Narrow Results

In face of broad adoption of International Financial Reporting Standards (IFRS), the Securities and Exchange Commission (SEC) is considering its quality and acceptability. This paper reports a study that examines changes in value relevance with a sample of Peru firms mandated to use international accounting standards between 1999 and 2007. The period under study is broken into a period of International Accounting Standards (IAS) between 1999 and 2001, a period of early IFRS between 2002 and 2004, and a more recent period of IFRS between 2005 and 2007 by major changes to accounting standards. The empirical results generally indicate that value relevance improved from the IAS period to the early IFRS period when the International Accounting Standards Board (IASB) took over the International Accounting Standards Committee (IASC), but worsened from the early IFRS period to the recent IFRS period when more accounting standards started to reflect IASB's preference for fair value measurement of assets and liabilities. Quality weakens to a greater extent for firms with more discretion for fair value estimates. Further analysis shows that such changes are less likely to result from changes in economic conditions, but from the changes of the standards. The findings are particularly alarming in face of rising IFRS adoptions and call for quality improvement to IFRS.

This paper examines the quality of financial reporting of Chinese firms cross-listed in the United States, Hong Kong and noncross-listed Chinese firms. We examine quality of financial reporting based on measures of earnings management, timely loss recognition and price-earnings association. We find that both cross-listings and noncross-listings show significant earnings smoothing and use accruals to manage earnings, and are not timely in loss recognition. We surmise that cross-listing in the United States or Hong Kong has not changed the accounting choices of Chinese cross-listing firms. However, our findings show that the market considers earnings and book value data of cross-listing firms to be more informative than those of noncross-listing firms in the event of good news. Our contribution is to show that in contrast to previous literature, firms from China do not have better reporting quality when they cross-list in the United States. There are still significant accounting deficiencies in many Chinese firms cross-listed in the United States (Financial Times, 2011).

In this paper, we examine the information content and value relevance of research and development (R&D) costs before and after the SEC eliminated the 20-F reconciliation to U.S. GAAP for Foreign Public Issuers (FPIs). Prior to the elimination both FPIs and U.S. firms experienced an increase in the indirect effect of R&D on operating income. After the requirement was eliminated, the direct effect increased for FPIs and the indirect effect decreased. This is in contrast to U.S. firms who experienced a continued increase in the indirect effect. This shift indicates there was a loss of informativeness in the R&D disclosures for FPIs.

In this archival study, we report three main findings related to how well pension accounting estimates of practice meet the stated objectives of professional accounting standards. Our evidence on estimated returns in pension accounting used in reporting on defined benefit pension plans in the financial statements indicates the following. First, the financial note disclosures of ranges of estimated returns are miscalibrated and provide low credibility of including either the actual or expected returns. Second, the estimated returns are unreliable estimates of the firms’ actual 10-year averages. Finally, the estimated returns can have significant risk of material misstatement arising from the uncertainty in the estimation process over the short run. The combination of these findings indicates that the estimated returns and related note disclosures on the ranges of the returns used in estimation processes may not be auditable, and may not meet the stated financial reporting objectives of professional accounting standards.

We investigate whether the comparability of financial statements changes after a switch from International Financial Reporting Standards (IFRS) in substance (i.e., content of IFRS) to IFRS in both substance and form (i.e., IFRS as issued by the IASB). While the substance of the accounting standards remains the same, form is added to the adoption in that it is now formally referred to as “IFRS as issued by the IASB.” We use data from South Africa, a country whose local generally accepted accounting practices (GAAP) was the same, word-for-word, as IFRS prior to the adoption of IFRS as issued by the IASB in 2005. We compare South African firms with firms in other countries, divided into two groups: mandatory IFRS adopters and non-adopters. We find evidence of increased comparability of financial statements of South African firms with both adopters and non-adopters. Furthermore, we find a global increase in the comparability of firms’ financial statements, consistent with market changes unrelated to IFRS adoption. However, an incremental increase in the comparability of financial statements of South African firms with the adoption of IFRS relative to non-adopting firms is consistent with benefits from South Africa’s addition of form to its existing in-substance adoption of IFRS. This increased comparability is also consistent with the benefits observed in the accounting amounts of firms from other adopting countries becoming more comparable with those of South African firms.

Synopsis

The research problem

This paper sought to ascertain whether IFRS adoption approaches impact accounting quality. Specifically, as some countries utilize IFRS without modifications while others modify IFRS to suit their local context, we aimed to test whether these differences in IFRS adoption approaches have implications for accounting quality.

Motivation

Prior studies focused on the impact of IFRS adoption on accounting quality without considering the different approaches used by the adopting jurisdictions. Such differences affect the version of IFRS utilized at the country level. We refer to jurisdictions as adopters of IFRS when the IASB’s version of IFRS is utilized without modifications. In contrast, jurisdictions where the IFRS standards are modified at the national or regional level are called adapters. We also recognize the role of enforcement; thus, we first examined whether IFRS adoption and enforcement influence accounting quality. Second, we compared the accounting quality for adopters and adapters of the standards.

The test hypotheses

Our first hypothesis is that the quality of enforcement has a stronger effect on accounting quality than the adoption of IFRS. Second, adapters will have higher accounting quality than adopters of IFRS.

Target population

We focused on the reporting of companies in African countries. These jurisdictions have not been sufficiently examined in prior studies.

Adopted methodology

We use panel data estimation, specifically, random-effects model.

Analyses

We examined accounting quality for pre- and post-IFRS reporting based on 3946 firm-year observations from six African countries over 18 years. Our analysis of the adoption approach is based on 3736 firm-year observations for companies utilizing IFRS. Except for Egypt, which used a modified version of IFRS, other countries in our sample utilized the IASB’s version of IFRS. Using various standard metrics for accounting quality (earnings management, timely loss recognition, and value relevance), we ascertained whether adaption is associated with higher accounting quality compared to adoption.

Findings

The results indicate that IFRS adoption and enforcement proxy are not associated with accounting quality, but other institutional factors are. Adoption of the standards is less important for accounting quality than the existing institutions. With regard to the adoption approach used, adopters demonstrated higher accounting quality for accounting-based measures, less income smoothing, and more timely loss recognition than the adapters. The adopters also exhibited greater value relevance, which suggests that their reporting was better able to capture information that affects firm value. The adoption approaches may influence different dimensions of accounting quality, and the resulting differences are important for users, companies, and standard setters to consider.

This paper investigates the dynamics of cross-listing in the US and accounting quality. Using an unbalanced panel of 11,780 observations for the period 2000–2019, we show that cross-listing improves accounting quality (in terms of conservatism, earnings management and informational relevance). This result holds for both types of cross-listing (i.e., exchange and OTC listing). Moreover, taking institutional variables into account leads to the conclusion that companies from countries with a weak legal and informational environment have better accounting quality following compliance with the strict standards of shareholder protection and disclosure of information imposed by US authorities. Finally, a complementary analysis shows us that companies listed in the US benefit from a better accounting quality record and less investment inefficiency. This explains why cross-listing in the US reduces the inefficiency of investments thanks to better accounting quality.