The effects of mandatory IFRS adoption: A review of evidence based on accounting standard setting criteria

The present article attempts to provide a broad picture regarding the consequences of the mandatory adoption of the International Financial Reporting Standards (IFRS) around the world by reviewing extant empirical evidence relating to four comprehensive accounting standard setting criteria: decision usefulness, reduction of information asymmetry, economic consequences of standards and political aspects of standard. The review reveals that mixed evidence exists regarding the decision usefulness of accounting numbers under the IFRS. The majority of the extant studies reviewed find that the value relevance of accounting numbers and financial reporting comparability is enhanced following the adoption of the IFRS. However, mixed evidence exists regarding the effect of IFRS adoption on earnings management, timely loss recognition and other properties of accounting quality. The majority of the extant empirical studies reviewed find a reduction in information asymmetry (enhanced analysts forecast accuracy, con- sensus and other properties). Generally, the extant studies reviewed provide evidence regarding favourable economic consequences (lower cost of equity and increasing foreign investment) under the IFRS regime. Certain studies provide evidence regarding the role of political pressures and lobbying activities in the development of a number of standards by the International Accounting Standards Board. A number of studies find that the favourable consequences following the adoption of the IFRS regime dependent on the strength of reporting incentives for a firm and the strength of a country’s enforcement system. In the absence of sufficient evidence regarding the consequences of IFRS adoption in developing countries and the significant differences in the institutional features of such countries, the aforementioned conclusions are less likely to be generalizable to developing countries. The conclusion of the present study is likely to be useful for international and national authority bodies and the users of financial reports. The conclusions also provide significant suggestions for further research regarding the consequences of IFRS adoption.