon the issue of enforcement of IFRS in Europe as from 2005. The AMF has been chosen in our study because of its extensive experience with the review of financial statements of listed companies. Our paper draws on qualitative interviews with people involved directly in scrutinizing financial information at the AMF as well as on the experience gained from attachment to the AMF's Accounting Division. While there is recent research that addresses the issues on enforcement of accounting standards, there is still a lack of studies which discuss the relevance and effectiveness of the methods used to monitor compliance with accounting standards. Our paper may be of interest to different groups of participants including regulatory oversight bodies, auditors, producers and users of financial information in the capital markets.     

IFRS implementation in the European Union and the survival of accounting families

This study examines eight IFRS implementation choices available to European Union (EU) and European Economic Area (EEA) member countries under the EU's 2002 IAS Regulation. Great disparities in IFRS implementation exist among the countries covered under the Regulation, including statistically significant differences in the IFRS elections for financial and non-financial firms. Using hierarchical cluster analysis, a classification of EU and EEA member countries according to similarities and differences in their IFRS implementation is developed, which identifies an IFRS antagonistic, an IFRS leaning, and an IFRS integrated group. These groupings may provide a springboard for future studies on effects of IFRS implementation differences. Following Meek and Thomas (2004) call to study the continuing relevance of taxonomies of accounting systems in the IFRS era, the study also provides evidence for a survival of the traditional micro-based vs. macro-uniform, strong vs. weak equity market, and outsider vs. insider economy classifications of accounting systems into the IFRS implementation decisions of EU and EEA member countries. These results suggest that traditional accounting system classifications remain important in the post-IFRS era.     

Perceived costs and benefits of IFRS adoption in Saudi Arabia: An exploratory study

In response to a current lack of research in the Middle East, this study aims to critically evaluate the perceived costs and benefits associated with the adoption of International Financial Reporting Standards (IFRS) in Saudi Arabia, the world's leading oil and natural gas exporter. Using documentary analysis and interviews with stakeholders (account preparers from listed companies in Saudi Arabia, auditors from Big 4 and local accountancy firms, and university academics), the study contributes to the literature by concluding that the benefits of IFRS adoption in Saudi Arabia outweigh the costs. Importantly, a lack of qualified accountants, significant dependence on Big 4 accounting firms, inadequate coverage of IFRS in university education, and a lack of research are identified as major obstacles to the effective implementation of IFRS. The findings offer a possible policy agenda for local and international policy makers.     

Auditors' Conflict Management Styles: An Exploratory Study

This study explores the conflict management styles used by auditors when resolving disputes with clients concerning financial statement issues. Rahim's (1983a, 1990) ROCI–II conflict management instrument was used to establish both the styles generally used and also those used in a scenario concerning possible inventory obsolescence. Size of the client and the strength of its corporate governance mechanisms were manipulated in the scenario. It was found that auditors indicate that they primarily use the integrating style to resolve disputes. The compromising and dominating styles are used to a lesser extent while the obliging and avoiding styles are rarely used. Partners are more likely than managers to use more assertive styles of conflict management. The size of the client and the strength of corporate governance mechanisms in place have a significant but relatively minor impact on the choice of styles. The study also identifies the parties whom the auditor would expect to help resolve the dispute. It was found that, when resolving a dispute with the client's chief financial officer, the audit committee is perceived to give the most assistance, followed by the chief executive of icer.     

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).     

Compliance with IFRS disclosure requirements and individual analysts’ forecast errors

We investigate the relationship between analysts’ earnings forecast errors and firm compliance with the disclosure requirements of International Financial Reporting Standards (IFRS). Using a comprehensive disclosure index of selected IFRS for which previous research has indicated significant noncompliance, we develop an unweighted and an innovative weighted measure of IFRS disclosure compliance. We document that forecast error is negatively related to IFRS compliance, and that the magnitude of this effect is larger when controlling for analyst fixed effects. Our findings suggest that compliance with the disclosure requirements of IFRS reduces information asymmetry and enhances the ability of financial analysts to provide more accurate forecasts. Our findings also support the viewpoint that the extent of compliance with accounting standards is as important as the standards themselves. Our results are robust to alternative model specifications.     

Adoption of IFRS in Spain: Effect on the comparability and relevance of financial reporting

EU Regulation 1606/2002 requires application of International Financial Reporting Standards (IFRS) by groups listed on European stock markets. In Spain, listed groups are now obliged to prepare consolidated financial information under IFRS, and legislative changes to bring local rules into line with international standards have been tabled.In this context, the potential impact of IFRS is fraught with uncertainty. Our study of IBEX-35 companies focuses on the effects of the new standards on comparability and the relevance of financial reporting in Spain. We address these objectives by seeking significant differences between accounting figures and financial ratios under the two sets of standards (i.e. Spanish accounting standards and IFRS).The results obtained show that local comparability has worsened. The study reveals that local comparability is adversely affected if both IFRS and local accounting standards are applied in the same country at the same time. Reforms to bring local rules into line with international standards are therefore urgent. We also find that there has been no improvement in the relevance of financial reporting to local stock market operators because the gap between book and market values is wider when IFRS are applied. While there has been no gain in terms of the usefulness of financial reporting in the short-term, improved usefulness may be achieved in the medium to long-term.     

Maximising international returns: Impact of IFRS on foreign direct investments

This study investigates whether the adoption of International Financial Reporting Standards (IFRS) by a country increases Foreign Direct Investments (FDIs) and impacts the profitability of investments conducted by Multi-National Enterprises (MNEs). The proposed regression models are tested on a data set containing 493 observations of Swedish companies’ FDIs in 73 countries made during 2007–2014. Empirical evidence is provided for a significant impact of IFRS adoption on FDIs and earnings generated by foreign investments, depending upon the extent of IFRS implementation and the level of convergence. This study also suggests that IFRS adoption is significant both for FDIs and reported profits obtained through FDIs for developed countries, contrasting with emerging markets. Finally, this is one of the first papers to empirically test and confirm that several significant underlying variables (including IFRS), which can explain both FDIs and profits reported by MNEs, are identical.     

Compliance with International Financial Reporting Standards and auditor choice: New evidence on the importance of the statutory audit

We examine the impact of auditor choice on IFRS compliance under the assumption of strict exogeneity of auditor choice. Our results reveal that compliance is positively related to auditor choice after controlling for firm size, profitability, leverage, degree of international diversification, and whether a firm has a U.S. listing or was audited according to International Standards of Auditing. We also find that auditor choice is positively related to firm compliance when controlling for unmeasured, firm-specific effects. The results of our study reinforce the importance of developing institutional mechanisms (e.g., enforcement, auditing, or corporate governance structures) to encourage compliance with IFRS.     

Relevance of Differences between Net Income based on IFRS and Domestic Standards for European Firms

Net income adjustments resulting from mandatory 2005 IFRS adoption in Europe are value relevant for financial and non‐financial firms. Differences in relevance of the aggregate adjustment and adjustments related to several IFRS standards, for financial and non‐financial firms and across country groups, suggest differences in domestic standards and institutions affect investors’ assessment of the relevance of IFRS accounting amounts. Despite these differences, except for French/German non‐financial firms, investors view net income measured using IAS 39 Financial Instruments: Recognition and Measurement as more relevant than that measured using domestic standards, which is notable because IAS 39 was highly controversial in Europe.     

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.     

Goodwill under IFRS: Relevance and disclosures in an unfavorable environment

The accounting treatment of purchased goodwill under IFRS has been severely criticized due to the extensive use of fair value accounting. The purpose of this study is to enrich the ongoing debate upon this issue by drawing attention to the market valuation implications of goodwill in a country outside the Anglo-Saxon accounting paradigm, where the application of fair value accounting has been seen as more problematic. The results indicate that, in the case of purchased goodwill, fair value accounting generates relevant accounting numbers but only in companies that comply highly with IFRS disclosure requirements.     

Goodwill and Mandatory Disclosure Compliance: A Critical Review of the Literature

The aim of this paper is to critically analyse the literature published from 2002 to mid‐2015 on disclosures of goodwill and their respective impairment tests; identify the main contributions of the literature, as well as its limitations; and suggest new approaches for future research. We also present a summary of the main determinants of disclosures on goodwill in the literature as well as the still scarce studies’ conclusions of those disclosures in the market. After a review of the literature, we discuss the need to reinforce enforcement mechanisms, so as to improve the level of compliance of disclosures on goodwill and their impairment tests. The majority of the analysed literature reveals that the information disclosed about goodwill is incomplete and largely heterogeneous, indicating a reduced level of compliance with the disclosures required by accounting standards. The paper may support the development of future empirical studies about goodwill's disclosures, which will bridge the identified gaps in the literature.     

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.     

Mandatory IFRS adoption: the trade-off between accrual-based and real earnings management

This paper examines whether firms substituted real earnings management for accrual-based earnings management after the International Financial Reporting Standards (IFRS) became mandatory. Using a sample of 101,331 firm-year observations from 33 countries between 2000 and 2010, we show that IFRS adoption came with the unintended consequence of certain firms substituting real earnings management for accrual-based earnings management, especially among firms in countries with strict enforcement regimes. Furthermore, we document that the trade-off is confined to EU countries in which strong firm-level characteristics (i.e. the firm-level mechanism of control, the market’s level of scrutiny, and firm-specific incentives to provide transparency) are coupled with strong enforcement. We also show that IFRS had an effect in countries outside the EU, albeit at a different time. Overall, the results suggest that accounting regulators’ efforts to increase earnings quality might have had the unintended consequence of increasing real earnings management activities.     

Extending the Classification of European Countries by their IFRS Practices: A Research Note

Abstract

This paper expands the IFRS accounting systems’ classification proposed by Nobes [(2011). IFRS practices and the persistence of accounting system classification. Abacus, 47(3), 267–283] to a broader set of European countries. The results suggest a classification distinguishing between four groups of European countries, and add to the evidence, reported by Kvaal and Nobes [(2010). International differences in IFRS policy choice. Accounting and Business Research, 40(2), 173–187] and Nobes (2011)., that pre-IFRS accounting differences influence the options adopted by firms. This study contributes to the literature suggesting that the widespread adoption of IFRS has not eliminated the differences between national accounting practices and that accounting systems classification did not lose its relevance.     

IFRS Practices and the Persistence of Accounting System Classification

The earliest paper on international classification of accounting systems is one hundred years old. For about fifteen years from the late 1960s, many papers on the subject were published. One feature of several of the classifications was the dichotomous split of countries into Anglo and continental European. This has been extensively debated. This paper prepares a classification based on the accounting policy choices made by the largest listed companies of eight countries in 2008/9. All the companies were using the same reporting rules, International Financial Reporting Standards (IFRS). This classification by IFRS practices shows the same two groups as a classification of national practices drawn up in 1980, despite 30 years of harmonization. None of the classifications above or the more recent ones was based on the actual accounting practices of companies in annual reports. This has several disadvantages, as the paper investigates. This paper's classification is the first to be based on accounting practices, as well as being the first in the IFRS era. The paper also investigates the implications of the persistent differences in practices for assessing the success of the IASB's whole project on improving comparability of financial statements.     

The temporal nature of legitimation: the case of IFRS8

Legitimation can operate on an episodic or continual basis [Suchman, M.C. (1995). Managing legitimacy: Strategic and institutional approaches. Academy of Management Review, 20(3), 571–610]. We examine the temporal legitimation of the International Accounting Standards Board (IASB)’s actions during the adoption and review of International Financial Reporting Standard (IFRS) 8 ‘Operating Segments’. We conceptualise the controversy surrounding IFRS8 as an episode when the IASB sought segmental reporting convergence with the US standard, Statement of Financial Accounting Standard 131. Interpreting evidence from 15 (20) semi-structured interviews undertaken in 2009 (2011), before (after) entities reported under IFRS8, reveals its adoption precipitated an episodic legitimacy threat from selected audiences to the actions of the IASB. We discuss the IASB's attempt to influence legitimation for this episode through commitment to a post-implementation review [IFRS Foundation. (2011). Post implementation reviews: Plan for developing the framework for conducting post-implementation reviews. IASB Board meeting February 2011. Retrieved July 27, 2011, from http://www.ifrs.org/NR/rdonlyres/3E1502E4-F1E8-4907-838B-FFB20C7268ED/0/PIR02111st2ndb04obs.pdf] of IFRS8. Interpreting legitimacy concerns across diverse audiences about specific actions of the IASB (the introduction of IFRS8) enables us to draw conclusions about the resilience of the IASB as a standard setting organisation, in itself.