Problems of Adoption and Application of International Financial Reporting Standards (Ifrs) in Bangladesh

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International Journal of Business and Management

December, 2009

Problems of Adoption and Application of International Financial Reporting Standards (IFRS) in Bangladesh Sumon Bhattacharjee (Corresponding author) Department of Business Administration, East West University 43-46 Mohakhali C/A, Dhaka, Bangladesh Tel: 88-17-1285-9617 E-mail: sumon@ewubd.edu Muhammad Zahirul Islam Department of Business Administration, East West University 43-46 Mohakhali C/A, Dhaka, Bangladesh Tel: 88-17-1665-3964 Abstract

E-mail: zahir046@ewubd.edu

The adoption of IFRS around the world is occurring rapidly to bring about accounting quality improvement through a uniform set of standards for financial reporting. However, accounting quality is a function of the firm’s overall institutional setting, including the legal and political system of the country in which the firm resides. This paper documents the prospects of IFRS adoption and their impact on the financial reporting environment of Bangladesh considering the underlying institutional and economic factors. It argues about trade-off between the scale advantage of IFRSs (designed globally by the highly sophisticated authority) and the local advantage of decentralized adaptation. It is also an effort to focus on the problems relating to adoption of IFRS in Bangladesh and to reach some concluding remarks for better applicability of accounting standards in ensuring transparent information environment. Keywords: IFRS adoption, IAS, Accounting quality, ICAB, Bangladesh 1. Introduction

International accounting literature provides evidence that accounting quality has economic consequences, such as costs of capital (Leuz and Verrecchia, 2000), efficiency of capital allocation (Bushman, Piotroski, & Smith, 2006; Sun, 2006), and international capital mobility (Young and Guenther, 2002). Also, economic changes are likely to have similar consequences as Land and Lang (2002) document that accounting quality has improved worldwide since the beginning of the 1990s, and suggest that this could be due to factors such as globalization and anticipation of international accounting harmonization. Accounting theory argues that the purpose of financial reporting is essentially to reduce information asymmetry between corporate managers and parties contracting with their firm (Watts, 1977; Ball, 2001) and financial reporting reduces information asymmetry by disclosing relevant and timely information (e.g., Frankel and Li 2004). Because there is considerable variation in accounting quality and economic efficiency across countries, international accounting systems provide an interesting setting to examine the economic consequences of financial reporting. Improvement in the information environment following change to IAS (Note 1) and IFRS is contingent on at least two factors. First, improvement is based upon the premise that change to IFRS constitutes change to a GAAP that induces higher quality financial reporting. For example, Barth, Landsman, & Lang (2006) find that firms adopting IFRS have less earnings management, more timely loss recognition, and more value relevance of earnings, all of which they interpret as evidence of higher accounting quality. Second, the accounting system is a complementary component of the country’s overall institutional system (Ball, 2001) and is also determined by firm’s incentives for financial reporting. La Porta, Lopez-De-Silanes, Shleifer, & Vishny, (1998) provide the first investigation of the legal system’s effect on a country’s financial system. They find that common law countries have better accounting systems and better protection of investors than code law countries. Other factors associated with financial reporting quality include the tax system (Guenther and Young, 2000; Haw et al.; 2004), ownership structure (Ball and Shivakumar, 2005; Fan and Wong, 2002), the political system (Leuz and Oberholzer-Gee, 2006), capital structure (Sun, 2006), and capital market...
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