Factors Affecting the Adoption of IFRS

Abstract

I. INTRODUCTION Based on a broad compilation of prior theoretical reasoning and empirical research, Choi and Meek (2008, CM) developed a model of accounting system development to explain observed differences in financial reporting worldwide. In CM's framework, eight factors in a country's environment are believed to have a significant influence on the differences found in accounting systems: major source of finance; legal systems; taxation; political and economic ties; inflation; economic development; education; and culture. International Financial Reporting Standards (IFRS) have been touted as high quality accounting standards that will enhance the value of accounting information across international borders. Over 100 countries now require or allow IFRS for domestic reporting (1). In light of the increasing popularity of IFRS, we attempt to identify how the set of factors in CM's comprehensive framework plays into the decision. Our sample consists of 73 countries based on survey of listing requirements from the period 2000 to 2007, supplemented and cross-checked with data from IASB and the World Bank Report on Country Observations of Standards and Codes (ROSC). Variables are constructed using data collected from the World Bank and other publicly available sources. These variables are then empirically tested in a general adoption model using random-effects logit regressions. Alternative specifications, including the addition of EU countries, and other analysis are discussed in robust section. Section II provides a background of IFRS and accounting system development literature. Section III develops hypotheses and Section IV details the methodology and variable constructs. Section V discusses the results and robustness checks. Finally, Section VI concludes the paper. II. BACKGROUND A. IFRS Development Diversity in accounting systems has significant economic consequences for the interpretation of financial reporting on an international level (e.g., Choi et al., 1983; Choi and Levich, 1991; Lainez and Callao, 2000; Bushman and Smith, 2001). As a result, international accounting and securities organizations initiated a process to promote the harmonization of accounting standards as a means to improve financial transparency and comparability. Efforts by the International Accounting Standards Committee (IASC, predecessor of the IASB), the International Organization of Securities Commissions (IOSCO), and other worldwide accounting bodies have led to the development of International Accounting Standards, now described as the International Financial Reporting Standards (IFRS). The adoption of IFRS has increased since the first set of core standards was completed in 1998, most notably by Australia and members of the European Union in 2005. However, there are some notable exceptions to this trend, such as the United States and Japan. It is not fully clear why there remain some prominent countries that have been reluctant to adopt. Arguments in support of IFRS emphasize the potential benefits such as increased investor confidence and reduced reporting costs for international cross-listed firms (2). Thus, the prospect of a comparative advantage from higher liquidity and lower cost of capital may influence national policy setters to adopt internationally recognized accounting standards (e.g., Leuz and Verrecchia, 2000; Daske et al. 2008). Some studies using firm-level data find an increase in investment allocation (Yu, 2009), others find no effect (Beneish et al., 2009) and still others finding only an effect conditional on certain factors (Florou and Pope, 2009; DeFond et al., 2011). Adoption of common accounting standards may enhance business relations between countries by lowering information processing and monitoring costs and increasing the linkages within communication networks (e.g., Meeks and Swann, 2009; Hail et al., 2010). Similarly, improvements in financial disclosure and/or comparability may lead to greater international capital mobility and cross-border investment (e. …

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