The aim of this paper is to examine the impact on quality of the financial reporting before and after the adoption of International Financial Reporting Standards (IFRS). ‘The purpose of financial statements is to deliver information about the financial situation, functioning and financial flexibility of a business that is valuable to an extensive variety of stakeholders in taking important financial decisions‘(Kwame and Manesh). In order for the investors to make vital invest decisions regarding the future of their business, immense importance is placed on the standard and quality of information available to them in the accounting genre. This is where IFRS plays a substantial role in controlling the quality of this information for its users.
The International Accounting Standards (IASB), formerly known as International Accounting Standards Committee (IASC), issues IFRS. The primary aim of this particular body is to cultivate a common accounting dialect of supreme quality, comprehensible and enforceable. Certainly, the international accounting standards necessitate extreme quality, translucent and comparable information in financial statements and supplementary reports to assist partakers in the investment enterprises decision-making in all global markets and also in other economic decisions. (Epstein and Mirza, 1999). The application of IFRS decreases information asymmetry amongst informed investors and other various uninformed stakeholders. The particular principal of IFRS states the businesses that the "presentation of financial statements needs complex information, such as management decisions and expectations while creating the entity's accounting policies and sources of approximate ambiguity that have a substantial influence on the financial statements of the business (ASSIDI, and OMRI). This specific material must be revealed and stated as suitable in the annual financial reporting. Therefore, such vital material could be a crucial decision. The decrease in the information asymmetry enhances the efficiency of the flow of communication between managers and other stakeholders of the business. The flexibility of IFRS allows the manger to engage in numerous strategies and also facilitates him to deal with these deviations to upsurge and influence the financial results results and affect information. ‘Correspondingly, accounting accruals contain numerous problems at the time of acceleration of income, which can assist to make a revelation of private information to investors resulting in higher and better quality information available (Healy and Palepu, 2001).
Mostly after adopting the IFRS various countries showed immense improvement in the quality of the financial reporting. As per the study carried out by Kwame and Manesh (2013) in Ghana, it become apparent that before the implementation of IFRS the accounting principals in Ghana were outdated and not of high quality. Many studies have been conducted to find the effect of the adoption of IFRS, (the accounting disclosure), on the efficiency of the stock market. The initial study carried out by Cerf (1961) on disclosures, where he surveyed 527 corporate annual reports against a disclosure index containing thirty-one information elements. ‘In this study he concluded that level of disclosure was positively related with corporate size and listing status but not with profitability’ (Cerf 1961). Another study (Street and Bryant 2000) highlighted the fact that more disclosure is associated with such specific accounting policies footnote that precisely lists that the financial statements are organized in agreement with International Standards on Auditing (IAS) along with an auditing opinion, which also informs that the ISA were considered while conducting the audit. This has resulted in the users making more informed and reliable decisions as this information authenticate the reports. Dumontier and Raffournier (1998) after their empirical research in Switzerland on the adaptation of IFRS, conclude that this has lead to amplified information disclosure. This study also found out that the companies using using IFRS had an positive effect of size, internationality, listing status, auditor type and ownership dispersion.
A lot of corporations implement IFRS on an intentional basis as their benchmarks have numerous benefits in comparison with local standards. These businesses validate this selection of IFRS by the statement that these standards mirror supreme trustworthiness of the significance of accounting information and distribute information more economically and result in more standard comparability. Latest findings have evaluated the connection between the intentional acceptance of IFRS and the function of accounting earnings in measuring internal performance. They establish that IFRS is a improved instrument for assessing the performance of local firms. Concerning the conversion to IFRS, numerous studies have observed the significance of revelation of the settlement of local GAAP standards and IFRS. Several researches have been carried out observing the transformation to IFRS as compared to the old standards. Mostly these researched have compared the quality of earnings before and after the conversion to IFRS. In investigating the effect of implementing IFRS, Daske et al. (2006) discovered that businesses with a assurance to transparency of the proficiency of the financial statements have greater market liquidity and low cost of capital. Another study with a focus on China revealed that the firms with the ‘greater demand for external capital experience a greater increase in the value relevance of their accounting earnings under IFRS’ (Lee et al 2013). The study concluded that the IFRS convergence amplified the value relevance of earnings for those particular firms with the greatest need to draw capital from external investors.
As per IFRS there are two main qualitative features of information in financial statements, which are of crucial importance, relevance and faithful demonstration. Information in financial statements is relevant when it is proficiently playing a role in altering or influencing the decision of the user of the financial statement decisions. Relevant information is of assenting and prognostic importance in accounting, which IFRS focuses on. ‘Faithful demonstration means that the information imitates the real-world economic phenomena that it significances to represent’ (Palea 2013). Relevance and faithful representation make financial statements valuable to the readers, which is solely accredited to the IFRS. It’s the purpose and the basic focus of IFRS to make sure that all the financial statements produced are relevant and contain faithful presentation of the financial elements facilitating the world of business and having a huge positive impact on it. It is noted that after the mandatory transition to
IFRS, forecast accuracy and supplementary methods of the quality of the information environment have progressed ominously more for obligatory adopters (Horton et al 2012). Furthermore, it is also established through research that the bigger the difference between IFRS earnings and local GAAP earnings the bigger is the amendment in forecast accuracy. These have resulted in boosting the confidence and trust in the system of IFRS, and have also established the belief that these standards produce the enhancement in the information environment. Therefore, to conclude in the end, the above mentioned researches have established the fact the adoption of IFRS has significantly led to the improvement in the quality of the financial reports by the companies.
Works Cited
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