The Implication Of The Mandatory Convergence Accounting Essay


The financial Crisis which came to a head in 2007-2008 triggered widespread reappraisal, locally or international which has established brutally how weak checks and balances have been in the public market. There is a likelihood of an economic catastrophe happening, from the drastic fall in share price which has still not fully picked up even after 5 years of financial crisis (Hoogervoorst, 2012). There has been continuous development of measures reduce exposure to the risk of more financial crisis happening in the public market. The convergence of IFRS globally is basically harmonizing by allowing uniformity of top quality standard all over the world i.e. from local Generally Accepted accounting principles (GAAP) to international financial reporting standards (IFRS) (H. DASKE, 2008).

This study will focus generally on the implication of the mandatory convergence to IFRS on emerging economies and the objective of this study will seek to research how the benefits of the converging to IFRS overweighs the cost involved in adopting by trying to analyse: Whether the adoption of IFRS has increased the quality of financial reporting, thereby plummeting creative accounting or earnings management. Second, whether the adoption has increased the inflow of foreign direct investment (FDI) by analysing FDI before and after the convergence of IFRS. Investor's satisfaction is very important and it creates a market for more investment. Also, this study seeks to examine the FDI to key events associated with the emerging economy towards mandatory IFRS reporting.

Theoretical Framework

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The drive to have a common set of accounting standards has been taking place for several decades to give it a professional shape and essence (Shil, 2009). International convergence of IFRS has become a highly demanded issue of discussion and debate among accounting professionals around the globe. The convergence of IFRS can be said as the goals of establishing a single set of accounting standards, are aligned, formulated and upgraded to international best practise (Mogul, 2003) that will be applied globally, and this is particularly to reduce the disparity between US Generally Accepted Accounting Principles (US GAAP), and the International Financial Reporting Standards (IFRS) (Marion and Cengage, 2001). Individual country is always entitled to customise the existing international accounting Standards according to its specific needs (Mogul, 2003). International convergence of accounting standards between nations is a very important current issue which has many possible benefits or consequences, as well as many obstacles to overcome for success (Articlebase, 2013). Harmonization is needed for the globalization of goods and services and increased cross border investment and borrowing (Hoogervoorst, 2012). Some of the study considering the convergence of IFRS internationally has been from:

Blanchette and Desfleurs (2011) evaluated that the economic reason for the convergence into basic characteristics which are basically for the purpose of quality, comparability, transparency, cost savings from not trying to reproduce the process of standard setting. Lawrence (1996) addressed a number of influences that is responsible for the move towards convergence of accounting standards which were because of multinationals, foreign investors, and globalisation. He also added reasons why the move to convergence maybe hard because of each individuals country legal system and Organisational conflicts. Shil (2009) justified the convergence of IFRS will assist in creating a "level playing field" globally where no country will be more advantageous than the other. Information received by both the regulators and auditors will be the same and will also their evaluation. Where there is no free trade, IFRS will enable tariffs, quotas and other restraint mechanism by countries become less risky and more accurate which will benefit those who trade thereby, allowing management and Investors make the best decisions based on the accuracy of the information. This will allow the resources of the world allocated properly and better managed. Ewert and Wagenhofer [2005] argued that tightening the accounting standards will assist to reduce or prevent creative accounting and earnings management thereby, producing high quality account reporting. Consistent with this argument, (HOLGER , et al., 2008) shows that IFRS convergence has a positive effect on the global market as it reduces the number of reporting decision made by many local GAAP, and particullarly, this mandates countries to improve the quality of their financial reporting reporting. Armstrong et al. (2007), Covrig, DeFond, and Hung (2007) argued that IFRS reporting reduces the cost that investors will require to compare companies across the global market and countries because there will be a common of accounting standards which will enable investors identify the difference between a high and low quality firms thereby reducing risk of estimation.

Proposed methods

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My research is going to make use of quantitative research method. Where Secondary data will be used as most of the data will be sourced from Online Resources like reports, World Bank, IFAC websites, financial reports of company's etc, using regression to analyze. To determine the implication of IFRS of FDI emerging economies we will use a model derived from a combination of previous literatures. Using a straight line regression:

OLS Regression Equation:

straight line:



Y = FDI (foreign direct Investment)

𝑥ð‘- = IFRS (control variables)

Using this method regression analysis in analyzing the data, will help to examine the objective earlier mentioned in the research question. It is a common method to evaluate related objective statistically. I used a combination of different previous literatures such as (Rudra, 2012) using regression on a lot of listed companies in India and (H. DASKE, 2008) because they did something similar to what I Intend doing and they used regression analysis in their research . Also got something from Lawrence et, al. (2012) who did something similar ''the impact of IFRS adoption on foreign direct investment.''


Potential practical problem and potential obstacles will be that some of these countries within the emerging economies don't keep appropriate data and we will have to use data from World Bank, this poses a problem because there limited other ways to compare the accuracy of data gotten from this source. Second, it's just only less than a year after the adoption of IFRS in Nigeria, Russia adopted 2012 and some of this other countries in this emerging economy like India plans to adopt by April although china and south Africa has adopted a little while ago but seeks to make some amendment to it. Hence, one year will be preliminary evidence to what might possible happen in the future.

My position as an accountant; over the past few years, I have been grounded on treatments of IAS's and IFRS's. Regardless, I will try as much as possible to be objective in the course of this research, so as to be sensitive to the possibility of negative implications of IFRS.

Also, I will endeavor to do a deeper literature review, to understand the epistemological position of also cons of the adoption of IFRS.


March- May 2013 Study the literature, and also have the first draft of my literature review of the dissertation.

May -June 2013 Exams. And also Collate data through DataStream and World Bank Site.

June-July 2013 Analysis of data. And also, writing of the methodology and Analysis chapter of the dissertation.

July- August 2013: Conclusion and Prepare Second and final draft of dissertation.