paper presented

Can IFRS be adopted as the global financial reporting language?

How practical and how soon?

Sansakrit Vichitlekarn, Ph.D.Federation of Accounting Professions &

Kasetsart University, Thailand

The 16th ASEAN Federation of Accountants Conference 2009December 9, 2009, Bandar Seri Begawan, Brunei Darussalam

Disclaimer: The views expressed in this presentation are those of the speaker and do not necessarily reflect those of the organizations to which the speaker is affiliated.

Sansakrit Vichitlekarn, Ph.D. Federation of Accounting Professions & Kasetsart University, Thailand 2

Agenda

IASC Foundation’s Principal Objectives Qualitative Characteristics of Financial

Information Mixed Research Findings on Information

Quality What Have We Learned From Research? Beyond the Turning Points?


IASC Foundation’s Principal Objectives

to develop a single set of high quality, understandable, enforceable and globally accepted international financial reporting standards (IFRSs) through its standard-setting body, the IASB;

to promote the use and rigorous application of those standards;

to take account of the financial reporting needs of emerging economies and small and medium-sized entities (SMEs); and

to bring about convergence of national accounting standards and IFRSs to high quality solutions.


Qualitative Characteristics of Financial Information

IASB’s FrameworkRelevanceFaithful RepresentationComparabilityUnderstandability

Research-based information quality-Ball (2005) Faithful Representation Low Capacity for Managerial Manipulation More Timely Loss Recognition (Conservatism)


IFRS may not result in better information quality

IFRS may result in better information quality- Non-US National GAAP

IFRS may not be sufficient to ensure the information quality

Mixed Research Findings:

1

2

3


Mixed Research Findings: IFRS may not result in better information quality

IAS firms exhibit lower accounting quality relative to US firms in terms of: Earnings smoothingCorrelation between accruals and cash flowsTimely loss recognition (Conservatism)Association between accounting amounts and

share price (Value relevance) Barth, Landsman, Lang, and Williams (2006)

1


Mixed Research Findings: IFRS may not result in better information quality

Comparison of German firms using US GAAP and IAS: there is little evidence on information asymmetry and market liquidity.Bid-ask spreadTrading volume

Luez (2003)

Reaction of stock market to accounting earnings is stronger under the US GAPP- Response Coefficients (ERC): US GAAP > IAS > German GAAP

Bartov, Goldberg, and Kim (2004)

1


Mixed Research Findings: IFRS may result in better information quality- Non-US National GAAP Mandatory IFRS reporting in 26 countries

around the worldMarket liquidity increases around the time of the

adoption.Cost of capital decreases and equity valuation

increases only prior to the official adoption date.The capital market benefits exist only in the countries

where the firms’ reporting incentives are transparent and the countries’ enforcement regimes for the financial reporting are strong.

Daske, Hail, Leuz, and Verdi (2008)

2


Firms with voluntary IFRS adoption experience less earnings management, more timely loss recognition, and more value relevant accounting information than firms applying non-US domestic standards do (IAS VS Non-US domestic standards in 21 countries).

Barth, Landsman, and Lang (2007)

Moving towards IFRS adoption may make possible cross-border investment and the integration of capital markets.

Covrig, Defond, and Hung (2007)

Mixed Research Findings: IFRS may result in better information quality- Non-US National GAAP

2


Countries with weaker investor protection mechanisms are more likely to adopt IFRS (Sample includes US).

Hope, Jin, and Kang (2006)

Adopting IFRS alone in EU countries cannot improve value- relevance of accounting information – Investor protection matters.

Narktabtee and Patpanichchot (2009)

Mix Research Findings: IFRS may not be sufficient to ensure the information quality

3


One of the key challenges in the adoption of IFRS in Belgian companies is the use of fair values which may increase volatility in the reported assets and earnings.

Jermakowicz (2004)

Mix Research Findings: IFRS may not be sufficient to ensure the

information quality 3


What Have We Learned From Research?

Mixed evidence on information quality improvement as a result of IFRS adoption.

IFRS adoption success depends critically on information infrastructure.

How practical? How soon?


Not

-Mu

tual

ly E

xclu

sive

Information infrastructure Investor Protection: Legal and Market-based

Monitoring and Enforcement

Technical Capacity Development on Fair value Accounting Lack of Accounting Professionals and

Professional Qualification Standards Training and Education Auditing Standards

What Have We Learned From Research?

Principle-based Standards

Capacity Building


Beyond the Turning Points?

Use of IFRSs for Domestic Listed Entities

Number of Jurisdictions

IFRS Required for All 89

IFRSs Required for Some 5

IFRSs Permitted for All or Some 23

Source: Practical Implementation of IFRSs (M. Stewart, IASB, 2009)


IFRS Adoption by the European Union in year 2005 Norwalk Agreement 2002: US FASB and IASB…

MoU 2006 and MoU 2008 US: Convergence in year 2014 Tokyo Agreement 2008: …convergence by June

2011 Brazil in year 2010 India in year 2011

…



“The increasing acceptance and use of IFRS in major capital markets throughout the world over the past several years, and its anticipated use in other countries in the near future, indicate that IFRS has the potential to become the set of accounting standards that best provide a common platform on which companies can report and investors can compare financial information.”

- ROADMAP FOR THE POTENTIAL USE OF FINANCIAL STATEMENTS PREPARED IN ACCORDANCE WITH INTERNATIONAL FINANCIAL REPORTING STANDARDS BY U.S. ISSUERS, SEC 2008



“We call on our international accounting bodies to redouble their efforts to achieve a single set of high quality, global accounting standards within the context of their independent standard setting process, and complete their convergence project by June 2011.”

-G20 Leaders Statement, Pittsburgh Summit, September 2009



Summary

IASC Foundation’s Principal Objectives Qualitative Characteristics of Financial

Information Mixed Research Findings on Information

Quality What Have We Learned From Research? Beyond the Turning Points?

paper presented

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