Q Assignment investigates the relationship between country specific features and adaptation of IFRS Home, - International Financial Reporting Standards Introduction A number of studies in contemporary era have investigated the relationship between country specific features and adaptation of IFRS (International Financial Reporting Standards). Traditionally, many countries have been found to adapt to local accounting standards and there was limited application of internationally accepted accounting standards that will simplify the process of transparent comparability. The findings of studies like Ashbaugh (2001) indicated that convergence with IFRS will facilitate investor protection and stricter legal enforcement. The literature on the impact of IFRS adoption on quality of financial disclosures and reporting has shown mixed results. The relationship between implementation of IFRS (International Financial Reporting Standards) and country specific features has been explored by modern research studies. By and large, the local accounting standards are widely followed by various countries and implementation of universally accepted accounting standards is being observed to a small extent,and the transparent comparability would be simplified only through the implementation of universal standards. Ashbaugh(2001) identified that stricter legal enforcementand investor protectionwould be enabled through the conjunction of different features with IFRS. Mixed outcomes have been revealed by the paper on the impact of IFRS adoption on quality of financial discoveries and reporting mechanisms. According to Covrig, DeFond and Hung (2007), there are some institutional and economic factors that can potentially instigate a firm’s demand for external finances. Some of these factors include delisting or listing regulations, foreign ownership, state authority’s tax structure, regional development and industry growth to name a few. In most general cases, it has been observed that listed companies having two or more subsidiaries present in different countries are involved in dual reporting. The two sets of financial reporting have raised controversial issues like recognition of assets, different depreciation charges for similar asset classes and inventory valuation(Barth, Landsman and Lang, 2008). There are other complex issues like derivatives reporting and hedge accounting that have raised concerns for the International Accounting Standards. Covrig, DeFond and Hung (2007) have described some economic and institutional factors, through which the external investments of a firm can be possiblyoriginated. The foreign proprietorship, delisting or listing regulations,regional development, tax structure of state authority and industrial development are believed to be among some of these factors. Dual sort of reporting is mostly observed by the listed companies, who are having two or more subsidiaries present in different countries. Besides different depreciation charges for similar asset classes, other disputedissues, such asacknowledgment of assets andinventory valuationhave been emerged because of the two sets of financial reporting (Barth, Landsman and Lang, 2008). Regarding the International Accounting Standards, different concerns have been raised by thecomplicated issues, such as, hedge accounting and derivatives reporting The common standard of reporting practices will make listed entities more accountable to external and internal stakeholders. With listed companies in more than hundred countries use IFRS, most of the other jurisdictions allow use of IFRS in certain circumstance like raising capital from foreign countries or investors. The objective of this study is to review the extant of academic literature in order to critically appraise the impact of IFRS adaptation on the quality of financial disclosures and reporting. Now, thelisted entities have become more accountable to internal and external stakeholders owing to the common reporting practices. As far as listed companies are concerned, the widespread use of IFRS is being observed in more than hundred countries, whereas other territories permit the IFRS in certain circumstance, for example, raising capital from stockholders or foreign countries. Toconclusively evaluate the impact of IFRS adaptation on the quality of financial discoveries and reporting mechanism, reviewing the academic literature is the primary goal of this study. The impact of IFRS adoption on the quality of financial reporting and disclosure The financial statements of a company are the most important source of information for the investors, shareholders, creditors and governing bodies. Listed entities are required to prepare and disclose all business related transactions and financial changes in position through their consolidated financial statements. Companies that are involved in derivatives transaction are required to highlight fair valuation of their assets and liabilities. The studies conducted by Barth et al., (2008) investigated the impact of IFRS on quality of financial reporting and financial disclosures through econometric regression models. The results of the study clearly show that IFRS has helped listed entities to improve the quality of reporting, increase intangible aspects, and win investor confidence. In short, convergence of IFRS has led to transparent financial reporting and minimising various risks inherent to the organization (Barth, Landsman and Lang, 2008). The key source of information for the shareholders, investors,creditors and governing bodies are believed to be the financial statements. Through the consolidated financial statements,listed entities can are desired to prepare and disclose the financial changes and all business related transactions. The fair valuation of the assets and liabilities is desired to be highlighted by the companies involved in derivatives transactions. By employing the econometric regression models, the impact of IFRS on quality of financial disclosures and financial reportinghas beenexamined by the studies performed by Barth et al., (2008). According to the findings of the study, listed entities have now been enabled to improve the quality of reporting, to win investor confidence and to increase intangible aspects through the IFRS adoption. Briefly speaking, various organizational based intrinsic risks have been curtailed and transparency in financial reporting can be observed due to conjunction of IFRS with other modules (Barth, Landsman and Lang, 2008). According to the arguments of Adam (2007), the accounting standards are not determined by transparency in reporting only. The quality of accounting standards is also dependent on incentivizing the firm for participating in the process of transparent reporting standards. According to the findings of this study, listed entities are aware that by adhering to proper disclosure standards and international reporting, they will be able to acquire capital very easily from the foreign investors that are scouting for genuine investment opportunities. Therefore, it is possible that many firms have voluntarily adapted IFRS standards to minimise their cost of capital (Asiedu, and Lien, 2011). The transparent reporting merely cannot regulate the accounting standards as per the findings of Adam (2007). Incentivizing the firm to make its contributionin the process of transparent reporting standards is another factor, which also determines the quality of accounting standards. The findings reveal that listed entities will be able to easily acquire capital from the foreign stakeholders that are searching for legitimate investment opportunitiesand it would be made possible only by demonstrating compliance to international reporting and proper disclosure standards. As a result, the IFRS standards might have been willingly adapted by various firms, so that they could curtail their capital cost (Asiedu, and Lien, 2011). Previous studies on the impact of IFRS have mainly focused on financial reporting. However, empirical scholars have done limited research on other aspects like organisation’s business structure, philosophies, internal control, performance management and compliance standards. Some of the authors have agreed that one of the primary motives for harmonisation of international standard of reporting is globalisation. Empirical studies on the effect of harmonization of IAS or IFRS in Europe and other developed countries have provided ample evidence that the investors of developed countries are in favour of common standard of accounting. A study conducted by Bartov et al. (2005), revealed that it will be possible for listed entities to improve the quality of reporting by providing quality scores. The process of quality score was prevalent in Germany, Australia and Switzerland prior to 2006 when the IFRS adaptation in Europe was not mandatory. This shows that advanced economies have always preferred transparency and fair reporting practices. However, after the global financial crisis of 2008, the matter became more concerning for the corporate sector as well as the regulatory boards. Most of the studies including Asiedu and Lien (2011) have indicated that the corporate industry will require certain incentives for voluntary disclosures and transparent reporting. According to the arguments of Azobu (2010), the corporate decision to adapt or reject IFRS depends on firm’s market capitalisation and number of equity shares owned by foreign entities. The authors have argued that domestic companies having limited foreign transactions and exposure in international markets are reluctant to adapt IFRS(Cuijipers and Buijink, 2005). Financial reporting was the only focus presented by earlier studies on the impact of IFRS. Nonetheless, other aspects, such as,viewpoints, business structure of organization, performance management, internal control and compliance standards have not been focused considerably by the empirical scholars. It has been agreed by a number of authors that globalisation is one of the primary objectivesfor synchronization of international reporting standard. The common standards of accounting are being supported by the investors of developed countries and the same has been corroborated by the empirical studies on the impact of harmonization of IFRS or IAS in Europe and other developed nations. Bartov et al. (2005) has described that refining the quality of reporting through deliverance of quality scores would be made possible for listed entities. Before 2006, the process of quality score was predominantin Australia, Germany and Switzerland when there was no restriction of IFRS adaptation across the European countries. It is now clear that fair reporting practicesand transparency are always preferred by the advanced economies. Nevertheless, the regulatory boardsand the corporate sectors were showing their concerns after the global financial crisis of 2008. As per the findings of Asiedu and Lien (2011), it has been revealed that certain incentives would be required by the corporate industry for bringing transparent reporting and voluntary disclosures. Azobu (2010) has discovered that number of equity shares owned by foreign entitiesand the firm’s market capitalisationare the factors behind the corporate decision to implement or reject the IFRS. According to the authors, domestic companies have no desire to implement the IFRS; especially, the companieshaving less exposure in international markets and having limited foreign transactions (Cuijipers and Buijink, 2005). Before discussing the impact of IFRS, it is important to understand the basic challenges and issues that have increased the importance of common reporting standards. IFRS is analogous to a common set of principals or global Generally Accepted Accounting Principles (GAAP). The IFRS has been defined by the IASB (International Accounting Standards Board) to assist corporate entities in preparing financial statements ensuring highest comparability, quality and transparency. In contemporary business environment, IFRS grabbed the attention of many businesses across the world because it helps public and corporate entities to minimise cost of transaction, ease the process of consolidating financial statements, ensure stricter internal control by management, maintain internal consistencies of reporting, help stakeholders to make reasonable comparison with global companies and also provide easier access to capital markets across the globe (Cuijipers and Buijink, 2005). Gaining an insight with the basic issues related to the significance of common reporting standards is very important prior to taking into account the impact of IFRS. International Financial Reporting Standardshave a similarity with theGAAP (Generally Accepted Accounting Principles) or certain common set of principles. The IASB (International Accounting Standards Board) has described the IFRS as the standards applied to assist corporate entities in preparation of the financial statements through which highest comparability, quality and transparency could be ensured. Besides ensuring stricter internal control by management,easier access to capital markets throughout the worldand assisting the stakeholders in making reasonable comparison with global companies, the attentions of severalworldwide businesses nowadays have been grasped by the IFRS because of the given below reasons:It facilitates the process of consolidating financial statements, it helps corporate and public entities to curtailtransaction cost andit internal consistencies of reportingare also maintained by it (Cuijipers and Buijink, 2005). According to the findings of Daske and Gebhardt (2006), the feasibility and need of uniform international standards for reporting is highly dependent on the following factors: 1. Easier access to information and increased interdependence of financial markets across the globe 2. Integration of economies around the world 3. Limiting barriers to flow of capital from country to another 4. Mobility of capital from one capital market to another 5. Listing of single corporate entity in different capital markets 6. Continuous demand of the stakeholders for transparent disclosures and improving the quality of reporting. The given below factors establish the need and viability of uniform international standards for reportingas per the findings of Daske and Gebhardt (2006): 1. Worldwide merger of economies 2. Enhanced correlation of financial markets and easier access to information across the world 3. Progress and social mobility of capital from one market to another 4. Restrictingblocks to flow of capital from one population to another 5. Making an inventory of single corporate entity across different capital markets 6. To carry out transparent discoveries and to enhance the quality of reporting,there is s continuous demand of the stakeholders. Authors such as Gordon et al. (2012) have identified some inherent problems associated with international or global reporting standards. For instance, language is one such issue that needs to be dealt very carefully. If a financial report is published in French and it is translated in English with automatic software then the particular term ‘asset’ may be connoted to ‘active’ which is not a pertinent translation.Hence, instead of improving comparability and transparency in financial reporting process, such mistakes will only add to existing worries of the stakeholders. In German language, there is no single reasonable synonym for the term ‘fair’ (often used in annual reports) which is also a problem. In short, there are certain accounting keywords like the ones mentioned earlier which are not universally comprehensible. According to authors such as Adam (2007), there are other problems like government policies of a country may not support IFRS because LIFO (Last-In First-Out) is not allowed for tax computation in inventory valuation which is common in many countries especially in the manufacturing industry. In addition to these common problems, there is also a common resisting tendency among SME’s (Small and Medium Enterprises) due to fear of losing investor confidence (Bartov, Goldberg and Kim, 2005). Some inherent issues regarding international reporting standards have been discovered by Gordon et al. (2012). For example, language barrier is one of the issues that need careful attention. If a financial report is printed in French and an automatic software is used for its English language translation, then the specific term ‘asset’ may be inferredas ‘active’ which is not a relevantinterpretation. Therefore, existing concerns of the stakeholders would be aggravated due to such mistakes; rather they could bring improvements intransparency and comparability within the financial reporting process. As far as the term ‘fair’ (often used in annual reports) is concerned, there is no single accurate synonym in German language,which is also an issue. To sum up, we have certain accounting keywords which are not universally understandable, such as, the ones which we have already discussed. Adam (2007) has stated thatIFRS might not be supported by the government policies of a country, because, LIFO (Last-In First-Out) is not acceptable for tax computation, which is very common, especially in the manufacturing and production trade. Due to distress of losing investor confidence, a common struggling tendency among SME’s (Small and Medium Enterprises) is also observed in addition to above said matters(Bartov, Goldberg and Kim, 2005). The findings of many studies indicate that organisations having significant requirement of foreign capital will be able to gain competitive advantage by adapting IFRS. This is because, companies that is located mainly in underdeveloped regions or receive low government subsidies will eventually require capital for expansion of business resources. IFRS can assist these companies to grab the attention of the potential investors who are looking for investment in companies that are financially sound and transparent in disclosures (Daske and Gebhardt, 2006). The potential impacts of IFRS are discussed below: • It plays a vital role in attracting foreign investments by lowering cost of capital for local companies and increasing transparency. • It assists in collating meaningful financial data on company’s performance and thereby encourages efficiency, comparability, reliability and transparency of financial reporting procedure and other form of disclosures. • It helps shareholders and other decision makers to take meaningful and informed decisions based on facts that can be easily compared at par with international standards. • It can help companies to access funds from international markets when the economic condition of domestic market is gloomy. • When two entities share information which is not based on common pre-defined standards, then it makes it difficult and time consuming task for the decision makers to aggregate facts. The process of consolidation is time consuming and it can be minimised by IFRS adaptation. • IFRS provides companies the same reliability standards as that of a multinational corporation and hence it helps to minimise the cost of raising capital. • Many additional disclosures are available in the financial statements prepared on the basis of IFRS and thus it helps shareholders and supervisory authorities to maintain proper control on the happenings of the business. • IFRS will help to minimise disputes between the government of a country and a legal corporate entity. In many countries, there are issues relating to double taxation, inventory policies, derivatives accounting, etc. which is effectively addressed by the predefined standards of IFRS (Gordon et al, 2012). A number of studies have suggested that competitive benefit can be gained by the organisations having considerable requirement of foreign capital and the IFRS implementation would accomplish this milestone. Since, thecompanies receivinginadequate grants from government or the companies that aresituated primarily in undersized regions will eventually require capital so that they could expand their business resources. These companies can be assisted by the IFRS to grasp the concentration of the possible investors who are looking for investment in flourishing and successful companies and the companies having transparent financial reports (Daske and Gebhardt, 2006). Following are the potential impacts of IFRS: • By enhancing transparency and by decreasing cost of capital for local companies,it plays an important role in appealing foreign investments. • Regarding the company’s performance, IFRSorganizes and presents meaningful financial data is organized and presented by the IFRS implementation and hence there would be a boost in productivity, comparability, trustworthiness and transparency of financial reporting procedure besides other components. • Based on facts that can be easily compared with international standards, the stakeholders and other executivesare enabled to take meaningful and sensible by the IFRS adaption. • When the domestic market has miserable economic condition,the companies canaccess funds from global markets through its realization. • Aggregating the facts becomes challenging and time consuming task for the decision makers, when information in this scenario is shared by two entities that is not based on common pre-defined standards. The process of consolidation is lengthy and IFRS adaptation can curtail its long time. • Both the local and multinational companies receive the same and equal reliability standards through IFRS, and thus it helps to reduce the cost of raising capital. • IFRS helps achieve a number of additional disclosures in the financial statements. Moreover,there is a proper control on the activities of the business by the stakeholders and supervisory authorities. • Thedisagreements between a legal corporate entityand the governmentcan be minimized through the IFRS adaption. Issuespertaining to inventory policies, double taxation andderivatives accounting are being observed in a number of countries and the predefined standards of IFRS can be applied to effectively address such issues(Gordon et al, 2012). Many authors have also mentioned that although the potential impact of IFRS adaptation in modern business appears to be very indulging, yet there are some key challenges that also need to be addressed before the concept is fully accepted in the society. Some of the key challenges identified by academicians and practitioners are discussed below: According to a number of authors,services of the professionals should be hired to addresscertain key challenges prior to the implementation of the concept across the society, while the likely impact of IFRS adjustmentseems to be veryspoilingin modern business. The practitioners and academicians have identified some of the challenges which are given below: Awareness – In order for smooth transition of current accounting systems to IFRS, every stakeholder (financial regulators, preparers of financial statements, educators, users of financial statements) should be aware of possible implications of IFRS adaptation. This will be possible by identifying regulatory synergies and effectively communicating the same to different stakeholders. Awareness – Every stakeholder,for example, educators, preparers of financial statements, financial regulators in addition to theusers of financial statements should be well-versed with the possible implications of IFRS adaptationso that there could be thesmooth transition of current accounting systems to IFRS. The identification of regulatory collaborations and their effective dissemination to different stakeholders would bring our desired outcomes. Education and training – The practical implementation of IFRS will require training of auditors, accountants and regulatory authorities. Countries whose accounting and financial professionals are technically more competent could witness faster adaptation to IFRS. Education and training – The practical of accountants, auditors and regulatory authorities would be initially needed for the practical implementation of IFRS. Speedy implementation of IFRS would be observed by the countries whose financial professionals are technically sound than their other counterparts. Amendments – It is true that once the IFRS is implemented then many laws and acts will have to be updated and amended. For example, the Company’s Act, Income Tax Act, various acts applicable to the securities market, revenue recognition policies, etc. will have to be amended accordingly. Companies will also have to change the basic outline of their annual report and include many qualitative aspects in addition to transparent quantitative facts (Daske and Gebhardt, 2006). Amendments – It is true that once the IFRS is implemented then many laws and acts will have to be updated and amended. For example, the Company’s Act, Income Tax Act, various acts applicable to the securities market, revenue recognition policies, etc. will have to be amended accordingly. Companies will also have to change the basic outline of their annual report and include many qualitative aspects in addition to transparent quantitative facts (Daske and Gebhardt, 2006).