The requirement of deregulating the financial market has resulted into creating unified goals. This is geared towards having uniformity of accounting standards for smooth capital flow, all across the economies and different global capital markets. IFRS is one of the globalized repotting standards. The single set of the globalized standards of accounting is becoming reality in capital market of world. Introduction of the mandatory reporting of IFRS across the world is having major economic consequences (Ball, Li & Shivakumar, 2015). The benefits of capital market exist only in those countries, which is having an institutional environment that provides strong incentives of reporting and strict enforcement regimes. IFRS helps in representing vehicle by which countries makes an effort for improving protections of investors and makes the capital market much more accessible towards investors of foreign. The uniformity of the standards of financial reporting results into lowering of the cost of capital. It helps in increasing liquidity of market, decreasing costs of transactions for the investors, reducing costs of capital and facilitating international formation and flows of capital market (André, Filip & Paugam, 2015).
The major purpose behind worldwide adoption of IFRS is for decreasing communication cost. Therefore, participants of capital market will be having similar higher information quality with the affordable cost in order to attain and utilize the information. The capital market integration will be enhanced, if one set of the accounting standards will be used, as it helps in reducing communication costs. The capital market integration means that the assets issued in various countries are having comparable correlated returns regardless of locations, in which they are being traded (Chebaane & Othman, 2014). It can be measured with the help of comparison of the returns of assets, which are issued in the different countries and which generates identical flows of cash. This research paper review the relevant literature and aims to study, analyze and review various theories that relates to financial disclosures and critical analysis will be done on effects of the IFRS adoption on operations and functioning of the capital market. Hence, this research paper aims to discuss regarding adoption of the IFRS and its effect on capital market (Cang, Chu & Lin, 2014).
During 1950s, the efforts towards convergence of the accounting started, which resulted into capital movements across the countries after World War II. The efforts of harmonization initially were meant for closing variations in accounting principles that was used globally in capital markets (Christensen et al. 2015). The efforts of harmonization got replaced by the convergence that is in relation to formulation of uniform set of higher quality standards of accounting that are international and is applicable globally across the capital markets. In 1973, committee of IAS was formed and it started issuing international standards of accounting, during same year. In 2001, IASB was formed for developing IFRS (Chen, Ng & Tsang, 2014).
The globalization of financial market results into need for having uniform accounting standards and practices. Moreover, the harmonization of standards enables the investors for making better and informed choices, more particularly for the diversified international portfolios. It is done with the help of comparing financial outcomes of different organizations, which are drawn for different jurisdictions (DeFond et al. 2014). The financial markets integrations enhance the international capital market access, as it facilitates inflow of FDI to different markets. It aids towards global growth of capital market. Moreover, adoption of the IFRS helps in avoiding financial reports restatement and further minimizes diversity of accounting reporting across the nations and hence, it promotes flow of capital across borders and global integration of capital market (Doukakis, 2014).
The standards of accounting recognizes the items that are disclosed as assets, liabilities, income and expenses, measuring criteria for these items, guidelines for presenting items in the financial reports and related disclosures of these items. The IFRS adoption is associated with enhanced decisions by investors on the investments because it acquires lower cost of information. The harmonization of standards significantly improves quality of the accounting information and results in key benefits to the capital markets such as reducing asymmetry information, higher liquidity of market and lower capital costs (Edogbanya & Kamardin, 2014).
This research paper aims for answering following set of questions:
Benefits of Adopting IFRS
It is acknowledged by the IASB that across the world, there are certain level of differences in preparation and presentations of the financial statements. It occurs because of the different legal, social and the economic situations all across the countries. Further, the diversity of accounting information uses means that there will not be exactly same financial statements across the nations (Houqe, Easton & van Zijl, 2014). Hence, in order to minimize these differences in the reporting, IASB seeks to harmonize accounting standards, regulations and procedures that relates to presentation and the preparation of the financial statements. It is with the help of harmonization, board expects to meet most of the user’s needs. This is the reason of development of IFRS by IASB, to achieve uniform reporting (Hong, Hung & Lobo, 2014).
The IFRS adoption has increased the debate regarding its impact on accounting information quality. There is association of uses of common set of the accounting base with the high levels of reliability, relevance, transparency and comparability of the financial reporting. Therefore, it helps in enhancing reported accounting information quality. The evidence shows that after mandatory adoption of the IFRS in Switzerland, France and Sweden, accuracy of forecasts and forecast variances have been improved (Li & Yang, 2015). The IFRS adoption by the organizations across globe has a great effect of the improvement of transparency and comparison of the financial information. It aids in reducing cost of financial statement preparations globally by the firms. The rigorous accounting standards applications, guarantees the players of capital market for accessing higher quality information for making better decisions of investments (Müller, 2014). The IFRS allows the capital market for allocating the funds of capital markets efficiently, which ultimately results in reducing the costs of capital. The demand for higher quality accounting standards helps in improving quality and comparability of the financial reports. This promotes local financial market application and boost up the international market integration, since various investors of both national and international, gets attracted to the market by using IFRS (Houqe, Monem & van Zijl, 2016).
The information of accounting is considered to be useful if it represent faithfully and is relevant, what it purports for representing. The information is termed as relevant if it makes differences on decisions that have to be made by the users. The usefulness of the financial information does not only depend on relevant information but it also depends on faithful representation of information. The faithful representations of information is required to be complete, which means it should include all details that are necessary and should be neutral and free from the error (Okoye, Okoye & Ezejiofor, 2014). Moreover, there was expectation with the formulation of IFRS that it will lead towards higher quality of the financial reporting. However, the empirical results gives indication that the enhancement of financial reporting quality is not guaranteed after IFRS adoption because of influences of the factors, for instance, differences of law across the nations. The benefits of IFRS adoptions are not uniform all across the countries because of influences of the country’s particular factors, which may affects the financial reporting. Moreover, adoption of IFRS has great effect on quality of the accounting information, both post and prior periods of IFRS adoption (Okafor, Anderson & Warsame, 2016).
The IFRS adoption helps in increasing the creditability of financial reports. Since the IFRS generates the credible reports, it recommends the government for adopting IFRS. The content of the information on the announcement of earnings has been improved after IFRS adoption with the help of reducing reporting time lags, increasing analysts’ predictions accuracy and increasing investments by the foreigners. This has improved quality of accounting. Moreover, adoption of the IFRS provides natural experiment for examining the impact of changes in information environment on the responsiveness of stock prices. If IFRS is adopted then it leads towards increasing the transparency and reducing the cost of obtaining information. The adoption of IFRS may not be able for achieving the objective, if there is inconsistent enforcement and implementation across the countries and firms (Procházka & Pelák, 2014).
It is because information is considered to be costly; the stock price helps in reflecting subset of all the relevant information. When there is decline in the cost of private information, informed trading increases that leads towards more informative pricing. The increase in the trading by the informed investors results in to increasing of stock return variations. Further, empirical evidences from literature shows that there is positive consequence associated with mandatory adoption of the IFRS. The share price is consists of more organization related true information after adoption of the IFRS. The organizations that are cross listed in the other countries, for instance US stock exchanges shows improvement in their informativeness because of the additional scrutiny and disclosures requirements for the cross listings (Procházka & Pelák, 2015).
The improvements of the informativeness of stock price are found to be more significant for the voluntary adopters than that for the mandatory adopters of IFRS. In addition, the impact of the IFRS adoption also depends upon enforcement levels of laws in country. The empirical evidences founds that the stock returns are considered to be synchronous in the emerging economies than in the developed economies. In addition, the enforcement of the trading laws improves the informativeness of stock price but only in the developed markets (Samaha & Khlif, 2016).
The IFRS adoption does not have major influence on capital market integration of the capital markets. The capital market does not have any kind of long-term relationship with IFRS. This approach contests the common belief that the IFRS adoption results into the enhanced integration of the capital markets. The IFRS adoption helps in reducing the diversity of accounting practices that facilitates efficient capital movements. The requirement for deregulating the financial market is towards creating unified goal that is geared towards more uniform accounting standards. It helps in smooth capital flow across the economies and different global capital markets. It has been found that significant efforts are geared towards harmonizing accounting standards globally, which is evidenced by various countries, which incorporated and adopted IFRS in their requirements towards regulatory reporting. The adoption IFRS was expected to result into improving quality of the accounting information and benefits other capital market, their benefits have not realized uniformly all through globe. It is because of the factors that are inherent to the organizations such as variations of political, cultural and economical factors among the various developed nations, which are United States, European Union and the other developed nation. The empirical evidence shows that there is mixed results on benefits of the adoption of IFRS that can be attributable towards political, legal and economic differences across the nations (Zakari, 2014).
There is tremendous benefit that arises from adoption of the IFRS to capital market such as enhancement of markets liquidity, minimizing asymmetry of information, increase in the cross listings by the firms, higher following by the analyst and lower costs of the capital. The formulation of IFRS by IASB was having the expectation to enhance the usefulness of reports of the accounting to capital market. However, the realization of this particular objective is dependent upon institutional and legal framework that relates to the financial disclosures (Chen, Ng & Tsang, 2014). If this is weak then there is no guarantee of achievement of objective. Hence, as the result of this, IASB should place the measures for ensuring the nations, which have weak law enforcement to be assisted for improving the enforcement of IFRS so as to reap the maximum benefits from the adoption of the IFRS. Moreover, the countries should include the IFRS into their own laws for making it mandatory for the firms to adopt IFRS (Procházka & Pelák, 2014).
The single set adoption of higher quality accounting standards by organizations all through the world, has already gained significant support worldwide. Further, the major argument behind this is thought that the uses of single set of the accounting standard would be able to enhance the transparency and comparability of financial statements. The capital market is considered to be one of the two major pillars of banking system and the financial system. The capital market efficiency depends upon defined set of the principles and standards with accuracy of information and requirements of strong listings (André, Filip & Paugam, 2015). Further, decision makers in capital market will be having higher quality of information, particularly if the application of the standards of accounting is consistent and in rigorous manner. It helps in creating more integrated capital market that would lead towards efficient funds allocation, lower capital cost and foreign investment flow, which are major goal of the IASB. These outcomes are important for developing countries because of the fact that their capital markets are suffering from the lack of liquidity, thin trading and lack of the efficiency of information (Ball, Li & Shivakumar, 2015).
From beginning of January 1, 2005, the compliance of IFRS was mandatory in EU for the organization’s consolidated accounts with the securities traded on the regulated market that is publicly traded organizations by the Regulation 1606/2002. The objective of regulation were for improving comparability and transparency, enhanced internal market functioning, cost-effective functioning of capital market, investor’s protection and the maintenance of confidence in the capital market and lastly, helping of the EU companies for competing on equal footing for the capital in capital market and EU (Christensen et al. 2015). However, the regulation was opposed by certain people and IFRS impact in EU has been controversial, since it was implemented, especially since financial crisis. The financial information helps in influencing the behavior of investor with respect to the selection of portfolio that in turn affects the prices of security and hence, it provides the terms on which the organizations obtains additional financing (Doukakis, 2014).
There is great impact of adopting the IFRS on capital market including positive reaction of the stock market to news, which increases the probability of adoption of the IFRS. Its adoption results into the revelation of the new information of firm. Hence, it reduces surprise component of disclosed information in the future. This informational content on the announcement of earnings improves after the IFRS has been adopted with the help of reduced reporting time lag, increased analysts prediction accuracy, increased foreigners investments and hence, it improves accounting quality. Further, capital market liquidity increases and cost of the capital reduces with the IFRS adoption. The mandatory IFRS adoption leads towards the enhanced knowledge on ability of companies and investors for utilizing IFRS that helps in improving significant positive effects of IFRS adoption (Hong, Hung & Lobo, 2014). Moreover, the relationship between IFRS adoption and financial integration is obvious in case where there includes key differences in the quality between IFRS and the stronger legal enforcement and local standards of accounting. Its adoption brought the capital market benefit and macroeconomic benefits. The voluntary IFRS adoption leads towards improved level of transparency that is reflected by the improved communication to the investors. It results in reduction of cost of capital and increasing following by the foreign analyst. The IFRS adoption reduces diversity of the accounting practices that in turn facilitates efficient capital movements (Edogbanya & Kamardin, 2014).
The IFRS adoption improves accounting quality, increased ability of the analysis of capital market for predicting, improved accounting information comparability and better using of the information of accounting. However, attaining these results is not easy, as major role is played by company factors and country factors. The uses of the common rules is not considered to be adequate for creating common set of the business language because incentives of management and the institutional factors helps in influencing the financial reporting. Moreover, the market analyst gets benefit from the IFRS adoption as they are one of the most important financial statements users (DeFond et al. 2014). It is because of improvements in the transparency, relevance and comparability of the accounting information. In addition , it has been observed that more closeness of the GAAP of nation to IFRS, the higher will be its likelihood to follow by the foreign analysts. Hence, analysts will be able to provide more correct forecast of organizations. The IFRS adoption leads towards financial reports comparability only in those countries, which is having credible implementation of the standards. The improvements are generally stronger in the firms, which is having higher uniformity degree. The mandatory adoptions of the IFRS in nations that have stronger credibility of standards implementations have experienced higher degree of the foreign ownership. However, it was higher for the organizations with the higher uniformity level. The adoption of the uniform set of the accounting standards results into higher comparability of the accounting information that ultimately helps in attracting the investments of cross border. The accounting standards convergence and the higher quality based information of IFRS are considered to be the major factors of improved comparison. In this relation, the study has observed that international comparability of accounting standards is subject to firm’s institutional environment (Chen, Ng & Tsang, 2014).
The firm with higher incentives for compliance, experiences, significantly increases the comparability, due to adoption of the IFRS. Moreover, adopting IFRS increases accounting information comparability with the help of introducing set of the uniform standards of accounting all across the countries. However, it has been found that comparability of the information of IFRS reduces when it is being compared with local information of GAAP. Hence, the standard setting bodies IASB has the strategy to promote IFRS and the objectives for developing standard, which leads towards increase comparability of the financial statement. The IFRS adoption plays important role in ensuring quality of financial statement in relation to its comparability. This means that in every country, standard setting bodies acts as the responsible institutions that regulates the environment of business. It can be entrusted with greater role for ensuring better quality of financial information (Samaha & Khlif, 2016).
Over last decade, member states of EU have directly have moved to IFRS from their own domestic standards of accounting. The countries such as US, Japan and China have converged own domestic standard with the IFRS. The major objective of adoption as well as convergence is for developing particular set of the high quality standards of global accounting, which could be used for the domestic as well as the cross-border financial reporting as the means for increasing the comparability. In this relation, FASB core mission is to seek more comparable accounting standard globally. They argues that the companies, investors, auditors and the other participants in the system of financial reporting of US will get advantage from increased level of comparability, which results from the closer standards alignment that are used internationally. It is also believed by FASB that the standards, which are more comparable have more potential for reducing the cost for preparers and uses of the financial statements and it helps in making the capital market much efficient worldwide (Müller, 2014).
Further, the investors is having major obstacle in the cross-border investment is higher cost of processing and acquiring the information that is related to the investment. They are having the major obstacle, when they look for the investment opportunities in abroad with the different standards of accounting, is additional time required for reconciling the financial statements. The financial statements preparers, users, regulators and auditors are having the perception that adoption of IFRS will be improving quality and comparability of the financial statements. Hence, when underlying processes of measurement for the earnings of accounting are more correlated with the same standards of accounting that is when the processes are comparable then investors could better harness relevant value information, which is embedded in earning signal of foreign firms. These arguments and perception are empirically supported by the previous research that shows that level of IFRS adoption reduces the home bias of investors. The level of the IFRS adoption improves the financial statement comparability (Houqe, Monem & van Zijl, 2016).
Research method is the methods, which includes techniques and methods that are used for conducting research. The data and information collected in this research paper is based on qualitative research. This research paper has used reliable sources that include journals articles, documents released by IASB, professional bodies and company’s comments letters and other credible sources.
The IFRS adoption is having numerous benefits and has number of impacts on general development and accounting information quality, performance and growth of capital market all over world. IFRS has been adopted in both the developed as well as the developing countries. In the developed countries, there is strong mechanism of legal enforcement that guarantees benefits of fully adopting standards of accounting and ensures adoption benefits. The developing countries are having weaker mechanism of legal enforcement and corruption that constraints full IFRS implementations. Hence, it results in unrealized benefits of the adoption of IFRS. Moreover, this research paper has realized that there are major benefits of capital market with the IFRS adoption. The benefits includes reduced asymmetry of information because of increased financial statements disclosures, reduced capital cost because of higher transparency after adoption of IFRS and improved efficiency of market, higher accounting information quality, increased liquidity of market. Further, its benefits also include improved analysts and foreign ownership predictions, higher financial market integration and increased foreign investments and cross listings. Therefore, it can be said that IFRS adoption significantly influences capital markets. It has been found that level of adopting IFRS has the positive impact on financial statement comparability. It indirectly helps in increasing the ownership of foreign investor with the help of financial statement comparability. This particular finding is in consistent with the proponents for the adoption of IFRS that argues that adopting IFRS helps in improving comparability of the financial statement that in turn helps in attracting greater investment across the border. It is observed that other specific variables factors such as political and legal system, standards quality, professional knowledge level, government, attributes of board, auditors’ quality, which are mandated for regulating accounting should have to be in place, in order to promote adoption as well as full compliance to the IFRS.
Conclusion
Hence, this research paper concludes that IFRS adoption helps in providing major benefits to the capital market that is reflected by increased liquidity of market, increased number of foreigner’s participation, increased capitalization of market, increased cross-listings and general development of the financial market all across globe because of improved financial information comparability.
The recommendations for this research paper includes that there should be evaluation of IFRS compliance level and its related effects. It is because studies on this will reveal motives for the level of IFRS compliance to the standards and ways for attaining highest possible compliance level to the standards. This will help in informing policies better and ensure to put in place mechanisms for better enforcement for guarantee better results from the adoption of IFRS. Moreover, standards applicability varies between different nations because of environment and geographical diversity. Hence, there should be analysis of the impact of firm and country specific aspects. It is critical because standards help in improving financial information comparability. There is great influence of specific factors of the IFRS adoption on country. The adoption of IFRS effects and success depends upon institutional and environmental factors, for instance, legal framework and the enforcement of the legal requirements. It varies from one country to other. Hence, the study related to reviewing country specific factors will be viable. Lastly, it is recommended that the regulators of capital market should adopt IFRS in their legislation for making it mandatory to guarantee benefits from its adoption.
References
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