A Review of the Literature on IFRS Adoption From the Perspective of the Value Relevance

Introduction

By catering financial information of the reporting entity, financial reporting contributes to the decision-making of existing or potential resource providers of the entity (IASB, 2010).¹ This is the general objective of financial reporting. By analyzing the literature on objectives of financial reporting, Zeff (2013) defines two major approaches: the functionalist approach describes objectives as intention-based and the representationalist approach defines objectives as measurement-based. In other words, the former seeks any information to meet the intended actions of intended users while the latter is just about providing information about identified variables. Among all recognition criteria of FASB (1984), relevance falls under the functionalist approach as financial information is relevant if it plays a significant role in decision-making, and reliability belongs to the representationalist approach since financial information is reliable ‘if it represents what it purports to represent’ (Barth, Beaver, & Landsman, 2001, p. 80). Bischof and Daske (2016) and Nguyen and Molinari (2013) illustrate that i) relevance assists users of financial statements in evaluating past, present or future transactions through predictive values, and ii) reliability depicts completeness and faithful representation of accounting information as well as the non-existence of any material error and bias.

As discussed above, more reliable and relevant accounting information eventually results in higher financial reporting quality. A rich body of research analyses several financial reporting quality measures belonging to different legal families which are majorly shaped by commercial law systems. La Porta et al. (1998) underscore that English-originated common law and Roman-originated civil law create today’s commercial laws. Although the groundbreaking study of La Porta et al. (1998) provide a comprehensive and very detailed picture regarding these law families, it can be summarized as follows: investor protection is higher in common law countries than in civil law countries.² Based on this classification, the literature extensively documents that the financial reporting quality in common law countries is superior to the financial reporting quality in code law countries (Knauer & Wöhrmann, 2016). In other words, accounting information is more reliable and relevant in common law countries. This evidence indicates that accounting standards in different law families may be improved in order to provide a higher level of financial reporting quality. The convergence of accounting standards from the inferior one to the superior one came into the scene at the beginning of the 1970s: International Accounting Standards Committee was established by professional accounting authorities of ten countries in order to adopt a single set of accounting standards, which is named International Accounting Standards (IAS, henceforth), for cross-border listings.³ The Committee published the first international conceptual framework in 1989 and the initial comprehensive set of thirty-one IAS in 1990; afterwards, the convergence process fastened. In 2002, the European Parliament enacted the Regulation which requires all listed companies in the European Union (EU, henceforth) to prepare their consolidated financial statements based on International Financial Reporting Standards (IFRS, henceforth) as of the beginning of 2005.⁴ This decision of the EU significantly accelerated the way to a single set of accounting standards: by following the EU, several countries including Australia, Hong Kong, New Zealand, South Africa, and Turkey implemented IFRS-based financial reporting in 2005. As of the end of the third quarter of 2018, IFRS-based financial reporting is mandatory in 144 countries.