Adoption of IFRS by Developing Countries - Research Proposal Example

What other determinants could affect countrys decision to adopt IFRS? Table of Contents Introduction 4 Bibliography 18 What other determinants could affect countrys decision to adopt IFRS? Introduction Background The inception of the 21stcentury saw many accounting frauds in the US corporate sector that undermined the value of the accounting and auditing professions. It has been noted that companies involved in these frauds majorly misused the accounting choices and reporting methods permitted by the US GAAP at the time. The situation led to the decision to reform the accounting regulatory practices and also redraft accounting rules to ensure that businesses can be prevented from misusing accounting standards in their benefit. It led to the process of harmonization of accounting standards between The International Accounting Standards Boards (IASB) and Financial Accounting Standards Boards (FASB). They have made necessary changes in their standards, adopted relevant standards from IFRS and eliminated some standards from their standards. The objectives stated by them is to provide a conceptual framework that the users of financial reporting could get choices of investments (Tauringana & Mangena, 2012). The comparison of the standards of two boards showed that differences in economic events of the two countries do not allow them to adopt similar accounting standards. There was an issue for the IASB regarding the adoption of International Financial Accounting Standards (IFRS) that would create harmonization in accounting standards. Twenty-seven European Union members also joined the harmonization process when they made it essential for companies to adopt IFRS and make financial reports based on a similar set of accounting rules and principles. After the adoption of IFRS by EU, many developing countries adopted IFRS to adopt a single set of accounting rules and principles. The adoption of IFRS for financial reporting is practiced by most of the emerging markets in the last decade. The aim of these countries was to make a conceptual framework for adopting highly qualified standards and also, to provide relevant information to all the users of financial statements (Brown, 2013). It is essential that financial reporting should be according to the standards that are highly qualified and are adopted by the most of the countries in the world. Different reporting standards could not provide all the required information to it investors that do not belong to the country where the company has its head office. Many developed countries have successfully adopted International Financial Accounting Standards, but developing countries are facing difficulties in adopting IFRS. The reason for the difficulties is different macroeconomic, social, political, and cultural factors. These factors have made it difficult for the developing countries to follow the standards of IFRS and make a single set of accounting rules that are followed internationally (Oxford Business Group, 2009). International Financial Reporting Standards require businesses to provide all necessary information using a single set of standards required by the users of financial statements. There is strong evidence that firms that have adopted IFRS have noticed an improvement in the comparability and quality of reporting. Potential investors need common accounting rules that are followed by most of the countries to compare the financial position of companies and make decisions for investment. It has been observed that effective financial reporting is necessary to encourage foreign investors to the company. Adoption of IFRS will disclose all the necessary information for the investors and could be helpful in maintaining an efficient investment market system. A common set of accounting standards will be helpful in comparing the financial statements of the firms of two different countries (Mirza et al., 2010). There is a need to identify that IFRS has effective reporting system that could provide relevant information to its users including foreign investors. It is also required to analyse the conceptual framework prepared by different countries that adopted IFRS. The problems need to be identified that are faced by the developing countries by the adoption of IFRS for financial reporting. There is a requirement to analyse the factors that affect the country to adopt IFRS. The countries consider and analyse common economic factors to make their decisions regarding the adoption of IFRS for financial reporting (Ankarath et al., 2010). Problem Statement Developed countries have successfully adopted IFRS, but developing countries have problems to adopt IFRS. They face the challenges of implementing IFRS for financial reporting. The economic factors play differently in developing countries that make it difficult for them to adopt international reporting standards adopted by developed countries. Moreover, developing countries have problems faced by them to attract foreign investors. The comparison of the two companies located in different countries could not be made while they are adopting different accounting standards. Research Aim The main aim of this research is to identify the economic determinants that could affect the decision of the country to adopt IFRS. The purpose is to identify the change in the reporting standards of the companies that have adopted IFRS for reporting, to analyse that adoption of IFRS could provide quality information to the users of financial statement. In addition to it, the aim is to provide relevant recommendations for adopting and implementing IFRS to improve the quality of standards. Research Objectives The underlying objective of the proposed study is to investigate changes that occurred in countries that have adopted IFRS and also identify and evaluate factors that do not allow developing countries to adopt and implement IFRS for financial reporting Research Questions • What benefits could be derived by the companies of emerging countries by adopting IFRS? • What factors affect the decision of the country for the adoption of IFRS? • How cultural and political factors affect the decision of implementing IFRS? • How adopting IFRS could influence the economic growth of the country? • How could the country influence foreign direct investment to be made in the country? Justification The research could be helpful in analysing the problems of the country to adopt highly qualified standards for financial reporting in developing countries. The factors that affect the decision of the country to adopt effective standards that are followed internationally. The research will be helpful in finding the solutions that how the companies of different countries could be influenced to set single set of accounting rules. There is a need to set common accounting principles that are being adopted by various companies of different countries (Fortin et al., 2010). Literature Review Introduction The section of the paper is related to the past writings regarding the adoption of IFRS by emerging countries and macroeconomics factors that affect the decision of the country on adoption of IFRS. The problems that were faced by the developing countries in past while adopting full IFRS or harmonization of existing accounting standards are helpful in determining the factors. Importance of IFRS and Adoption Problem for Developing Countries Zack (2009) has stated the treatment and importance of International Financial Accounting Standards. IFRS have eliminated the chances of fraud. Fair value was introduced by IFRS that illustrate that the value of non-current assets should be according to market price or the value of change of interest rate. The value of the prices should not be according to the historical values unless stated by IFRS. Uddin & Tsamenyi (2011) have stated that the developing countries of Asia had a problem of adopting IFRS standards. There was a problem of adopting fair value concept by the emerging countries including Jordan. IFRS are continuing the concept of fair value and increasing the implementation of fair value in accounting practices. But developing countries have to face negative consequences by applying fair value in financial reporting. Culture Factor Cardona-Cardona (2014) states that the economic factor including culture affects the decision of the country adopting IFRS for reporting standards. Macroeconomic factors may not allow the country to adopt IFRS. It could not be possible for the country to adopt IFRS if its culture does not support the standards. Srivastava & Gupta (2014) have conducted research for the factors that affect the decision of adoption of IFRS in India. Corporate culture of India was not ready to adopt IFRS for reporting because of some economic factors. The research was conducted to identify the problems that were the barriers for India to adopt IFRS. Mande (2014) has identified that the regulatory process of the country affects the decision to adopt highly qualified standards for reporting. The focus of the research was on Nigerian market, and the paper identified the reason for adopting IFRS to attract foreign investors. The local authorities of Nigeria putted a barrier to it because they did not want to practice harmonization in their existing standards. Cieslewicz (2014) argues that there is an indirect relationship between the culture of the nation and accounting rules. Although there is a need to prepare financial statements and to report according to the international standards to provide information for attracting potential foreign investors, the adopting standards should not contradict with the country’s economic culture. It is suggested that harmonization could be practiced rather than the adoption of all the accounting policies and rules. Political Factor Konigsgruber (2010) argues that the political system of the country affects the decision to make harmonization in existing accounting standards. The author have proved its studies by giving the model that to practice harmonization in the reporting standards of the country it is necessary to start with the political system for influencing them to adopt IFRS for accounting standards. A model is given to prove the argument that the political system of European countries to set accounting standards. From the above model, it is observed that Commission, Accounting Regulatory Committee (ARC) and Parliament of Europe played an important role in setting accounting standards referred to as International Accounting Standards Board (IASB). Legal System Barrier Dima et al. (2014) have described the barrier of adoption of IFRS in Islamic countries. The legal systems of Islamic countries do not support most of the standards of IFRS, and they are not ready to adopt IFRS for reporting but harmonization could be possible in the existing standards. Sarea & Mohd Hanefah (2013) has analyzed the importance for accounting standards for the Islamic countries that must follow the Islamic principles. The authors have highlighted the requirement of Standards for Islamic Financial Institutions that must be according to Shari’ah. Miniaoui & Oyelere (2013) conducted a research to analyze the factors that were observed during the recession in financial markets of UAE. There was a need to analyze the factor that either the adoption of IFRS was the reason behind the recession of UAE including banks and other Financial Sectors. Educational Factor Vysotskaya & Prokofieva (2013) have discussed the economic change of Russia that has made a dramatic change in the accounting system of the country. Russia has not implemented IFRS for all types of business. The problem is related to the education for accountants that what system they have to follow and to what extent. Kılıç et al. (2014) had identified the problems faced by the accountants of Turkey when they decided to apply IFRS for reporting of for Small and Medium-sized Entities (SME) in 2010. The implementation was to be started from 2013, but the decision was reversed because there was a need of training for the accounting professionals to work according to IFRS. Education and training are necessary for implementing IFRS in the country. Economic Growth and Accounting Standards Akisik (2013) has identified the relationship between accounting regulations and economic growth of the country. The study pointed out the case of fraud in the early 2000 when the capital market was losing the trust of the investors. Accounting regulation could affect the economic growth of the country, and the government would control the situation. Albu & Albu (2014) stated the importance of economic development and relation to the adoption of standards in South-Eastern European Countries including Turkey and Poland. There was no development in the economy regarding the accounting standards point of view because of lack of knowledge of accounting policy changes. Daske et al. (2008) have illustrated the effect of adopting IFRS using a sample of 26 countries and identified the economic consequences faced by them. Cost of capital and market liquidity is examined in the article and the details given to recognize these consequences before adopting IFRS for the country. Ames (2013) have identifies the changes in South Africa that had fully adopted IFRS for reporting in 2005. Capital markets and foreign investments in the emerging markets were noticed at that time in the economy of South Africa. Economic growth in South Africa is the evidence for the argument that economic factors are affected by adoption of IFRS in the developing countries. (Ghedrovici et al., 2014)et al (2014) have expressed the problem in the adoption of IFRS in many countries. The focus country was Republic of Moldova as they adopted IFRS in 2011. The planning was to implement IFRS from 2009 but due to various reasons and objectives the program was postponed to 2011. The reason was the economic and education of accounting standards in the country. The country had not created environmental conditions for the adoption of high-quality standards in between 2009 and 2011. The planning was not made by the authorities to adopt IFRS in the country. The difficulties were observed at that time were the fiscal instability, limitation on current IT systems, and other factors. These factors were not allowing the country to safely adopt IFRS for financial reporting. There were many questions that came in front while the decision was to be made for the adoption of new accounting standards. There were other factors that were limiting the government to adopt IFRS along with the economic conditions. There were small numbers of chartered accountants that were fully aware of the accounting rules and regulations. There were minimum accounting experts that know how to practice new standards. Education was another factor that limited the adoption of IFRS and the country was unable was facing different situation to teach the new accounting standards that had to be followed by most of the companies. Many points are highlighted in the writings of the author that were the issues in adopting IFRS for the country. The issues including regulatory framework, personal experiences and economic conditions of the country were obstacles in the adoption of IFRS. The argument is placed on the fact that adoption of IFRS will result in the growth of the economy of the country (Ghedrovici et al., 2014). Foreign Direct Investment Laura (2011) has focused on the fact that to attract foreign investment in the country it is necessary that the accounting standards of the country must be according to international standards. IFRS standards are internationally practiced by most of the countries of the world and to encourage foreign direct investment it is essential that financial reporting is to be understood effectively by the investors as observed in the case of European Countries. Gordon et al. (2012) have tested the impact of adoption of IFRS on foreign direct investment by using a panel data of 1300 observations from 124 countries during a period of 1996-2009. The testing has emerged out the fact that the increase in FDI of developing countries was due to the inflows of foreign investment to developing countries that are opposite to developed countries. Conclusion It is observed through the past writings that adopting IFRS was not easy for the emerging countries but they practiced to adopt highly qualified standards for reporting to ensure that full information is disclosed to the users of financial statements including foreign investors. Culture, politics, education, the legal system, economic growth and FDI are the factors had affected the decisions of emerging countries regarding the adoption of IFRS for reporting. Research Methodology The research will be quantitative including hypotheses regarding the effects of adopting IFRS for financial reporting. Research will be focused on the common problems for emerging countries to adopt IFRS, and it will not specifically focus on a particular country. Size of the sample will be 80 countries from that 37 will be those that are not practicing IFRS. Data will be collected from the period 2004-2014. Dependent variable will be the adoption of IFRS in the period of 2004-2014. Macro-economic variables will also be considered that will identify the problems. Regression analysis will be used in the study to find out the impact of macroeconomic factors on adoption of IFRS in different countries. Additional focus will be made on Kingdom of Saudi Arabia because it follows its accounting standards while UAE practices US GAAP for reporting. Variables Dependent: IFRS adoption (Three categories will be mentioned (1) Fully adopted (2) Partly adopted (3) Not adopted) Independent variables: Macroeconomic Factors (culture, political, legal, educational, economic growth, foreign direct investment) The following regression analysis will be used: IFRS Adoption = β0 + β1 (Culture) + β2 (Political) + β3 (Legal) + β4 (Educational) + β5 (Economic growth) + β6 (Foreign direct investment) Method of Analysis The variables will be selected to anticipate relationship between them. Dependent variable will be adopting IFRS, and macroeconomic variables will be selected as independent variables. Relationship will be determined by employing regression and correlation on SPSS. Regression analysis will be helpful in the estimation of the relationship between the dependant and independent variables. Regression will be first used for the pointing the adoption of IFRS by developing countries. The relationship between independent variables and dependent variable will be emerged out through the outcomes of the analysis (Kleinbaum et al., 2013). Correlation is used to measure the relation between two securities. The range of the correlation is in between -1 to +1. Positive value shows that the security increases with an increase in other security or vice versa. Negative value represents that the value of security increases with a decrease in the value of another security or vice versa. If 0 appears, it suggests that there is no relationship between them, and the securities are random (Archdeacon, 1994). SPSS is an advanced statistical tool that allows different statistical methods for implementation in the proposed study. SPSS can be used for analyzing regression and correlation of the data. Data provided by the user is processed by SPSS, and the results could be obtained in few seconds. Graphical representation could also be obtained by using SPSS. Variables will be selected by the researcher for obtaining the result (Carver & Nash, 2011). Interpretation will be made after analysing the results of SPSS. The relationship will be discussed in the interpretation. Resources Ebscohost website will be used for searching academic readings for the requirement of research. There are other academic resource websites where the user could search academic general articles just entering the name of the topic. Data will be collected from World Development Indicators (WDI) (World Bank , 2014) and World Governance Indicators (WGI) (World Bank, 2013). Data will exclude binary variables of accounting standards and regulation scores. The articles provided through the website will be useful in finding the views of the past writings related to the research questions and problem statement of the research. Books will also be used for referencing that could get through online websites. Books will be helpful in referencing the points that were written by the author. Previous studies of the author could provide an idea about the reviews of the topic that is selected. Books are the secondary sources that are useful for finding relevant writings that could enhance the research contents. Time Plan Time plan for the conducting research is necessary that could identify the time estimated for each task of the research so that the research could be conducted in a systematic manner. Following the table indicates the time frame prepared for the research. Details March April May June July August September Task 1 Research Proposal Research Questions Research Aim and Objectives Scope of the Research Task 2 Searching of Academic Journals and Books Reading the articles and Books Finding Key Points Task 3 Selection of Variables SPSS Interpretation Analysis Results Conclusion Recommendations Final Submission The time plan shows that how much time will be given to three different tasks. First task will take two months time because it is important to make research proposal before conducting a research and its scope after making the proposal. Task 2 is time consuming because it is related to the readings and findings of academic sources that would be quite helpful in making effective research. Key points will be gathered from journal articles and books to determine the importance of research topic. Previous writings will influence the interest in conducting a research. Task 3 of the paper is most important part and will take a reasonable time to complete. SPSS will prove to be quite helpful in analysing and interpreting the results. Analysis will be made on the results of SPSS software. Results will be shown in the last portion of the paper. Concluding remarks will not consume high time because it will reflect the workings of the paper. Recommendations will be mentioned for the problem statement and answer of the research questions. The project will be submitted in September so that feedback could be obtained. Bibliography Akisik, O., 2013. Accounting Regulation, Financial Development, and Economic Growth. Emerging Markets Finance & Trade., 49(1), pp.33-67. Albu, N. & Albu, C.N., 2014. IFRS application in Central and South-Eastern European countries. Accounting & Management Information Systems / Contabilitate si Informatica de Gestiune., 13(2), pp.182-97. Ames, D., 2013. IFRS adoption and accounting quality: The case of South Africa. 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Critical Perspectives on Accounting. , 25(6), pp.511-28. Daske, H., Hail, L., Leuz, C. & Verdi, R., 2008. Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences. Journal of Accounting Research., 46(5), pp.1085-142. Dima, Ş.M., Dima, B., Megan, O. & Păiuşan, L., 2014. A discussion over IFRS adoption in Islamic countries. Accounting & Management Information Systems / Contabilitate si Informatica de Gestiune. , 13(1), pp.35-49. Fortin, H., Barros, A.C. & Cutler, K., 2010. Accounting for Growth in Latin America and the Caribbean: Improving Corporate Financial Reporting to Support Regional Economic Development. Illustrated ed. Washington DC: World Bank Publications. Ghedrovici, O., Mihaila, S., Erhan, L. & Birca, A., 2014. Transition to IFRS in the Republic of Moldova: general and practical aspects. Accounting & Management Information Systems / Contabilitate si Informatica de Gestiune., 13(2), pp.259-80. Gordon, L.A., Loeb, M.P. & Zhu, W., 2012. The impact of IFRS adoption on foreign direct investment. Journal of Accounting & Public Policy., 31(4), pp.374-98. Kılıç, M., Uyar, A. & Ataman, B., 2014. Preparedness for and perception of IFRS for SMEs: evidence from Turkey. Accounting & Management Information Systems / Contabilitate si Informatica de Gestiune. , 13(3), pp.492-519. Kleinbaum, D., Kupper, L., Nizam, A. & Rosenberg, E., 2013. Applied Regression Analysis and Other Multivariable Methods. 5th ed. Mason: Cengage Learning. Königsgruber, R., 2010. A political economy of accounting standard setting. Journal of Management & Governance. , 14(4), pp.277-95. Laura, M.-R., 2011. European Accounting Harmonization: Consequences of IFRS Adoption on Trade in Goods and Foreign Direct Investments. Emerging Markets Finance & Trade. , 47, pp.42-57. Mande, B., 2014. Emerging Nations and Financial Reporting Complex: A case for IFRS adoption in Nigeria. Journal of Finance, Accounting & Management. , 5(2), pp.1-23. Miniaoui, H. & Oyelere, P., 2013. Determinants of Internet Financial Reporting Practices: Evidence from the UAE. Review of Pacific Basin Financial Markets & Policies. , 16(4), p.1. Mirza, A.A., Holt, G. & Orrell, M., 2010. International Financial Reporting Standards (IFRS) Workbook and Guide: Practical insights, Case studies, Multiple-choice questions, Illustrations. unabridged ed. Hboken: John Wiley & Sons. Oxford Business Group, 2009. The Report: Oman 2009. Oxford: Oxford Business Group. Sarea, A.M. & Mohd Hanefah, H.M., 2013. The Need of Accounting Standards for Islamic Financial Institutions. International Management Review., 9(2), pp.50-59. Srivastava, A. & Gupta, P., 2014. Adoption and Implementation of IFRS in India: A Corporate Experience. IUP Journal of Accounting Research & Audit Practices., 13(4), pp.7-24. Tauringana, V. & Mangena, M., 2012. Accounting in Africa. Illustrated ed. Bingley: Emerald Group Publishing. Uddin, S. & Tsamenyi, M., 2011. Accounting in Asia. Bradford: Emerald Group Publishing. Vysotskaya, A. & Prokofieva, M., 2013. The Difficulties of Teaching IFRS in Russia. Issues in Accounting Education. , 28(2), pp.309-19. World Bank , 2014. World Development Indicators 2014. Washington, DC.: World Bank Publications. Zack, G.M., 2009. Fair Value Accounting Fraud: New Global Risks and Detection Techniques. Illustrated ed. Hoboken: John Wiley & Sons. Read More