Adoption of Ifrs

Topics: International Financial Reporting Standards, Financial statements, International Accounting Standards Board Pages: 9 (3173 words) Published: April 16, 2013

The IASB was established in 2001 and since have assumed the responsibility of the standard setting from its predecessor body, the International Accounting Standards Committee (IASC) and began issuing International Financial Reporting Standards (IFRS). IFRS has recently been dominating the regulatory changes in accounting for listed companies around the world. Through the years, over 100 countries have adopted IFRS reporting, some of which include Australia, the European Union, India, Japan, South Africa, Russia and most recently Canada. In addition, the U.S. Securities and Exchange Commission (SEC) are working towards the final element of a work plan to incorporate IFRS into the U.S. financial reporting jurisdiction. In November 2007, the SEC voted to allow foreign issuers that report in IFRS to file their financial statements with the SEC without reconciling to U.S. generally accepted accounting standards (GAAP). Accounting standard setters anticipate that the use of IFRS will improve the comparability of financial statements, improve reporting transparency, and increase the quality of financial reporting which in turn will lead to greater investor confidence. From an economic perspective, some believe that it’s challenging to perceive that such expectations will be achieved as a result of converting to IFRS. However according to proponents of IFRS, publicly traded companies believe that applying these principles will allow for a single set of high quality accounting standards as this will contribute to better functioning of the capital markets (Quigley 2007). In the following paper I will discuss the reasons why firms around the globe have adopted IFRS in relation to the financial reporting and disclosure quality, comparability across firms and countries, and the costs and benefits associated with reporting improvements. Most countries are in favor of adopting IFRS, from the viewpoint that IFRS standards are more capital market oriented, which in turn provides higher quality information that will 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 empirical studies that suggest firms engaging in IFRS implementations should see an increase in market liquidity followed by a decrease in the firm’s value of cost of capital. According to Leuz and Wysocki (2008), they have provided some evidence in relation to the effects of reporting quality on market liquidity. They indicate the issue regarding information asymmetry, where investors who possess less knowledge of a firm’s reporting structure or policies, are concerned about trading with the better informed investors. They indicate how these non-informed investors are to lower the price at which they are willing 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 likely to trade. These effects of adverse selection and information asymmetry reduce the liquidity of securities market. Therefore, IASB strongly encourages essential financial disclosure. This will alleviate the adverse selection problem and will result in increased market liquidity by leveling the playing field among all market participants. In addition, other studies have shown that improvements in financial reporting and disclosure can affect the cost of capital in a variety of ways. Some of which include, investors that require a higher return from less liquid securities and lower estimation risk as this makes it easier for the investor to estimate a firm’s future cash flow. This in turn, will improve risk sharing in the economy by making investors aware of certain securities or by making them more willing to hold them (Leuz and Verrecchia, 2004). Hence reducing the cost of capital....
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