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IFRS – Ten Years Later: The Perspectives In 2005 & 2015

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IFRS – Ten Years Later: The Perspectives In 2005 & 2015

Ray Ball

University of Chicago

February 26, 2016


A decade ago, the near-simultaneous adoption of IFRS in over one hundred countries could fairly have been described as a “brave new world” in financial reporting. Any systems innovation, and especially an innovation of such importance and magnitude, thrusts those involved (companies, users and accountants) into the unknown. There was good reason to expect success, based largely on widespread enthusiasm for international standards and, behind that, recognition of the strong forces of globalization. Nevertheless, there were risks involved and there was limited a priori evidence to guide the decision makers. A decade later, this is still the case. Globalization remains a potent economic and political force, and drives the demand for globalization in accounting. Nevertheless, most political and commercial activity remains local, so adoption of uniform rules does not by itself lead to uniform reporting behavior around the world. For many of the claimed benefits of IFRS adoption to be realized, uniform implementation would have to occur in a wide range of countries, which seems unlikely and requires more than simply creating regulatory enforcement mechanisms. Some evidence of actual outcomes from IFRS adoption has come to light but, as will be argued below, by and large the evidence to date is not very useful. So IFRS adoption is an innovation of historical proportions whose worldwide effects remain somewhat uncertain.

IFRS – Ten Years Later: The Perspectives In 2005 & 2015 – Introduction

The widespread adoption of International Financial reporting Standards (IFRS) a decade ago constitutes a truly historical innovation in financial reporting. All innovations are at least to some degree leaps of faith, and can only be based on prior expectations gleaned from evidence and from reasoning, so their outcomes never are completely as anticipated. In the case of IFRS, prior expectations were high. There were clear reasons and some prior evidence of a substantial demand for accounting globalization, so expectations were very high at the outset. On the other hand, there were some equally clear reasons and prior evidence to be cautious, and to expect limits to globalization in actual financial reporting practice, as distinct from standards.

Against this background, the Institute of Chartered Accountants in England and Wales (ICAEW) commissioned the 2015 PD Leake Lecture which forms the basis of this essay, the objective being to provide a ten-year retrospective on the “big bang” events of 2005. While the essay makes several observations on what can (and, perhaps more importantly, cannot) be learned from the research evidence, it is not a literature survey, of which there have been several already.1 Instead, the essay attempts to provide a perspective for assessing the outcomes from IFRS adoption, both at present and in future.

Then and Now: Summarizing the Perspectives in 2005 and 2015

The perspective in 2005 was that IFRS were generally perceived to be “high quality” standards, whatever that may be, but that they were incomplete. Ten years later, they remain viewed as of high quality and they are substantially more complete. There already was widespread adoption of IFRS in 2005, and that remains the case. In the meantime, exactly what “adoption” means in various regimes has been clarified to a large degree by a systematic review of adopters that was conducted by the IASB, described below. There remain a handful of holdout countries, most notably the United States, but the overall adoption record is impressive indeed.

A priori, there were many conjectured benefits from IFRS adoption, including more efficient cross-border transacting, enhanced informativeness of financial reports (increased “transparency”), greater inter-company comparability of financial data, better asset prices (“efficiency”), lower cost of capital, and balance sheets that facilitate more efficient contracting between companies and lenders. Whether these benefits have in fact materialized is difficult to say. For reasons discussed below, there is limited evidence to go on, and many of the studies are flawed or have been misconstrued.

At the outset, there also were many concerns. One concern was that what constitutes “adoption” might vary considerably across regimes, which might carve out or modify particular standards to accommodate domestic economic, political or legal issues, but this has not transpired. Adoption has been remarkably uniform.

Whether the newly-adopted standards would actually be implemented uniformly was a concern, and remains so. While globalization is a potent force, it has its limits. Political and economic forces are what create the incentives of the actors who determine what actually transpires in financial reporting (managers, auditors, boards, regulators, courts, analysts, press, educators) to push for implementation of adopted rules; the same forces determine – over a very long period – the complex institutional structure within which they act. But politics and commerce are in varying degrees local, as distinct from global, leading to incentives and institutional structures that are likely to differ across IFRS adopting countries and to implementation that is likely to differ as a consequence. Adoption of uniform rules does not by itself lead to uniform reporting behavior. For many of the claimed benefits of IFRS adoption to be realized, consistent implementation across regimes has to occur.


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