In the paper, “The case for global
accounting standards: Arguments and Evidence”, Ann Tarca, factually summarises
the various benefits that have come to light through various studies on effects
of IFRS in the pre and post adoption phase.
The author especially focuses on:
-The
effects of adoption of IFRS on market efficiency. Such effects have been
measured through indicators such as, changes in market liquidity, firms’ cost
of capital, stock return synchronicity and trends in foreign investment/ownership
and improvements in analysts’ report and forecast accuracy.
-The
boost to economic development by way of implementation of IFRS; this is
highlighted by relating the financial infrastructure of the country to its
economic growth. It is also stressed upon here the effects of country’s
political and legal practices on its economic and financial furtherance.
Various parameters as, total foreign investment growth, ownership accumulation,
etc. are used to determine whether the implementation of IFRS has been
beneficial or not.
-IFRS
as a subject of policy matter in financial re regulation initiatives. This
has been a widely discussed subject, post the crisis of 2007. The major
endeavour in this context being, monitoring financial and banking systems so as
to increase transparency, accountability, co-operation and integrity in
financial markets. IFRS as a way of making monetary systems transparent and
comparable has been widely embraced.
-The
effect of IFRS in developed markets. The last part of the paper elucidates
upon the trends noticed in developing countries pre and post adoption of IFRS.
It also brings to notice a paradox wherein, the developed countries which bear
great financial influence and dominance, and themselves propagate the use of
IFRS, have difficulties and reservations in implementing them.
The author takes a stand, which criticises
and analyses, by raising proper evidence with reference to the effect of IFRS
on various entities in different settings. Although the paper largely outlines
the benefits of the IFRS, the paper is also critical in giving due credit to
factors supporting the success of the IFRS. The author also presents scenarios
where the IFRS have not been very successful and the paradox and barriers
impeding the success of the standards.
It will be helpful to understand Ann
Tarca’s point, by analysing the arguments put forward in the paper one by one.
1. IFRS adoption and market
efficiency
The author tries to answer
the question, ‘whether the information provided by IFRS has been beneficial to
market participants or not?’ Various studies cited in the paper attempt to
answer the question by bringing to light various parameters to gauge the
efficiency of the standards. Evidence is gathered by monitoring changes in
market liquidity and firms’ cost of capital. Market liquidity increased and
cost of capital decreased due to increased disclosure of critical information
and better comparability under the IFRS. It was also noticed, that trading
activity increased highlighting investments in foreign equity by individual
investors; increase in cross border holdings; larger volumes of mergers and
acquisitions and their smoother execution; increase in institutional ownership
of equity; and foreign analysts being able to make accurate forecasts.
All this has been directly
and indirectly related to the adoption of IFRS. Since, the standards have made
available quality information in a highly comparable manner, narrowing
geographical distances and making information relevant and timely for other
entities. Thus, information is not anymore exclusively restricted as ‘private
information’. Foreign investors rely on such standards as they reduce the
chances of surprises.
Such benefits have been
proven to relate to IFRS by investigating stock return synchronicity across
mandatory IFRS adopters in the EU.
However, Ann also
emphasizes the importance of a strong legal implementation and enforcement
infrastructure to effectively bring IFRS into action. A case in point being,
the example of US mutual fund ownership increasing for mandatory adopters, but
only when adoption is seen as ‘credible’. The author also points out, that IFRS
have not been successful in every case; for example, in some IFRS adopting
firms’, earning comovement has increased, meaning a poorer information
environment thus bringing out the lags in the standards. Hence, a continual
improvement plan is recommended.
2. IFRS and economic
development
The point highlights
various studies that have concluded that countries with weaker investor
protection laws or weak law enforcement tend to have weaker and smaller capital
markets; this can be linked to the high amount of risk a potential investor
need to assume before participating in such markets. On the other hand, economies
with stronger investor protection and stricter law enforcement tend to have
larger and stable capital markets thus, winning over investor confidence by way
of outsider rights, information disclosure, transparency and comparability.
Therefore, a relation is
known to exist between the state of law and the health of financial markets and
in turn economic development. The inevitability of a good legal and financial
structure and quality accounting standards has been stressed upon in various
policy initiatives to promote capital market growth. The use of IFRS has been
the answer to the requirement of such policies, as they have been noticed to
stimulate foreign investments by making markets accessible and safe for foreign
investors; by providing relevance, transparency and comparability along with
enhanced investor protection. Ann cites the case of Malaysian Accounting
Standards Board, which has taken up IFRS to improve ‘transparency and
international perception’ in order to attract foreign investment. The move has
been made by MASB to align Malaysian companies with global standards, as they
operate in an international environment.
However, the paper also
talks of studies which have pointed out that IFRS are largely concerned with
trade and foreign direct investment – prominent issues for developing and
transition economies, and of little significance in economies where either
foreign investment is not a problem or which already embrace quality accounting
standards.
3. Financial re regulation
It has been the focus of
policy makers, post the economic crisis of 2007-2008, to make financial markets
more stable and disciplined. It has been a worldwide realisation, that
financial systems need to be monitored and checked due to the potential snow
balling of economic crisis and costs incurred in losses and rehabilitation in
case of such crisis.
The key objectives under
reformatory measures have been:
-strengthening
transparency
-increasing accountability
-sound regulation of
financial systems
-promoting integrity in
financial systems and reforming them
-and fostering
international co-operation in bringing the above points in implementation
framework
These objectives can be
reached, by the application of accounting standards which bring about,
consistency in financial records and their maintenance, by bringing about
standardisation in recognition, measurement and disclosure for financial
instruments.
Thus, the characteristics
specified for ideal policy requirement closely tally with the IFRS. Hence, a
lot of nations have adopted the standards to mitigate a hostile risk strewn
financial climate and as a cautious step to safeguard against potential
economic crisis.
However, Ann Tarca also
quotes a review posted by SEC about IFRS reporting which summarizes, the use of
options in IFRS has lead to insufficient and inconsistent disclosure in certain
areas affecting comparability. Thus, it can be summed up, on one hand IFRS
provides a strong check against potential economic and financial risk; on the
other hand, due care must be taken while applying the standards so as not to
skew the results.
4. IFRS in developed markets
The last point in the
paper analyses the reception and effects of IFRS in developed countries. The
first part of the argument puts forward the example of developed countries like
Australia and New Zealand, which already have robust investor protection
program, also embracing the need for IFRS. Post adoption of IFRS, researchers
have observed an increase in value relevance, persistence of earnings and
growing capital markets, in such countries. Adoption of IFRS by developed
nations which already had good accounting programs goes on to vouch for the
benefits of the standards. Such nations have stimulated integration with world
economies and sought IFRS as a way to reduce cost incurred on reconciliation
among varying national standards. This has also benefitted investors by
widening their pool of investment.
The argument also points
out the need for influential developed nations such as Japan and USA, to
integrate and converge with global standards such as IFRS, to maintain their
position in international markets.
However, the author also
points out a paradox pertaining to the adoption of IFRS by nations as
influential as the USA. Such nations do not converge to IFRS on basis of
foreign trade volume or investment inflows but, rather make the decision based
on the government’s capability of timely decision making and opportunity cost
of switching. It may be noted that a country is likely to switch if its trade
partners or neighbours make the move to reduce the transaction costs involved.
Therefore, a problem of delayed adoption and gaps in integration of IFRS also
need to be addressed.
To conclude, it may be
stated that, while the author believes that the wide acceptance of IFRS
internationally has spearheaded growth and has accrued plethora of benefits for
embracing nations. However, it is to be noted that such successful
implementation is only possible when backed by a strong political and legal
climate along with a sound financial infrastructure.
Also, gaps in
interpretation and implementation of IFRS need to be addressed and corrected
for their successful working.
Benefits occurring in
developed markets are more varied since, such markets already had some sound
accounting procedure in function before IFRS; so the benefits in such markets
pertain to more than increasing transparency, disclosure and comparability.
Overall, the author cites
the IFRS as progressive and supports with factual studies and survey. However,
she also highlights the lags in the standards’ interpretation and
implementation, and need for proper checks to counter the weaknesses in the
system.
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