Accounting Assignment : Implementing IFRS

Question

Task: Debates on whether the converged International Financial Reporting Standards have resulted in harmonised international accounting practices across countries have been growing over the last ten years. Study based in emerging economies, such as China (He et al., 2012), Romania (Albu et al., 2014), India, Pakistan, and Bangladesh (Ali et al., 2006), South Pacific Island countries (Chand, 2005), United Arab Emeritus (Irvine, 2008), and Turkey (M?s?rl?o?lu et al., 2013), have consistently reported the challenge of effectively implementing IFRS in those countries due to country-specific contextual issues. Nobes (2015) also reported challenging issues in implanting IFRS in developed countries.

Required

From the institutional theory perspective, explain what factors drive the convergence of International Financial Reporting Standards.
Review the prescribed list of the research articles (see below), and three more relevant research articles at your choice, explain are the contextual issues of implementing IFRS in emerging economies and in developed countries.
Discuss whether the convergence of IFRS will lead to improved financial reporting quality.

Answer

Executive Summary
Financial reporting, as well as accounting are present to provide reliable and vital information on an entity or other organization to external parties. The major reporting instruments incorporate data that are valuable as they did in the past. The orientation of the past eliminates the power of the stakeholders in ensuring an effective decision making process. Therefore, IFRS can be defined as a standard that performs as a uniform code of language and is helpful in understanding the common reporting for users that enhances process of decision making. This accounting assignment further sheds light on the convergence of IFRS. This accounting assignment initiates with the introduction of IFRS followed by the factors that drive convergence of IFRS through an institutional theory perspective. Further, the accounting assignment stresses on the contextual issues in the implementation of IFRS. The end part of this accounting assignment stresses upon the fact that convergence and adoption of IFRS standards share the same vision of framing a single set of standards of accounting that are of better quality

Introduction
Several studies reflect that accounting standards are not ascertained by accounting standards alone and instead, these are also partly ascertained by the incentive organizations have to offer high-quality financials. There are evidences that organizations’ dependence on external capital maximizes their incentive to offer better-quality information and to offer effective financial disclosures. Besides, improvements in quality of financial reporting usually occur amongst organizations with higher reporting incentives (Albu et. al, 2014, p.495). Nonetheless, various institutional factors also play a role in driving the convergence of IFRS in many developed countries like China. However, when international accounting standards meet the domestic context, often various contextual issues arise during the implementation of IFRS that gives rise to the question whether IFRS convergence can result in improved quality of financial reporting (Petty et. al, 2012). Therefore, with the help of this accounting assignment, it can be determined whether post-IFRS convergence has resulted in harmonization of global accounting practices around several countries.

Factors driving convergence of IFRS through an institutional theory perspectivebr>There are empirical evidences of the fact that various institutional pressures within a country often remains the primary drivers of adoption of IFRS. Consequently, the policy makers must also seek to affect such institutional pressures that thwarts or increase IFRS adoption. Besides, for the executives of several multinational organizations, there are insights that can facilitate in describing and prediction of future adoption of IFRS within many countries (IFRS Foundation, 2010).

There has been a rising interest in the theory of institution in various areas. Such theory has been considered in accounting literature as an effective framework to describe the country-specific factors influencing the decisions of emerging economies to allow the use of IFRS. Further, such institutional pressures primarily occur at the firm or country or organizational level (Nobes, 2015). From an institutional perspective, there are various factors that drive the convergence of IFRS in many emerging economies. Such theory has been attained from the organizational conformity with beliefs and social values that mould organizational life (IFRS Foundation, 2010). Further, such beliefs and values are more relevant than technical advantages, bestowing strong legitimizing traits, thereby allowing organizations access to funds and assuring their sustenance in an inter-connected and organized society (Shah, 2013). Nevertheless, organizations do not only compete for customers and resources, but they also fight for institutional legitimacy and power for economic and social wellness. Coercive, normative, and mimetic ideologies come under the purview of institutional theory that has driven the convergence of IFRS. In coercive isomorphism, countries face pressures in the form of persuasion, force, or invitations to participate in collusions (Needles & Powers, 2013). Further, such coercive institutional pressure generally arises from financial dependence. Under the mimetic perspective, countries imitate the successful adoption of IFRS of other developed countries. Further, greater is the level of economic globalization of an emerging economy, greater will be the level of adoption of IFRS due to such isomorphism (Deegan, 2011). From a normative perspective, higher the strength of accounting profession experienced by an emerging economy, greater will be the level of IFRS adoption (Ali et. al, 2006, p. 49).

In relation to China, from an institutional theory perspective, there are factors that had driven the convergence of IFRS. Firstly, despite impressive growth of China, potential differences in economic development prevailed across regions. Besides, the development of coastal areas had been prioritized by the countries reform policies and exaggerated by the demand for international trade (Deegan, 2011). Therefore, the gap betwixt economic affairs in the coastal areas and those in the inland provinces affected institutional developments like government decentralization and financial markets. Overall, these factors played a primary role in influencing the reporting incentives of firm, thereby driving the convergence of IFRS. Another factor that drove the IFRS convergence was foreign ownership wherein foreign investors basically had a higher demand for organizational transparency than local investors. However, there was lack of domestic knowledge about China’s business culture and institutional background that resulted in an enhancement of reliance on investors on hard information from the financials (Rebel, 2017). Therefore, such increase of comparability of financials or quality of accounting disclosure has driven the IFRS convergence that is expected to benefit foreign investors.

In addition to these, government controls (coercive) isomorphisms also played a key role in driving the convergence of IFRS in China. For example, although Chinese capitalism had been increasingly less centrally planned and more market-oriented, the government often continued to impact economic development through introduction or implementation of subsidies. Since, the Chinese government was one of the most relevant sources of finance, subsidies were offered to facilitate development of government-prioritized sectors like transportation, energy, etc. Further, organizations that attained subsidies from the government were believed to possess lesser financial constraints and be less likely to depend on outside capital markets to provide their financial requirements. Hence, organizations that received lesser government subsidies had more reliance on equity investors and as a result, drove the IFRS convergence.

Contextual issues in implementing IFRS
Despite the global adoption of IFRS, various studies depict that many countries and especially developing countries lack proper infrastructures for the effective implementation of IFRS. This means that the convergence of accounting standards remaining on de jure level might not be compulsorily resulting in convergence de facto (He et. al, 2012, p. 542). For instance, studies have indicated that the direct implementation of IFRS in Nepal does not primarily enhance the transparency and comparability of financials prepared by the companies. The reason behind this can be attributed to the fact that contextual issues in Nepal like underdeveloped capital market, widespread corruption, absence of well-trained professionals, etc are more likely to obstruct application and implementation of IFRS (Ross et. al, 2014). Similarly, there are evidences that companies of Turkey have failed to apply IFRS consistently despite mandatory adoption of the same in the year 2005. The reason behind this can be attributed to the fact that contextual factors like tax-oriented tradition of financial reporting, absence of effective enforcement mechanisms, and improper management information systems obstructed the path of successful implementation of IFRS (Sunder, 2011).

In addition to these nation-specific contextual factors, there are firm-specific factors like size of firms that are potential elements determining the successful implementation of IFRS. In other words, firm size is also a potential variable in ascertaining an organization’s preparedness for implementing IFRS and depicting that larger organizations possess powerful incentives to enhance the quality of reporting (Ali et. al, 2006, p.40). Furthermore, the incompatibility betwixt present national institutional arrangements and IFRS and the issues associated to specific industries or size of firms may result in unwanted results like decrement in the reliability of financial reporting (Madura & Fox, 2011). Moreover, this can hinder the attainment of intended goals of IFRS adoption like improvement of transparency and comparability of financial information. In relation to China, domestic companies are not bound to implement IFRS but the government requires Chinese listed companies to prepare their financials based on CAS (Chinese Accounting Standards). However, there are various contextual issues like interpretation of IFRS, cost of implementation of IFRS, etc that pose a major challenge for the country.

Since, Chinese professionals lack the required experience and judgements to make effective interpretations under principle-based accounting standards, they primarily rely on the guidance offered by the MOF. This has resulted in the present CAS to offer more rules than is offered by the IFRS. In addition to these contextual factors, the cost of implementing IFRS in China is also a major problem. This is because the MOF requires the companies of China to prepare both non-consolidated and consolidated statements based on the new set of CAS. Therefore, the adoption or implementation of IFRS in China would also result in an increment in regulation and enforcement costs of supervisors like MOF, thereby bringing a financial burden for the companies. Other contextual issues in the implementation of IFRS includes education and training issues, translation of IFRS, etc that obstructs the path of successful implementation.

Whether convergence of IFRS will result in improved reporting quality
Both convergence and adoption of IFRS standards share the same vision of framing a single set of standards of accounting that are of better quality. Further, one relevant aspect of the intended advantages of both strategies of alignment with the IFRS is to enhance the comparability of financial statements prepared by organizations situation in different countries (Merchant, 2012). However, it has been observed that most of the countries and organizations remained under prepared for their respective transition to IFRS standards. The reason behind this can be attributed to the fact that there was improper training and education and since the convergence was primarily regarded as the problem of the accountant, the complications of IFRS requirements was not considered interrelated to education requirements (He et. al, 2012, p. 549).

In relation to China, studies and a range of institutional factors have depicted that organizations with increased demand for external capital often experience a bigger increase in the value significance of their accounting revenues under the converged IFRS-CAS. Moreover, this also comprises of organizations that are situated in more competitive areas and with better foreign ownership. This gives rise to the fact that investor protection and weaker legal enforcement has disallowed China to attain benefits from the converged IFRS. Nevertheless, it has also been observed that such convergence has provided advantages to some companies in China (Peirson et. al, 2015). When it comes to other countries, such advantage is not stagnant but heterogeneous across companies, relying on every reporting incentives.

Overall, it was observed that the convergence of IFRS in China only enhanced the value significance of earnings more for companies with the most requirement to attract capital from the external investors (Carmichael & Graham, 2012). This suggests that the adoption of IFRS in China with the CAS may have served to broaden the gap in competitiveness across companies with varying extends of government assistance. Considering the enhancing prominence of China in the entire global economy, the IFRS experience of convergence can have useful implications for other emerging and translational economies. Hence, even though there are potential movements towards the global convergence of IFRS, yet there are various issues that must be surpassed so that the reporting quality can be enhanced altogether (Carmichael & Graham, 2012). As the move towards global convergence continues, the alterations in financial reporting in the upcoming tenures will be dramatic in nature and only time can say whether this initiative has altogether resulted in overall effectiveness or not.

Conclusion
With the help of this accounting assignment, the challenges to implementation of IFRS has been well identified. Even though the strategy behind the convergence of IFRS was to harmonize the standards across several countries, yet many developing economies have encountered issues in the implementation of IFRS with their already existing accounting standards. Furthermore, there are various contextual issues that hinder the path of enhanced reporting quality while implementing the IFRS and if emerging economies do not get rid of these, the effort of a universal IFRS convergence will fail to offer required benefits. Besides, only time is the primary factor that can assist in reflecting whether such step can reap the anticipated rewards and whether the global economy can enjoy lesser cost financial reports that are more useful and completely comparable in nature. Besides, the question of whether IFRS convergence has resulted in better reporting quality has also witnessed varied answers in different countries.

References
Albu, C. t. l. N., N. Albu, and D. Alexander. (2014). When global accounting standards meet the local context? Insights from an emerging economy. Critical Perspectives on Accounting. 25 (6), 489-510. Retrieved from https://www.researchgate.net/publication/256044793_International_Financial_Reporting_Standards_in_an _Emerging_Economy_Lessons_from_Romania

Ali, M. J., K. Ahmed, and D. Henry. (2006). Harmonization of Accounting Measurement Practices in South Asia. Advances in International Accounting. 19, 25-58.

Carmichael, D.R. and Graham, L. (2012) Accountants Handbook. Financial Accounting and General Topics, John Wiley & Sons.

Deegan, C. M. (2011). In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill

He, X., T. J. Wong, and D. Young. (2012). Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China. Contemporary Accounting Research 29 (2), 538-562. Retrieved from https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1911-3846.2011.01113.x

Madura, R., & Fox, J. (2011). International financial management (2nd ed.). South Western

Merchant, K. A. (2012). Making Management Accounting Research More Useful. Pacific Accounting Review, 24(3), 1-34. doi: https://doi.org/10.1108/01140581211283904

Needles, B.E., & Powers, M. (2013). Principles of Financial Accounting. Financial Accounting Series: Cengage Learning.

Nobes, C.(2015). IFRS Ten Years on: Has the IASB Imposed Extensive Use of Fair Value? Has the EU Learnt to Love IFRS? And Does the Use of Fair Value make IFRS Illegal in the EU? Accounting in Europe. 12 (2), 153.

Peirson, G., Brown, R., Easton, S., Howard, P & Pinder, S. (2015). Business FinanceNorth Ryde: McGraw-Hill Australia.

Petty, J. W, Titman, S., Keown, A. J., Martin, J. D., Burrow, M. and Nguyen, H. (2012) Financial Management: Principles and Applications, 6th ed. Australia: Pearson Education Australia.

Rebel. (2017) Responsible Business and Profit Maximisation [online]. Available from: http://www.responsiblebusiness.eu/display/rebwp2/Responsible+Business+and+Profit+Maximisation [Accessed 31 August 2018]

Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. And Jordan, B.(2014). Shah, P. (2013) Financial Accounting, London: Oxford University Press

Sunder, S. (2011) IFRS Monoply: Pried Piper of Financial Reporting’, Accounting and Business Research, vol. 41, No 3, pp. 22-41

Thomson, A. (2009). Comment: Australia’s Adoption of IFRSs – A Clarification from the AASB. Australian Accounting Review, 19(2), 153. Doi: https://doi.org/10.1111/j.1835-2561.2009.00053.x

Walker, M, Chua, W.F., & Taylor, S. L. (2008). The rise and rise of IFRS: An examination of IFRS diffusion, Journal of Accounting and public Policy, 27, 462-473. Retrieved from http://eprints.kingston.ac.uk/19809/1/Dunhill-A-19809.pdf

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