IFRS Adoption Around the World: Has It Worked?
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2013 Wiley Periodicals, Inc.Published online in Wiley Online Library (wileyonlinelibrary.com).DOI 10.1002/jcaf.21889
Erick Rading Outa
As globaliza-tion continues to take effect, competition for resources, inves-tors, creditors, and donors has given rise to demands for high standards on the qual-ity of information that is given to various stakeholders in the financial world. These demands have also been driven by questions that have been raised as a result of financial and capital markets turbulences that have been expe-rienced around the world over the past many years. Accord-ing to Imhoff (2003, p. 117), orderly capital markets around the world can be achieved if corporations provide investors and creditors with relevant, reli-able, and timely information. In this context, one of the most significant regulatory changes in accounting history has been the creation of International Financial Reporting Standards (IFRS), which is also referred to as IAS.
This article takes a close look at the adoption and implementation of International Financial Report-ing Standards (IFRS) across the globe. Have they worked properly? And are they really necessary? Those kinds of questions are increasingly asked in the wake of various recent financial scandals and crises. In spite of major efforts by standard setting bodies to develop and promote quality standards, many challenges remain. And the adoption of IFRS around the world has produced mixed results. 2013 Wiley Periodicals, Inc.
IFRS Adoption Around the World: Has It Worked?
According to International Accounting Standards IAS Plus (2010), IFRS refers to the entire body of pronouncements of the IAS Board (IASB), including standards and interpretations approved by the IASB, the Inter-national Accounting Standards Committee (IASC), and their interpretations. IFRS or IAS, therefore, is a set of standards stating how particular types of transactions and other events should be reflected in financial statements. IFRS was first issued by the IASC, now referred to as IASB, whose objective is to develop a single set of high qual-ity, global accounting standards
that are acceptable worldwide (Barth, 2008).
Currently, IFRS has been adopted by over 100 countries from different parts of the world (Daske, Hall, Leuz, & Verdi, 2008). Given that many countries have adopted IFRS and others continue to do so, with the United States consider-
ing full adoption by 2015, the effectiveness of IFRS should be evaluated through studies that capture the experiences of dif-ferent countries and companies that have already adopted IFRS (Chen, Tang, Jiang, & Lin, 2010). The main objective of this article is to review the adoption of IFRS worldwide.
The History of Accounting Standards
For many years, account-ing standards were gener-ated locally in fulfillment of
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the reporting standards leading to the creation of 13 standards, which are currently referred to as IFRS.
Even though the United States actively participated in the development of IFRS, it does not subscribe to these standards. This is because the development of standards in the United States occurs within the framework of the Securi-ties and Exchange Commission Act of 1933 and the Securities Exchange Act of 1934. These laws were passed by Congress in response to the stock market crash of 1929 and the subse-quent financial depression.
The need for reliable infor-mation for the investors and the regulation of capital markets continue to be key issues along-side the question of governance, which has always been an ongo-ing debate. The importance of regulation was reinforced in the wake of the 2008 world financial crisis. The crisis meeting of the G20 group in Washington, and later in London, concurred that standards should be enforced as a strategy to avoid the sort of crisis that the world witnessed in 2008/2009 and called on IASB and FASB to work urgently on a single set of high-quality global accounting standards, including adjusting the controversial IAS 39 to a forward-looking model as opposed to a historical one.
Perceptions About IFRS Adoption
The topic of IFRS adop-tion has elicited numerous views from various stakeholders around the world. These views can be loosely categorized into those who support the adop-tion and those who oppose it. Proponents of IFRS, such as Barth (2008), state that global
mission and center on transla-tional reporting of multinational companies. By 1990, the IASC had expanded its membership to include the International Organization of Securities Com-mission (IOSCO), which joined in 1987, and the European Commission and the Financial Accounting Standards Board (FASB), which joined in 1990. This group noted that a number of developing countries were using the accounting standards voluntarily and recommended that the international accounting standards should be revised fur-ther so that they could be used for cross-border listing from the year 2000.
In spite of its efforts, the IASCs intention of creating uniformity in the preparation of financial reports was marred by its failure to agree on a con-ceptual framework that met user needs. In addition to this, the composition of IASC was problematic because of the dominance by accounting firms, which contributed to the inad-equate enforcement of standards by rendering their financial statements as invincible. The poor performance of IASC was further aggravated by poor gov-ernance and political interfer-ence, which made it difficult for the organization to respond to issues quickly.
In response to these chal-lenges, a foundation was incor-porated in Delaware, United States, with a supervisory func-tion through a group of trustees. The IASB became operational in 2001 as the IASB announced that the IASC foundation had agreed that accounting stan-dards issued by the IASB would be designated as IFRS, with the first IFRS being published on May 23, 2002. By 2011, the IASB had revised and refined
a mandate from the financial ministries or the legal offices of each country. However, with the increased interconnectedness of the worlds financial systems, domestic standard generation faced criticism because of the incongruence between local standards from different states. This realization came to the fore following the invitation of George Benson, then president of the Institute of Chartered Accountants of England and Wales (ICAEW), in 1966 to visit institutes in Canada and the United States. As a result of the visit, the three institutes (United Kingdom, Canada, and United States) established an interna-tional study group in February 1967. This group published articles on accountancy topics that led to the development of a framework. It is these activi-ties that led to the formation of International Accounting Standards Committee (IASC) in 1973, through the extension of invitations to other bodies from Australia, France, Germany, Japan, Mexico, and the Neth-erlands. The aim of IASC was to issue international standards of reference that would guide the convergence of national standards over time. By 1998, when IASC was transforming to IASB, it had generated 41 IASs even though some had been withdrawn.
Over time IASC grew, with its governance evolving to accommodate an expanding and increasingly diverse stakeholder base. Representatives of the World Bank, the United Nations (UN), the Organization for Eco-nomic Cooperation and Devel-opment (OECD), and other par-ticipants formed a partnership in 1981 leading to the creation of the IASC consultative group, with the UN setting up a com-
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2013 Wiley Periodicals, Inc. DOI 10.1002/jcaf
eignty has been an important consideration in the adoption approaches. The EU also quickly adopted IFRS as a political strategy in what was meant to prove EUs independence from U.S. influence. In South Africa, concerns about state sovereignty have been addressed through the alignment of IFRS with national standards, as opposed to its full adoption by the state.
The second factor in these challenges was the question of regulation. Many countries around the world have laws that prescribe how companies are formed and managed and the nature of reports that should be issued. The way IFRS has been issued by IASB from London is such that local legislation of different countries has not been taken into account. A key controversy in this area is that IASB uses the terms true and fair view, which appears in country statutes, but true and fair view has not been properly defined. Cultural factors have also featured prominently in the adoption of IFRS. Of par-ticular interest has been Islamic culture where interest cannot be charged in lending, which would automatically create problems in revenue recognition. IFRS imple-mentation in Malaysia has cited this as a problem, while a study in Egypt confirmed the same because of the secretive nature of related party transactions in Egypt. This made it impossible to fully implement related party disclosures (IFRS 8) as such dis-closures are a taboo.
The fifth challenge that has been cited is understandability, which is one of the four qualita-tive characteristics of account-ing information. And it has also been one of the critiques of financial statements that some people do not understand
formance indicators, corporate finance structure, and financial products. Other writers argue that the adoption of IFRS is more than an accounting issue, with potential economic, social, political, and cultural outcomes (Prather-Kinsey, Jermakowicz, & Vongphanith, 2008).
Although there are numer-ous calls for the universal adop-tion of IFRS, there is still con-siderable debate as to whether the adoption of IFRS is benefi-cial. In this regard, consensus is yet to be reached on issues relating to improved accounting quality, lower costs of capital, transparency, and capital market effects. In spite of the debates, widespread adoption of IFRS has been prominent since 2005.
The Challenges of IFRS Implementation
The International Federa-tion of Accountants Commis-sion (IFAC) undertook a study on the challenges and successes in the implementation of IAS. The commissions report, which was issued in September 2004, categorized seven challenges that were likely to arise from the adoption of international accounting standards and indi-cated that the issues of legiti-macy and authority of IASB is subsumed in all the seven chal-lenges (Wong, 2004).
Among the challenges was the issue of incentives that might encourage or discourage national decision makers from adoption. Country sovereignty has also been an issue as indi-vidual countries try to debate whether the adoption of the standards would be an infringe-ment on their sovereignty. Australia and the European Union (EU) are typical examples among others where sover-
financial reporting has positive effects on the functioning of global markets. They argue that the adoption of IFRS will facili-tate the availability of standard and quality information to all stakeholders around the globe while reducing the costs incurred in the preparation of financial statements. Indeed, global firms incur huge amounts of money in auditing and interpreting infor-mation that has been prepared with different accounting stan-dards from different countries.
Although cost reduction has been cited as a key benefit of a single set of financial reporting standards, those who oppose IFRS adoption, such as Sunder (2009), argue that the costs of IFRS adoptionand the fact that there is no evidence to sug-gest that it has any advantages when compared to national reporting systemsmakes its adoption unviable. While there is no doubt that huge costs will be incurred as organizations transit into the international system, these are once-off investment costs associated with training employees and enlisting appro-priate technology to process and generate transactions in line with IFRS requirements. As Barth (2008, p. 1171) argues, the cost of learning to live with ambi-guity and judgments and the consequences therefore, include costs associated with under-standing and accepting different viewpoints.
The American Institute of Certified Public Accounting (AICPA, 2008) concurs with Barth by pointing out that the transition is not just an account-ing exercise, but an exercise that will require tax planning, management reporting systems, investor relations, employee executive compensation, employee benefit plans, per-
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and what its characteristics are. This is problematic because the underlying fundamentals of the entities are not known and com-parison becomes a buzzword rather than a practice.
Ball, Kothari, and Robin (2006), argue that increased worldwide integration of both markets and politics makes increased integration of report-ing standards necessary, but the challenge lies with markets and political forces that remain local. This indeed is a powerful argu-ment given that managers and enforcers remain local and the local financial reporting quality may not meet the international level standards. An interesting example in this regard is the case of EU, where the criteria for adoption have elicited public interest in the European market. This implies that local political considerations are paramount. Balls observations are in line with Sunder (2009), who argues that there is no theory or evi-dence on which to build upon the assessment of the advan-tages and disadvantages of uniform accounting rules within a country or internationally. Both Sunder and Ball concur that substantial differences in implementations across coun-tries will inevitably result in differences, and this is already being witnessed in a number of studies in various jurisdictions, as explained below.
Global Experiment: Global Spread of IFRS in Different Markets
The global spread of IFRS has been described by Vron (2007) as the global accounting experiment since some of the causes and effects of adoption have not been validated. Sunder (2009), in his challenge to the
appreciate that IFRS are arrived at through continuous research and debate. Sunder goes on to compare IFRS to the Structural Adjustments Programs (SAPs) prescribed by the World Bank and the International Monetary Fund (IMF) in the 1980s and 1990s and predicts failure for the same reasons, which included lack of consensus, legitimacy, and forced implementation. The key arguments in these issues, therefore, appear to stem from disadvantages of monopoly standardization.
The arguments for and against principle-based standards are endless. Even though IFRS claims its standards are principle, as opposed to US GAAP rule-based, a publication of...