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Many studies have argued on the effects of IFRS adoption by focusing on investor and capital market. One argument is that the adoption of IFRS improves financial reporting to outside investors. Daske and Gebhardt (2006) state that "IFRS are more relevant to investor as IFRS are more capital market oriented and comprehensive, for example disclosure than United States Generally Accepted Accounting Principles (US GAAP)."
Another argument is that IFRS reduce the amount of reporting discretion relative to US GAAP. Ewert and Wagenhofer (2005) provide evidence that "the level of earning management reduces and reporting quality increases with tighter enforcement of accounting standards." However, Ball and Nobes (2006) point out that "not every firm would make material changes to their reporting policies after switching to IFRS."
Although the quality of corporate reporting may remain the same, greater comparability may make the financial reports more useful to investors and other stakeholders. When the firms from other countries use the same set of accounting standards, it is beneficial for outsiders to explore accounting manipulations and earnings management. The key benefits of IFRS adoption are greater comparability of firms' reports, reduce cost of capital and improve market liquidity. Thus, by switching to IFRS, Chelsea plc will have an opportunity to upgrade its performance management capability as well as enhancing reporting quality. Gallery et al. (2008) shows that "although the standards mandate superior accounting practices and require more disclosures, not evidence could prove that the firms would make the reported numbers more informative." This argument can also apply for comparability.
Numerous studies on the effect of IFRS reporting focused on voluntary and mandatory adoptions. Leuz and Verrecchia (2000) find that German firms which use IFRS present higher turnover compared with other German GAAP firms. Daske (2006) finds that IFRS adoption by German firms present higher cost of equity capital than other German GAAP firms. Ashbaugh and Pincus (2001) examine that "the differences in accounting standard between IFRS and US GAAP cause the forecast errors." After firms adopt IFRS, those firms are able to gain more accurate forecast analysis. It is useful for Chelsea plc as the company need more accurate forecast information to manufacture its products.
Covrig et al. (2007) shows that "IFRS reporting helps firms attract more foreign investors as IFRS give higher foreign mutual fund ownership than US GAAP. According to Capkun et al. (2010), "the firms that move to IFRS experience increased earning management." Since Chelsea plc is a multinational company, this will lead to more foreign investors consider investing in Chelsea plc. However, Cuijpers and Buijink (2005) do not find any differences between IFRS firms and US GAAP firms. Christensen et al. (2007) also concludes that "there is no evidence to prove the improvements in accounting quality for firms." Although IFRS adopters experience positive capital market effect, for example cost of capital and liquidity, I think there is a must for firms to concern the results and interpret carefully. The evidence only indicates the potential benefits of IFRS for firms but unable to provide a rational reason to adopt IFRS.
2.2 Impact on reporting quality
According to Barth et al. (2008), "Firms applying IFRS experience higher accounting quality overall than firms applying US GAAP, and that the former present an improvement in accounting quality between the pre and post adoption period."
Proponents debate that IFRS and US GAAP are now having similar quality and the differences between two standards are small. Besides, proponents also argue that IFRS are principle-based whereas US GAAP are rule-based. Principle-based accounting system provides guidance and positions that can easily be considered and cheaper to implement compare to US GAAP, which are more complex and detailed. (PWC 2007) These arguments can be concluded that US firms move to IFRS will have similar reporting practices, increase in reporting quality and might reduce long run cost savings. However, there is a risk that IFRS can encourage fraud because IFRS allow the companies use the methods they wish to. For example, the company might change the method of inventory valuation and make the company more profitable.
On the other hand, opponents argue that changes in reporting will probably lead to lower reporting quality to US firms. Benston et al. (2006) opposes that IFRS and US GAAP remain many important differences. Benston et al. (2006) also points out that "IFRS are less tested and comprehensive than US GAAP." Professors Hail, Leuz and Wysocki (2010) examine that US companies do not seem to have an impact on the reporting quality by moving to IFRS. The authors argue that the companies have the responsibilities to report high quality information to satisfy their investors in order to increase outside funds in capital markets. Therefore, it is unlikely to conclude that IFRS adoption will significantly improve US firms' reporting quality.
Professors Hail, Leuz and Wysocki (2010) examine that US companies do not seem to have an impact on the reporting quality by moving to IFRS. The authors argue that the companies have the responsibilities to report high quality information to satisfy their investors in order to increase outside funds in capital markets. Therefore, it is unlikely to conclude that IFRS adoption will significantly improve US firms' reporting quality.
I think it is difficult to justify the improvements in reporting quality since US firms' reporting quality is already high. As a result, IFRS adoption would be unlikely to make any changes (increase/decrease) of reporting quality in US.
2.3 Impact on comparability
The Financial Accounting Standards Board (FASB) states that there are two aspects of information comparability, which are similarity and difference aspects. Similarity aspect indicates whether firms engaged in similar economic activities report similar accounting amounts and the difference aspect indicates firms engaged in different economic activities report dissimilar accounting amounts. If IFRS adoption could make the US firms' financial reporting more comparable than those firms under US GAAP, it definitely provides a rationale to swift to IFRS.
First, the magnitude of the comparability benefits is possibly a function of the closeness of US GAAP to IFRS. (Bae et al. 2008) Another factor is taking a network perspective, one could argue that the comparability benefits are considered small for US firms to join "IFRS network" as US capital markets are large. (Meeks and Swann 2009)
At this point, it probably will not affect Chelsea plc's strategic because only little evidence on comparability benefits from IFRS had been discussed. Also, IFRS can be implemented in different way so the potential benefits for IFRS to improve comparability are questionable.
2.4 Effect on earning management
Healy and Wahlen (1999) define "the occurrence of earnings management as an instance when managers alter financial reports to mislead stakeholders about the underlying economic performance of the company or to influence contractual outcomes that depend on reported accounting numbers." Ahmed et al. (2010) finds that there is an increase in income for firms switching to IFRS. Ahmed et al. (2010) also proves that "more aggressive reporting of accruals and a decrease in timeliness of loss recognition for IFRS adopters." However, Christensen et al. (2007) shows that "IFRS adopters presents a reduction in earnings management and more timely loss recognition." In addition, Capkun et al. (2010) finds that IFRS adopters experience a decrease in earnings after switching to IFRS. Cai et al. (2008) documents a decline in earnings management after the firms adopted IFRS. Chelsea plc in this case might consider improving transparency and comparability of financial reporting in order to increase income.
Fair value accounting is used in both US GAAP and IFRS, but IFRS put greater reliance than US GAAP. Under IFRS, property, plant and equipment can be measured to a revalued number which equals Fair Market Value (FMV) less Accumulated Depreciation (Deloitte 2008). Unlike IFRS, US GAAP are measured at historical costs. For intangible assets, US GAAP record at original value and can only be written down whereas can have an upward revaluation in an active market. (Hughes & Sander 2007) The finance director is interested in this point as FMV illustrate well for a company's balance sheet, making the balance sheet stronger and attracting more investors to invest in the company.
While proponents think IFRS can help companies, stakeholders, investors and the economy, opponents blame that financial instruments are recorded at their current value in the market under fair value accounting. This cause companies have to sell off their assets at a value below market price during recession. (WG&L, 2009) Opponents claim that assets seem to be not worth under fair value accounting.
2.5 Implementation costs
Professors Hail (2010) points out that US firms require various upfront costs when switching to IFRS. The firms will incur transition costs during the transition phase. The firms also have to provide comparative financial information between two accounting standards, which are the previous US GAAP reports and current IFRS reports. Therefore, modification of accounting systems and processes will incur costs. Professors Hail (2010) also mentions that US firms move to IFRS has a huge cost in training their staff and outsiders to understand the new standards. The case study from Nigeria shows that training and educating staff and preparing financial statement compliant to IFRS implementation not only costing the firms but also spending more time and effort on the new standards. For example, hiring new staffs that have an expertise in international accounting can be expensive as they are temporary to help to train the existing staff during the transition phase. However, Leuz (2010) show that many firms could not afford these upfront costs in the current economic environment.
Christopher and Steven (2010) state that the firms will probably look for outside sources, such as external auditors, another accounting firms and consultants with IFRS management capabilities. During the transition from US GAAP to IFRS, many professional bodies believe that the costs of tax planning will not be affected and if it happens, will probably bring slightly increase in costs and time. (Smith 2009)
However, Wysocki (2010) argues that the US firms could save a lot of money in translating their reports into different languages, especially when IFRS become the global set of accounting standards. But this could only apply to US multinational firms and not domestic US firms. Therefore, Chelsea plc would benefit from the transition to IFRS because it avoids the costs of translating the financial reports into several languages, provided to foreign investor. It could potentially attract more investors and it is likely that Chelsea plc would realize substantial cost savings.
2.6 Effects on capital market
Armstrong et al. (2010) finds that "investors believe IFRS adopters could experience an increase in liquidity as IFRS give the capital markets to become more globally competitive." Daske et al. (2007) indicates that mandatory IFRS adoptions will increase market liquidity. Hail (2007) conducted a study focus on previous study by Daske et al. to identify the effect on capital market of IFRS adopters. Hail (2007) would like to determine the changes in cost of capital and market liquidity after using IFRS. Hail (2007) provides evidence of changes in the capital market for US firms, showing that an improvements in market liquidity.
In contrast, Platikanova (2009) documented that "liquidity costs of UK firms have been affected by IFRS whereas only slightly effect on US firms. Platikanova (2009) also shows that German, French and Swedish companies experience no effect on liquidity costs. However, the process would not be pretty good but overall, Chelsea plc should be relieved by the result as it does not prove that IFRS reports are on a lower quality.
Lambert et al. (2007) shows that "that increased disclosure reduces the cost of equity capital." Armstrong et al. (2010) argues that IFRS is likely to improve information comparability and results in the reduction of cost of equity capital. In addition, Li (2010) concludes that IFRS will cause a reduction in the cost of equity capital. With recognition of the benefits of IFRS, it is useful for Chelsea plc moving to IFRS. Additionally, Hail & Leuz (2007) prove that all IFRS adopters experience a lower cost of capital than US GAAP adopters. On the contrary, Daske (2006) shows "no evidence of the lower cost of equity capital for IFRS adopters and yet increase cost of equity capital during the transition period."
2.7 Adopt or not adopt IFRS?
Cohn (2012) says that investors expect the US will eventually support IFRS but the process need some time. Most investors think that the adoption of IFRS will result in a net benefit in US economy. In ACCA's view, adoption of IFRS in US will give great impact around the world. As a result, with the development of the high quality accounting principles in IFRS, the SEC concludes that the reconciliation was no longer necessary when the financial statements are prepared in IFRS. The SEC has considered whether adopt or not adopt IFRS in the US for many years. So far the SEC has not come out with any clear answers with this question. According to American Institute of Certified Public Accountants (AICPA) chairman of the board of directors Gregory Anton, although US firms have the option to use IFRS, the soonest IFRS in US will be seen in five to six years time.
The director of SEC, John W. White says that the US GAAP treated the US firms and US markets extremely well over the years although there may have some complaints about the standards. US GAAP give the investors more transparent and comparable financial information. Investors can make decision base on the wide range of issuers and industries information. He mentions that there is no reason for the SEC to look at IFRS for US firms but if not, will disappoint US issuers, investors and the whole economic market. It is clear that countries like Australia and Canada have strong capital market after switching to IFRS, providing investors more useful information. However, it is worthwhile to observe what happens in other markets around the world after moving to IFRS compare to what happens in the US markets.
In my opinion, it is difficult to decide which accounting standards is the best without proper information provided and explained. Proponents argue that there are many benefits for firms to switch to IFRS. But we noted that, it only concerns the successful in other countries and how convenient it would be. Proponents also mention that IFRS make obtaining capital fairer in US. (Albrecht 2010) I think it is not the best interest for Chelsea plc to adopt IFRS. One of the reasons is the accounting profession, which have to retrain the staffs under the new accounting standards. However, IFRS have a single language of accounting for the whole world would likely benefit for Chelsea plc.
3.0 Relevance and Reliability
3.1 The article "Have 'European' and US GAAP measures of income and equity converged under IFRS? Evidence from European Companies listed in the US" written by Sidney J. Gray, Cheryl L. Linthicum and Donna L. Street on 2009
This academic was found on Business Source Premier. In this article, the author identifies the issues regarding income and equity of European and US GAAP change under IFRS. The authors use sample companies to measure the comparability of European and US GAAP during the transition period. The authors apply theories from several studies to measure the equity between UK GAAP and US GAAP. The author also used this approach to determine the impact of income between IFRS and US GAAP, which is very relevant to my research question.
The authors performed the hypotheses to examine the impact of the accounting standards utilized by European firms. It was not a reliable measure because it based on the period between 2001 and 2006. Also, to obtain results that are more in detail, the authors used a methodology developed by Gray to examined and calculated the index of comparability.
This article was written by three authors. There are professors in university and expert in accounting, business and economics area, therefore, it could improve the reliability. The article was published in 2009 which means it was not relevant to my topic because it is not a current issue and there might be effect on macroeconomic during 2009 and all the data are on a historical basis.
3.2 The article "The impact and importance of mandatory adoption of international financial reporting standards in Europe" written by Francois Aubert and Gary Grudnitski on 2011
This article discusses the impact of mandatory adoption of IFRS across thirteen countries and twenty industries. The article was found on Business Source Premier. The authors used two-stage analysis to examine the impact and importance of mandatory adoption of IFRS in EU companies. The first stage is used to measure the impact of IFRS and the second stage determined the importance of IFRS adoption.
In terms of data and sample, this article has chosen to use a wide range of 4800 firms. This method could prove that the article provides findings that are reliable. However, in this article it shows some opposing opinions as well; opposing theories as well as opposing opinions from other published authors and weighing the points. This means that the researchers have carried out very deep comparison and contrast research in the findings, which could lead to a reliable result after all.
It is also one of the key journals from the publisher of Wiley-Blackwell. They are from the United State of America. More than 1000 libraries subscribe to the journal published by Wiley-Blackwell. More than 1500 peer review journal were publish by them. In other words, the requirement for journal articles to be published in the journal should be high. Thus, it reflects the reliability of the information is high as well.
In a nutshell, this article is said to be relevant as well as reliable as the material researched was made of a wide yet specific sample of countries, taking into account the impact that could affect the EU firms as well. No doubt that more theories could have been used as to determine the importance of IFRS adoption.
3.3 The article "Market reaction to the adoption of IFRS in Europe" written by Christopher S. Armstrong, Mary E. Barth, Alan D. Jagolinzer and Edward J. Riedl on 2010
This research paper which conducts its studies based on market reaction to the adoption of IFRS in Europe makes it highly relevant to my research as it binds effects that occur not just in the UK or the US but identifies what the other countries as well. Although once again the key finding from their research was not the key conclusion I wish to obtain from my own, the studies carried out contains viable and heavily useful information relevant to my research structure. The article finds that positive reactions for banks with lower quality pre-adoption information, which is an indirect point I am trying to clarify through my research. Arguably, the authors did not show some opposing opinions or opposing theories as well as opposing opinions from other published authors. In terms of relevance it could be that this article is not as relevant as most of the evidence in my research.
The selection of sample size in this research article is based on the 16 adoption events. After that, the authors provide descriptive and analytical evidences on the overall market reaction. Again, this only strengthens how relevant this article is to my research. However, the selection of sample covers all firms with returns available for all 16 events between 2002 and 2005. The sample period from 2002 to 2005 is considered historical data, questioning this article's reliability on information.
3.4 The article "Analyst following and forecast accuracy after mandated IFRS adoptions" written by Hongping Tan, Shiheng Wang and Michael Welker on 2011
This article was found in Business Source Premium database. It was published in late year 2011. The information provided is very close to the current economy condition as it reflected the issue that was just occurred.
In this article, the authors identify the issues of mandatory IFRS adoption which is relevant to my research. The research is referring to past paper to form the hypotheses. This involves wide range of resources referred in the research. Again, the reliability of the research is assured. The authors are all in the relevant study field and work in university. Besides that, this article has been cited by many authors. Hence the information should be valuable and knowledgeable. However, the author did not point out any opinions on the mandatory IFRS adoption.
In my opinion, the article may be reliable on an average basis. Although it has a wide range of information sources and is also fairly objective, the research method used is not very strong. If the article were to be used as part of a research, then it should not be used as a main source of information, rather, as a complementary article. Thus, the reliability of the article may be questionable.
3.5 The article "AssetÂ Liquidity,Â CostÂ ofÂ CapitalÂ andÂ IFRSÂ Adoption" written by George Lee and Yasheng Chen on 2010
The article identifies the impact of asset liquidity between IFRS adoption and cost of capital. The authors show that no full commitment to fair value accounting leads to less value relevance of information disclosure on the property, plant and equipment valuation, which is relevant to my research. The authors determine that bias depends on the strength of asset liquidity under IFRS.
However, in this article it shows many opposing theories from other authors and weighing the points. This means that the authors have carried out very deep comparison and contrast research in the findings, which could lead to a reliable result after all. In terms of data and sample, this article has used a sample of 2064 firms encompassing a large range of information from the year 2002 until the year 2007 shows that the span or sample size is very wide. The data is based on years ranging from not too long ago and includes several costs of capital effects in their period of observations.
In my opinion, this article is said to be reliable as it has a wide range of information sources. If the article were to be used as part of a research, then it should not be used as a main source of information.
5.0 Reference lists
ACCA (2011) International variations in IFRS adoption and practice. [online]. Available at http://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/rr-124-001.pdf [ Accessed 18 February 2013 ]
ACCA (2012) IFRS in the US: The investor's perspective. [online]. Available at http://www.accaglobal.com/content/dam/acca/global/PDF-technical/financial-reporting/pol-afb-iusip.pdf [ Accessed 18 February 2013 ]
Accounting Today (2012) Investors predict U.S. will adopt IFRS. [online]. Available at http://www.accountingtoday.com/news/Investors-Predict-US-Adopt-IFRS-64689-1.html [ Accessed 20 February 2013 ]
Accountancy Age (2012) US won't adopt IFRS for at least five years, says AICPA chairman. [online]. Available at http://www.accountancyage.com/aa/news/2198009/us-won-t-adopt-ifrs-for-at-least-five-years-says-aicpa-chief [ Accessed 20 February 2013 ]
Aubert A. and Grudnitski G. (2011) The impact and importance of mandatory adoption of international financial reporting standards in Europe.Â Journal of International Financial Management and AccountingÂ [online]. 22 (1), pp. 1-26. [Accessed 26 December 2012].
CFO (2012) SEC report backs away from convergence. [online]. Available at http://www3.cfo.com/article/2012/9/gaap-ifrs_gaap-iasb-fasb-convergence [ Accessed 19 February 2013 ]
Christopher S., Mary E., Alan D. and Edward J. (2010) Market reaction to the adoption of IFRS in Europe.Â The Accounting ReviewÂ [online]. 85 (1), pp. 31-61. [Accessed 11 January 2013].
George L. and Yasheng C. (2010) Asset liquidity, cost of capital and IFRS adoption. [online]. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1534316 [ Accessed 13 February 2013 ]
Hail L., Leuz C. and Wysocki P. (2010) Global accounting convergence and the potential adoption of IFRS by the U.S. (Part I): Conceptual underpinnings and economic analysis.Â Journal of Accounting HorizonsÂ [online]. 24 (3), pp. 355-394. [Accessed 10 January 2013].
Hongping T., Shiheng W. and Michael W. (2011) Analyst following and forecast accuracy after mandated IFRS adoptions. Journal of Accounting ResearchÂ [online]. 49 (5), pp. 1307-1355. [Accessed 15 January 2013].
John W. (2008) IFRS and U.S. companies: A look ahead. [online]. Available at http://www.sec.gov/news/speech/2008/spch060508jww.htm [ Accessed 19 February 2013 ]
Leslie, K. (2008) Using Activity-Based Management for Cost Control.Â Journal of Performance ManagementÂ [online]. 21 (2), pp. 18-29. [Accessed 10 January 2013].
Muhammad H., Matt K. and Peter C. (2010) Understanding IFRS adoption: A review of current debate and consequences. [online]. Available at http://www.afaanz.org/openconf/2012/modules/request.php?module=oc_program&action=view.php&id=41 [ Accessed 13 February 2013 ]
Sidney J. Gray, Cheryl L. Linthicum and Donna L. Street (2009) Have 'European' and US GAAP measures of income and equity converged under IFRS? Evidence from European Companies listed in the US.Â Journal of Accounting and Business ResearchÂ [online]. 39 (5), pp. 431-447. [Accessed 20 December 2012].
The CPA (2010) IFRS adoption: Some general issues to remember. [online]. Available at http://leeds2.emeraldinsight.com/bibliographic_databases.htm?id=1884873&PHPSESSID=cunifbf98v3mlo6iasr4606pp5 [ Accessed 15 February 2013 ]
The CPA (2010) IFRS adoption in the U.S.: Why the postponement?. [online]. Available at http://www.docstoc.com/docs/68858183/IFRS-Adoption-in-the-US-Why-the-Postponement [ Accessed 17 February 2013 ]