determinants and consequence of adopting international

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Available online at www.ijcmit.com

International Journal of Contemporary Management and Information Technology (IJCMIT)

Volume 1, No 3, March 2021, pp. 39-48

e-ISSN: : 2773-5036

Determinants and Consequence of Adopting International Financial Reporting Standards (IFRS): A Systematic Literature Review

Kamal Masoud Ab Abonwara 1, Noor Lela Binti Ahmad 2, Hazianti Binti Abdul Halim 3

1,2,3, Faculty of Management and Economics, Sultan Idris Education University (UPSI), Malaysia, email: [email protected]

Article history Submitted: 16 February, 2021 Revised: 20 March, 2021 Accepted: 26 March, 2021

Abstract The International Financial Reporting Standards (IFRS) has been widely adopted by countries around the world. There is a mixed result regarding the adoption and the consequence of using the IFRS. The purpose of this study is to review the literature regarding the predictors and consequences of adopting IFRS. A total of 48 articles were reviewed and frequency analysis was conducted. The findings showed that studies of IFRS focused on the European Union (EU) and conducted studies on several countries tougher. Single country investigated in a limited number of studies. Most of the studies in the developed countries focused on the consequence and found that there are mixed findings regarding the usage of IFRS. In the context of developing countries, the adoption is still taking place and the studies found also that the consequences are mixed, and the predictors are individual-related factors (education, accounting capabilities), organizational (size, age, readiness), and macroeconomic (legal system, regulation, political ties). The findings were discussed, and more studies are needed to identify the role of IFRS in the context of developing countries.

Keywords: IFRS, Adoption of IFRS Consequence of IFRS Predictor of IFRS

1. Introduction

The International Financial Reporting Standards (IFRS) is one of the widely used standard for reporting the financial performance of companies. IFRS was introduced by the European Union (EU) to simplify the comparability between companies in term of their performance and to allow a common language that investors and other stakeholders can eastly comprehend [1]. The introduction of the IFRS was an effort to increase transparency, quality and comparability in financial reports produced by companies regardless of their country of origin [2]–[4].

Currently, more than 120 countries are utilizing the IFRS to report the financial performance of companies. Nevertheless, several setbacks have made the companies as well as countries hesitant to adopt the IFRS and these are related to the accounting capabilities as well as the compatibility, complexity, and government regulation [5]–[7]. Important predictors of using the IFRS and other accounting techniques were related to knowledge, education, experience, and the background of users[8]–[11]. However, there is no agreement among researchers regarding the predictors of using IFRS and these predictors are dependent on the country and the industry context [1], [12]–[16]. In addition, the consequence of adopting the IFRS are mixed. Some studies found that adopting the IFRS requires additional cost and affect negatively the performance of companies. Other indicates that the cost is mitigated in the long term and lead to positive impact on the performance of companies [17]–[19].

The predictors and the consequence as well as the goodness of IFRS for countries are still being investigated with mixed findings. Developed nations have a well-established financial system that are more flexible compared with the developing and emerging economies. For this reason, the predictors are mixed based on the country context and the legislation of the country. [1], [12]–[16]. It is also not known what are the predictors based on developed and developing countries [4] [20], [21] [22]–[24] [19], [25].

Empirical studies outperform the review studies and there is a need to understand the status and the predictor as well as the consequence of IFRS. This study aims to review systematically the literature to identify the state of the art of IFRS and to find the predictors and the consequence. The study aims to conduct a systematic literature review on the articles that are related to the adoption of IFRS, consequence of IFRS, predictors of IFRS. The next section discusses briefly the literature. In the third section, the methodology of this study is explained as well as the findings and the direction of future work.

Abonwara et al., International Journal of Contemporary Management and Information Technology Vol.1, No. 3, 2021

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2. Literature Review

This study is a systematic literature review study. The study deals with the predictors and consequence of adopting IFRS. A total of 48 articles were reviewed. A summary of the reviewed articles can be found in Table 1. It can be seen that the articles are divided into group where the organizational level of adopting IFRS and the macroeconomic level are discussed by the previous studies. The studies are also divided in term of investigating the predictors or the consequence of adoption IFRS on the organizational and the national level. Table 1 shows the author, country, data type, sample size, analysis technique and the field of the study.

Table 1: Summary of Reviewed Studies

Author Country/ industry

Type of data Sample size Data analysis Org Macro Predictor Consequence

[4] Spain Secondary 26 firm SPSS Ö Ö [26] Europe Secondary 1956 firm SPSS Ö Ö [5] Libya Primary 276 individuals SPSS Ö Ö [3] Sweden Secondary 180 firm STATA Ö Ö [12] Europe Union Secondary 1547 firm STATA Ö Ö [24] 73 countries Secondary 527 firm SPSS Ö Ö [27] Libya Review Review Nil Ö Ö [28] Review Review Review Conceptual Ö Ö [29] 74 developing

countries Secondary 74 firms SPSS Ö Ö

[23] 10 Countries Secondary 10 firms SPSS Ö Ö [25] Malaysia Secondary 4010 firms SPSS Ö Ö [30] UAE Primary 245

respondents SPSS Ö Ö

[6] Libya Interview 11 Interviews Content analysis Ö Ö [31] Libya Review Review Nil Ö Ö [7] Libya Primary 30 respondents SPSS Ö Ö [32] Libya Review Nil Nil Ö Ö [33] Slovenia Secondary 209 companies SPSS Ö Ö [34] Nigeria Secondary 14 firms SPSS Ö Ö [22] 70 countries Secondary 70 firm STATA Ö Ö [35] 145 countries Secondary 150,265 firm SPSS Ö Ö [17] Developing countries Review Review Review Ö Ö [13] 15 European countries Secondary 2342

companies f SPSS Ö Ö

[36] Australia Secondary 50 companies Content analysis Ö Ö [37] US Secondary 78 firms Regression Ö Ö [38] Arab Gulf Countries Secondary 39 firms SPSS Ö Ö [39] South Africa Secondary 120 firms SPSS Ö Ö [18] Developing countries Secondary 8 firms Content analysis Ö Ö [14] Europe countries Secondary 359 firms Event analysis Ö Ö [40] Nigeria Secondary 10 firms SPSS Ö Ö [21] Global Primary 84 individuals SPSS Ö Ö [41] Japan Primary 111 firms SPSS Ö Ö [1] Europe Secondary 2,078 firms SPSS Ö Ö [42] Japan Primary 292 individuals SPSS Ö Ö [43] Germany Primary 63 firms SPSS Ö Ö [44] Canada Secondary 581 firms SPSS Ö Ö [45] Canada and USA Secondary 800 firms SPSS Ö Ö [46] Canada Secondary 2496 firms SPSS Ö Ö [15] European countries Secondary 113 firms SPSS Ö Ö [47] Indonesia Secondary 3,861 firms STATA Ö Ö [48] Uganda Primary 40 firms SPSS Ö Ö [19] Nil Review Review SPSS Ö Ö [2] Vietnam Secondary 154 firms. SPSS Ö Ö [49] Asian Secondary 20 firms SPSS Ö Ö [50] Libya Review Review Nil Ö Ö [16] European union Secondary 9,237 firms SPSS Ö Ö [51] Iraq Primary 182 individuals SPSS Ö Ö [52] Nil Review Review Nil [20] Global Secondary 11,772 firms SPSS Ö Ö

Note: Org: Organizational, Macro: Macroeconomic, SPSS: Statistical Package for Social Science,

International Journal of Contemporary Management and Information Technology Vol. 1, No. 3, 2021

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3. Methodology

In order to understand the findings of previous studies and identify the gaps, a systematic literature review was conducted. Articles published in reliable journals and databases were extracted and reviewed. Key words such as adoption of IFRS, predictors of IFRS, consequence of adopting IFRS, and a combination of these words were used to identify and select the related articles. A total of 323 articles were identified. However, not all the articles are related to the subject. For this reason, three screenings were conducted. In the first screen the outdated articles, duplicated articles, and non-English articles were removed. This has resulted in removing 194 articles. The second screening focused on the title and abstracts. This has resulted in deleting 69 articles.

A full review of the remaining articles (60 articles) was conducted. As a result, a total of 12 articles were removed due to the fact that they are out of the scope of this study. This has resulted in reviewing 48 articles that deal with the issue of adopting IFRS in several countries. Figure 2 shows the process of selecting and refining the articles.

Figure 1: Process of Selecting and Refining the Reviewed Articles

Keywords: Adoption of IFRS, Predictors of IFRS, Consequence of adopting IFRS, IFRS

323 articles

Total articles = 129

Second Screening: Title and Abstract. 69 articles removed.

Total articles= 60

Science Direct Web of Science Google Scholar

First Screening: Duplicated, Non-English, outdated= 194

articles removed.

Reviewed articles= 48

Third Screening: Full reading. 12 articles removed.


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4. Findings

The background information of the reviewed articles as well as the predictors and consequences are presented in this section.

4.1 Country of the Reviewed Studies

The studies can be divided based on the countries into four categories. The majority of the studies focused on the European union (EU) and collected data from these countries. The second highest group focused on collection data from several countries that include developed and developing countries. Global perspectives were also seen as some studies collected data from global perspective. However, minority of the study focused on the practices of the IFRS in specific country. Figure 2 shows the distribution of studies based on countries.

Figure 2: Countries of the Reviewed Studies

4.2 Approach of the Review Studies

The approach can be divided into three groups. The first group is the empirical studies, and it includes studies that have deployed a quantitative and quantitative. The quantitative are mainly based on secondary data approach and accounted to 62% of the reviewed studies. The primary data approach accounted to 19% of the reviewed studies. The second group is the review studies. This group included articles that have reviewed the benefits and challenges as well as the predictors of adopting IFRS and it accounts to 17% of the reviewed studies as shown in Figure 3. The interview or qualitative approach received only 2% of the reviewed studies.

Figure 3: Approach of the Reviewed Studies

Several Countries 23%

EU25%

Spain2%

Libya13%

Sweden2%

Malaysia2%

Arab Gulf Countries 4%

Nigeria4%

Australia 2%

US4%

South Africa2%

Japan4%

Canada6% Indonesia

2%

Uganda2%

Iraq2%

Secondary 62%

Primary 19%

Review17%

Interview2%


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4.3 Sample of the Review Studies

For the 39 studies which are 30 have used secondary data approach and 9 used primary data approach, the sample size ranged between 30 and 292 respondents for the primary data approach. The observations and number of firms in secondary data approach ranged between 11 firms to 15,026. Figure 4 shows the distribution of the sample size among the reviewed studies.

Figure 4: Sample Size

4.4 Analytical Techniques

The analytical techniques that are used in the reviewed studies are shown in Figure 4. It shows that the majority of the reviewed studies have deployed SPSS (80%). The Stata software deployed in 10% of the reviewed studies. Content analysis based on primary and secondary data received 10%.

Figure 5: Analytical Techniques

4.5 Predictors and Consequence of Adoption IFRS

The findings regarding the predictors and consequence of adopting IFRS can be divided into two categories. The first in the developed nations and the second the developing nations.

4.5.1 Developed Countries

In the developed countries, most of these countries are adopters of the IFRS. Thus, the focus is on the consequence of adopting the IFRS. The findings regarding the adoption are mixed and inconclusive. Negative effect of adopting IFRS was seen in several studies. For example, in the study of [4] in Spain, the authors found that the adoption of IFRS has a reversal impact on the ratio such as ROE and ROA of the Spanish companies. The findings of the study of [12] indicated a mixed finding. The negative part is related to the effect of the adoption of IFRS on the market-based accounting such as Tobin’s Q. In a study of [44], the authors found that the earning quality under GAAP is higher than IFRS. The study of [46] found that the adoption of IFRS did not have any effect on the increase of investment in Canada. In the study of [15], the authors found that the adoption of IFRS in European countries did not have any effect on the loan loss provisions.

0

10000

20000

1 2 3 4 5 6 7 8 9 1011121314151617181920 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39

80%

10%

10%

SPSS

Content Analysis

STATA


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Positive effect of adopting IFRS was also seen in several studies. For instance, in the study of [26] on European countries, the findings indicated that the adoption of IFRS has enhance the quality of information. However, the authors highlighted that the positive effect is not consistent in all countries and there are inconclusive findings regarding the adoption of IFRS and its impact on companies. In agreement with this view, the study of [12] found that the adoption of IFRS has a positive effect on the accounting-based attributes such as the ROE and ROI while there is a negative effect on the market-based attributes such as Tobin’s Q. Against this view, a study was conducted by [3] found that the adoption of IFRS in Sweden has increased the goodwill and the price shares of the Swedish companies. In Japan, the study of [41] showed that the adoption of IFRS has increased the disclosure of non-GAAP practices. In addition, [43] found that the adoption of IFRS in Germany has increased the comparability between companies. In Australia, the study of [36] indicated that the adoption of IFRS has decreased the length and complexity of the financial reports and increased the readability of these reports. [45] compared the implications of IFRS and GAAP in Canada and USA. The authors found that the adoption of IFRS increased the tax paid by companies in Canada while the GAAPs did not affect the tax paid in USA.

Based on the above findings, it can be seen that the previous studies are not in agreement regarding the effect of adopting IFRS on macroeconomic level. It can be seen also that the majority of studies did not focus on one particular country but investigated the effect of adoption on a group of countries using secondary data.

4.5.2 Developing Countries

Existing studies in developing countries showed that the results of adoption IFRS in developing countries is also mixed. For instance, in a study conducted by [18] on eight developing countries to examine the economic and accounting impact of adopting IFRS, the authors found that the adoption of IFRS is mixed. It has a positive impact on four countries while insignificant impact on other four. In the study of [40] found that the adoption of IFRS in Nigeria has resulted in profitability, basic earning and leverage ratio. However, the study also found that there is no impact of adopting IFRS on interest ratio.

The mixed resulted also was found in the study of [47] on Indonesian companies. The study found that there is no conclusive evidence that all accounting quality dimensions including accruals quality, earnings smoothing, timely loss recognition and earnings persistence increased in post-IFRS convergence. In Asian, the study of [49] found that the adoption of IFRS affected positively the earning management but did not have a significant effect on analyst coverage.

A positive effect of adopting IFRS was found in the study of [25] in Malaysia who found that the adoption of IFRS is associated with higher quality of reported earnings. In the study of [34] in Nigeria found that the adoption of IFRS also has increased the earning quality of Nigerian banks. The author indicated that the leverage, profitability and the growth of the bank has increased after the adoption of IFRS. Studies such as [22] conducted a study using data from 70 countries. The findings indicated that there is positive effect of IFRS adoption on the GDP as well as the FDI in the countries that adopt the IFRS.

In similar approach, the study of [35] collected data from 145 countries and examined the impact of the adoption of IFRS on the financial structure. The findings showed that the impact of the adoption of IFRS in financing decisions is positive and heterogeneous among companies from different regions and countries. In a larger scale study that include all countries that adopt the IFRS, [20] attempted to examine the effect of adopting IFRS on the delisting of multinational companies. The findings showed that delisting increased for non-IFRS-reporting companies among multinational companies.

Positive effect of IFRS adoption was observed in the study of [53] in UAE who found that the adoption of IFRS has increased the earning per share and book value per share as well as the market share price per share. In line with this finding, the study of [30] in UAE found that there are several benefits from adopting IFRS and these benefits outperform the difficulty and cost inquired of the adoption.

Regarding the predictors of using IFRS in developing countries can be divided into two groups. The first is the macroeconomic level which focused on the legal system, economic structure, culture structure, political ties, legislation, and educational system [5], [7], [24], [31]. On the organizational level, the reviewed studies focused on the role of individual factors such as the ease of use, usefulness as well as the cost. In addition, the technological factors and the organizational factors such as the size of organization [28]. The size of the organization and the age as well as the nationality has also been a predictor of the IFRS adoption [39] [38]. On the individual level, the training programmes, accountants lack adequate skills, awareness and capabilities, accounting education, English language, absence of enforcement from external auditors, and the governance mechanisms, user readiness, and attitude as well as commitment and awareness of IFRS are critical predictors [6] [50]. 5. Discussion and Future Work

IFRS is a widely used system for reporting the financial performance. It is a language that can be understood by several stakeholders worldwide. There are differences in the predictors and the consequence of adoption IFRS based on countries. The benefit is still emerging with 120 countries are currently using the system by mandatory or voluntary basis. In the developed countries, the financial system is well established, and these countries are users of the IFRS. The situation


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differs in developing countries where the use of the IFRS is still in its infancy with except for the emerging economics where the usage might be better than the developing countries. Therefore, the results in one country cannot be generalized on other countries due to the differences in the background and the macroeconomic indicators. Thus, it is recommended as a future work to examine the predictors in the context of developing countries using a single country rather than several countries. It is also recommended to examine the effect of adopting the IFRS on corruption in the developing countries.

Future studies are recommended to examine the individual level adoption of IFRS. Such as to understand the predictors that lead accountant to use the IFRS. A combined approach such as to combine the individual and organizational level of adoption can be a direction for future work. The accountants or the top management of the companies can be the respondents to understand the predictors of adopting IFRS. This is also because the previous studies are dominated by secondary data approach and a primary data is important to understand the perception of decision makers to adopt the IFRS.

Future studies are also recommended to conduct an interview with the top management and official decision makers or policy makers to understand the predictors of adopting IFRS. A focus group can be a direction for future work to enhance the understanding of the predictors. Most of the previous studies have deployed either the agency theory or the stakeholder theories, other theories that are related to the adoption of IFRS has been used in limited number of studies. The technology, organization, environment framework as well as the technology acceptance model [54], [55] are important models for adoption and could be examined in the future studies.

More importantly, none of the previous studies examined the predictor and the consequence of using the IFRS. This can be an important direction of future work. The use of intervening variables such as mediating and moderating variables has been used in a few studies. Future studies are recommended to examine the mediating role of governmental support and the moderating role of ownership concentration or structure to understand their role in enhancing the adoption of IFRS and its consequence.

6. Conclusion

This study reviewed systematically the literature. Articles were extracted from established databases and the findings showed that the studies of IFRS were dominated by the European Union where the majority of the studies examined either the consequence or the predictors of IFRS in the EU. The approach of taking several countries together is also obvious in the literature. The secondary data approach outperforms all other types of studies. SPSS has been used as an analytical technique in the majority of the studies. The predictors were examined in the f developing countries rather than the developed countries. On the other hand, the consequence was examined in the developed rather than the developing countries. Future researchers are recommended to examine the predictors and the consequence because the result in the literature is mixed and there is an avenue for future work in this regard.

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