Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence

Contemporary Accounting Research (Impact Factor: 1.43). 07/2012; 30(4). DOI: 10.2139/ssrn.1502909

ABSTRACT We provide evidence on the preliminary effects of mandatory adoption of International Financial Reporting Standards (IFRS) on accounting quality for a relatively broad set of firms from 20 countries that adopted IFRS in 2005 relative to a benchmark group of firms from countries that did not adopt IFRS matched on the strength of legal enforcement, industry, size, book-to-market, and accounting performance. Relative to these benchmark firms, we find that IFRS firms exhibit significant increases in income smoothing and aggressive reporting of accruals, and a significant decrease in timeliness of loss recognition; however we do not find significant differences across IFRS and benchmark firms in meeting or beating earnings targets. Our findings contrast with findings in earlier studies which suggest that IFRS adoption leads to increased accounting quality. Our findings primarily hold for firms in strong enforcement countries which suggests that enforcement mechanisms in these countries were not able to counter the initial effects of greater flexibility in IFRS relative to domestic GAAP.

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    • "Capkun et al. (2012) argue that IFRS changed significantly from 2003 to 2005, allowing managers greater flexibility and discretion. They conclude that these changes explain the contradictory results of Barth et al. (2008) for voluntary and Christensen et al. (2008) and Ahmed et al. (2013) for mandatory IFRS adopters. An improvement in accounting quality is documented by Chen et al. (2010), who find evidence of a decrease in earnings management toward a target, a decrease in absolute discretionary accruals, and a decrease in the standard deviation of unexplained accruals. "
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    ABSTRACT: This study examines the effect of mandatory adoption of International Financial Reporting Standards (IFRS) on both accrual-based and real earnings management. While prior literature has mainly examined the effects of IFRS adoption on accrual-based earnings management, no study to date has focused on the impact of IFRS adoption on real earnings management. Using a sample of 15,206 observations from 22 European countries between 2000 and 2010, this study employs a control sample of voluntary adopters and applies a differences-in-differences design to control for confounding concurrent events. The results suggest that mandatory IFRS adoption had no significant impact on either real or accrual-based earnings management practices. Additional analysis on a sub-sample of firms with relatively strong earnings management incentives supports a dominant role for firm-level reporting incentives over accounting standards in shaping financial reporting quality.
    Journal of Accounting and Public Policy 12/2014; 33(6):551-572. DOI:10.1016/j.jaccpubpol.2014.08.006 · 1.05 Impact Factor
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    • "at are relevant for financial reporting . Third , we identify a potential explanation : the deficiency in the application of the most important conditional conservatism mechanism , namely impairment tests . We add to prior studies on the effects of IFRS adoption ( e . g . , Barth et al . , 2008 ; Christensen et al . , 2008 ; Daske et al . , 2008 ; Ahmed et al . , 2013 ) ."
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    ABSTRACT: Abstract: We study the effect of mandatory IFRS adoption in Europe in 2005 on conditional conservatism. We capture conditional conservatism with a modified version of the Khan and Watts (2009) measure (C_Score) that also controls for potential shifts in unconditional conservatism and cost of capital. From a sample of 13,711 firm-year observations drawn from 16 European countries spanning the 2000-2010 period, we document an overall decline in the degree of conditional conservatism after the adoption of IFRS. We show that the decline in conditional conservatism is less pronounced for countries with high quality audit environments and strong enforcement of compliance with accounting standards using the Brown et al. (2014) index. As asset impairment tests are a key mechanism ensuring conditional conservatism in the IFRS framework, we further examine these. We show that firms booking an asset impairment present a smaller decline in the degree of conditional conservatism relative to firms that do not. We also demonstrate that firms that do not book an asset impairment when evidence suggests the probable need to do so experience a more pronounced reduction in conditional conservatism. We argue that IFRS are conceptually conditionally conservative but that inappropriate application of conditional conservatism principles is likely to prevent financial reporting from reaching the level of conservatism targeted by the IASB. Key words: Conditional Conservatism, IFRS, Europe, Enforcement, Impairment, Goodwill, Intangibles JAL: M41, M48, G38
    Journal of Business Finance & Accounting 12/2014; 42(3-4). DOI:10.1111/jbfa.12105 · 0.69 Impact Factor
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    • "We further consider the influences of legal, corporate ownership, and financial reporting pre-conditions, two firm-level measures of capital investment efficiency, and industry effects. Our results reveal mandatory and comparability (Ahmed et al. 2012; Cascino and Gassen 2012), and positive stock market reactions (Armstrong et al. 2010; Christensen et al. 2007), with generally stronger associations in countries with more developed legal, control and reporting conditions. "
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    ABSTRACT: We examine whether adoptions of International Financial Reporting Standards (IFRS) enhance capital investment efficiency, a purported benefit. Data for 10,340 adoptions across 26 countries during 2001-08 reveal mandatory but not voluntary IFRS adoptions to be significantly associated with enhanced capital investment efficiency measured by investment-cash flow sensitivity and value-enhancing risk taking. In contrast to prior findings for capital market effects of IFRS adoptions, associations between mandatory IFRS adoptions and capital investment efficiency are stronger in countries with weaker legal protections, more concentrated ownership, and prior reporting standards that differ more from IFRS. Combined, these findings lend support to mandatory but not voluntary IFRS adoptions serving to enhance firm-level capital investment efficiency, particularly in countries with weaker investor protections.
    SSRN Electronic Journal 01/2013; DOI:10.2139/ssrn.2353693
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