Executive Summary
International
Financial Reporting Standards (IFRS) represents a major regulatory element in
accounting globally. Most firms have adopted IFRS- partly as a result of a push
by national governments- because they believe it will increase the quality of
their financial reporting, thereby improving accountability and leading to
increased profits.
Australia is one of
the very earliest countries that adopted IFRS and pushed to have its firms
adopt the framework in their financial reporting. The purpose of this paper is
to examine the feasibility of IFRS in achieving the purpose for which it was
adopted in the country. In this regard, this paper will cite evidence showing
how IFRS has improved the quality of financial reporting in other countries and
in Australian firms (both public and private) that have adopted mandatory IFRS.
Introduction
From
2005, more and more countries have moved towards implementing the elements of
International Financial Reporting Standards (IFRS). By 2008, more than 100
countries had adopted IFRS reporting or reported requiring this framework in
the future, including the US Securities and Exchange Commission (SEC), which at
the time was considering allowing firms in the country to prepare their financial
statement based on the IFRS framework (Goodwin et al 2007; Daske et al 2008). Australia
is one of the countries that have since adopted IFRS. In fact, as noted above,
it was one of the earliest countries to adopt IFRS.
However,
even as IFRS becomes increasingly prominent globally, many are questioning its
credibility, whether it really does improve the quality of financial reporting.
This question has been answered in various ways, with focus on various elements
involved in accounting, including the actual quality of accounting (Barth et al
2008) and the information environment: i.e. a framework of accountability (Horton
et al 2013). Other studies have cited evidence from national and local
government entities and others on individual firms (Daske et al 2008; Ahmed
& Alam 2012). Generally, the proponents of IFRS argue that it can
facilitate cross-border comparability, increase transparency of reporting, and
reduce costs of information and information asymmetry and, ultimately, “increase
the liquidity, competitiveness, and efficiency of markets†(Horton et al 2013, 388).
This
paper examines the evidence to provide a justification for the adoption of IFRS
in Australia.
IFRS in Australia
The
general question here regards the feasibility of the accounting standards in
ensuring quality accounting. Barth et al (2008), for example, in their review
of International Accounting Standards (IAS) (the predecessor to IFRS), found
that the “accounting amounts of firms that applied IAS were of higher quality
than those of non-US firms that did not†(p.496). This owed to an interaction
of various elements of the financial reporting system, including the
interpretation, enforcement and litigation of accounting standardsâ€. However,
it is important to note that the behavior of these three factors depend on the context
(such as a country). As Horton et al (2012) note, the effects of compliance
with IFRS are not homogenous for all firms or all countries. In other words,
IFRS’s success elsewhere does not necessarily mean it will be a success in
Australia. Moreover, Barth et al (2008) cited limitations of IAS relating to managerial
discretion and inherent flexibility, which might also affect apply in the case
of IFRS.
However,
it is only fair to question IFRS. Besides, IFRS has been seen as an improved
version of the earlier international standards of financial reporting and accounting.
Daske
et al (2008) focus on general economic impacts of IFRS around the world and
note that IFRS improves financial reporting by enhancing the ability to compare
financial statements and improve corporate transparency.
Horton
et al (2013) examine the ways in which IFRS has improved the information
environment relating to financial reporting. It is important to mention in
passing that studies have associated higher reporting quality with adverse
selection in security markets and improved efficiency of information intermediaries
(Hail & Leuz 2006; Hodgdon et al 2008). In the end, Horton et al (2013)
base their examination on the hypothesis that the adoption of mandatory IFRS provides
information quality results and, ultimately, affects the accuracy of analyst
earnings forecast. Indeed, their findings show that, of the firms involved in
their studies, those that had adopted mandatory IFRS had recorded significant
improvement of the information environment and forecast accuracy. This view was
reaffirmed by the finding that “the larger the difference between IFRS earnings
and local GAAP earnings the larger the improvement in the information
environment†(Horton et al 2013, 419).
Although
Horton et al (2013) take note of limitations, such as the aforementioned issue
of contextual differences between firms and countries, they show that these
positive effects of IFRS on the information environment are more evident in
capital markets, which they define as a situation that “facilitates efficient
allocation of resources towards its most productive users†(419), a description
that fits Australia. Supporting this view related to capital markets, Daske et
al (2008) argue that IFRS in these markets reduces the amount of discretion in reporting
by compelling firms to improve their financial reporting.
Ahmed
and Alan (2012), on their part, focus on the effects of adopting IFRS on the
financial reports of local government entities in Australia. In this regard,
their study focuses on the effects of IFRS adoption on local governments’ accounting
loss or surplus, equity and assets and liabilities.
Amplifying
the findings of Horton et al (2013), Ahmed and Alan (2012) find a general positive
effect on surplus and equity for large councils. Moreover, the increase on
total assets exceeded that of total liabilities ($55 million and 3.07 million
respectively). These findings shed light on the effects of IFRS on performance
in general, which is positive.
Conclusion
This
paper aimed to provide the evidence that IFRS is a good thing for Australia. It
is, however, crucial to point out, as implied throughout the discussion, that
the advantages of IFRS are not automatic. The market circumstances within a
country, most importantly the type of economy, as well as internal contextual
elements of adopting firms, play a major role in the success of IFRS. For
example, while there is the view that IFRS have more positive impact in capital
markets, they must however be accompanied by, for instance, strong government incentives
for transparency (Hail & Leuz 2006; Hodgdon et al. 2008; Horton et al. 2013).
Having said that, this paper cites a number of studies that provide evidence regarding the positive impact of IFRS, not only in other countries but also within Australia, and in both private and public entities. Indeed, the complexity of the issue still remains and not all positive financial reporting elements in the countries adopting IFRS can be solely attributed to IFRS. Still, evidence ultimately shows that IFRS improve the quality of financial reporting in relation to the financial environment and preparation of actual financial documents (Ahmed & Alan 2012; Horton et al. 2013).
Bibliography
Ahmed, K &
Alan, M 2012, ‘The effect of IFRS adoption on the financial reports of
local government entities’. Australasian Accounting Business and Finance Journal, vol.6, no.3:
pp.109-120
Barth, ME,
Landsman, WR & Lang, WH 2008, ‘International Accounting Standards
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L, Leuz, C & Verdi, R 2008, ‘Mandatory IFRS reporting around the
World: early evidence on the economic consequences’.
Journal of Accounting Research, vol.46,
no.5: pp.1085-1142
Goodwin, J,
Ahmed, K & Heaney, R 2007, The effects of International Financial
Reporting Standards on the accounts and accounting
quality of Australian firms: a retrospective study
Hail, L, &
Leuz, C 2006, ‘International differences in the cost of equity capital: Do
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Hodgdon, C,
Tondkar, RH, Harless, DW & Adhikari, A 2008, ‘Compliance with IFRS
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International Accounting, Auditing and Taxation, vol.7, no.1:pp.1–13
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