The International Financial Reporting Standards(IFRS), issued by the International Accounting Standards Board(IASB) explains, how the financial data are to be maintained and how they are to be reported. IFRS, a set of standards, implemented and executed with the aim of making accounting easier to access in between different companies to companies, as well as different countries to countries.
The implementation of IFRS helped several investors to examine the accuracy of the companies which they are going to invest. Also, implementation of IFRS standards helped the companies to maintain transparency which helped them to attract more investors.
IFRS have led to many improvements in the financial reporting. Some of them are listed below,
1. Helps to attract more investors, which lead to the inflow of more foreign capital.
2. Benefits the business world by improving international business.
3. Helps to attain more capital.
4. Helps the firms to coordinate internationally.
5. Helps accountants to submit reports in an understandable and common way.
International Accounting Standards are the standards for preparing and presenting the financial reports which were issued by the International Accounting Standards Council, which was then modified by the IASB.
The implementation of IAS has resulted in many developments, as it helped to bring the accounting quality in a higher level.
Aim of my paper
The aim of my paper is to review and examine a journal article related to the changes occurred after the implementation of IAS in different firms.
Aim, Title and Author
The journal article aims at identifying the variations occurred in accounting quality, value relevance, earnings management and so on after the implementation of IAS.
The title of the article is “International Accounting Standards and Accounting Quality” and was written by Mary E Barth(Stanford University), Wayne R Landsman(University of North Carolina) and Mark H Lang who has worked on Financial Accounting Standards Board.
Structure of the paper
The structure of my paper covers the Introduction, Summary, Discussion and Conclusion.
In the Introductory section, A brief idea on the aim, title and authors of the paper is explained.
After the Introduction part, the paper continues with the Summary section which explains the hypothesis development covered in the article and the design and methodology used to prepare the journal article.
The paper then ends up with the Conclusion part, where the overall importance of the paper is examined, the evaluation of hypothesis questions, whether it is answered correctly. It also covers whether the collected information is enough or more information is to be collected or not and so on.
As mentioned in the Introductory part, the journal focuses on examining the accounting quality in the firms which have adopted IAS compared to the firms which are using domestic standards. More than determining the accounting quality, the paper also focuses on the effects and understanding on the features related to the financial reporting. In the journal, the authors have included data from 21 countries where, the firms have adopted IAS in their reporting system during the period of 1994 to 2003. The paper also gives us a clear idea on the preadoption period(the period before the adoption of IAS) and the post adoption period(The period after the adoption of IAS) which helps us to achieve a clear view on the differences after the implementation of IAS in the companies. The journal article also examines whether the adoption of IAS in the firms could result in the decisions of value importance, revenue management and loss recognition.
The authors also note that, their assumptions have may not be born out because of two reasons. Those reasons are,
1. The quality of IAS may be lower when compared to the domestic standards.
2. Any improvements in the accounting quality may be eliminated by the effects of features of the reporting system.
The authors use a two-way approach to examine the quality of accounting based on IAS. As a first way, they use data collected from various firms using IAS accounting methods for several years. Second, they use an arrangement of measurement of quality attained from a normal time duration and use a mutual set of constant variables.
To achieve a clear and specific view on the topic, the journal article covers three hypothesis developments. Those are listed below,
1. Regarding the quality of IAS accounting
2. Comparison between IAS accounting and domestic standards
3. Regarding the measures of quality of accounting
1.Regarding the quality of IAS accounting
Development of high quality accounting was one of the goal of IASB and IASC. As a part of achieving this goal, the IASC introduced the first IAS in 1975. As of part of this, several countries(including most of the public listed companies in Europe), were required to prepare the statements according to the principles of IFRS.
In this journal article, as the topic suggests, the main aim of the article was to check whether the implementation of IAS have made any improvements in the quality of accounting compared to the firm using domestic standards.
One of the findings regarding the accounting quality was that, in most of the cases, the accounting policies revealed were not predictable with IAS. Also, authors claim that several differences were observed in the accounting quality for reasons like incentives and monetary environments. Considering the monetary environment, there is a chance for the firms to implement and execute IAS in their structure, as they expect that application of IAS will be a compulsory process in the coming years.
2.Comparison between IAS accounting and domestic standards
It is noted that, considering the case of Germany, the firms which have adopted IAS did not revealed any differences between the firms which have adopted IAS and the firms which have adopted German standards, especially in the case of earnings management and reduction in cost of capital.
Comparing to the case of China, it is noted that, IAS firms in China exhibits less value relevance compared to the firms using Chinese domestic standards.
For this mixed comparison in an individual country, the authors give 4 explanations. Those are listed below,
1. Some of the changing accounting values were common to the amounts of the domestic standards.
2. The infrastructure in developing countries and economies were less to impose the execution of IAS.
3. Studies reveal that, there are several differences in the firm’s standards and which can affect the monetary environment.
4. The usage of different measures collects data from different control variables and different time durations.
This journal article is entirely different from this type of research; that is it does not focus on individual country research. For this the authors claim 3 reasons,
1. The sample collected for this research covers 21 different countries.
2. The measurement of arrangement has derived from a single period.
3. An empirical procedure is developed to reduce the effects occurred from factors which are not related to the financial reporting system.
3. Regarding the measures of quality of accounting
The journal article notes that, companies with higher quality of accounting can help in more value relevance, timely loss recognition as well as less earnings management.
By measuring the earnings management, two indices examined, one is the smoothing of earnings and the second is relating to the management towards positive earnings.
Considering these two indices, it is expected that in common law countries, the earnings smoothing is less marked. A less negative correlation between accruals and cash flows has been detected among the firms using domestic standards which result in lower accounting quality.
Considering the timely loss recognition, if earnings are smoothened, the chances to occur loss is comparatively very less. Thus, it helps us to understand that, lower rate of large losses can be expected from higher quality of accounting.
In the case of value relevance, the authors expect a higher association between the earnings, the equity book value and stock prices are experienced in corporations with a higher accounting quality, as higher quality accounting can depict a firm’s hidden economics. It is because of 3 reasons,
1. Higher accounting quality firms helps to report the statements in a true and faithful manner.
2. Less unprincipled managerial decisions can be achieved with the help of higher quality accounting.
3. In estimating accretions, higher quality accounting exhibits a less no opportunistic error.
Thus, the firms executing IAS experience higher equity book value and higher importance than the firms executing domestic standards. One of the advantage while using various measurement techniques, the authors notes is that, it helps them to assess the quality differences between the IAS adopted firms and the firms adopting domestic standards.
Research Design and Methodology
A two-way approach has been introduced to reduce the effects occurred in the financial reporting system which has been emerged from measuring the quality of accounting. As a first way, a matching technique was conducted to collect data from the NIAS firms. For example, for the differences related to size, size has been chosen as a control variable. The second way approach focuses on the timely loss recognition and the earnings management. The definitive approach to reduce these effects have not been discovered yet now.
Every firm’s (which have adopted IAS) country and adoption year have been noted by the researchers. Also the researcher’s evaluated the firms which have not adopted the IAS, those which also exhibits its equity market value closer to the IAS firms, at the end of the adoption year.
As a primary section of the research, the researchers compared the accounting quality measures among the IAS firms and NIAS firms after the period, the IAS firms have adopted the IAS; that is the post adoption period. This can help the researchers to measure whether the firms adopted IAS have a higher quality in accounting or not. There is a chance for a potential problem, while making this comparison, that is, during comparison, both the IAS and NIAS firms can exhibit differences in the post adoption period, because of the changes in the economic features of those firms. As a solution to this issue, the researchers compared the firms, accounting level during the preadoption period, that is, the period before firms adopting IAS. Similar differences occurred in both, before and after the adoption of IAS, hence it become difficult to examine the differences in the accounting quality after the adoption of IAS.
Considering the measurement of Earnings Management, four techniques were used, one was aiming towards a target, and the other three were for the earnings smoothing. For the earnings smoothing, the first technique or formula was based on the changes in net income measures based on total assets. The second formula was regarding the changes in net income to the changes in the operational cash flows. The third formula is based on the accruals and cash flows, according to the Spearman correlation.
The timely loss recognition was measured based on coefficient of large negative net income.
While measuring the importance of value, the first measurement method is based on descriptive power from regression of value of stock on the net revenue and the book value of equity. There are two more methods to measure the importance of value. In the case of those two methods, they are based on the descriptive power from regression of net revenue per share.
The researchers collected data through conducting 1896 firm observations, which covered both preadoption period (from the beginning of 1990)and post adoption period(after the firms which adopted IAS from 1994). The sample has been collected from several countries, including higher contribution from Germany, China and Switzerland.
The results reveal that, during the post adoption period, the firs with IAS have experienced higher value importance, less earnings management and higher timely loss recognition.
During the preadoption period, findings reveal that both IAS and NIAS firms showed no differences except the timely loss recognition.
By comparing the IAS and NIAS firms, results from preadoption period provides only few evidences regarding the difference in accounting quality in the postadoption period.
Considering the differences, the quality of accounting was better in the IAS firms than NIAS firms during the postadoption stage.
Overall, the journal covered data from both the pre and postadoption periods, which helps us to gain a clear understanding on the topic, as it clearly states the differences occurred in both the periods. More than considering only on the quality of accounting and their interpretation, the paper also focused on the different attributes like earnings management, value recognition and timely loss recognition.