A review of the IFRS adoption literature

TLDR: The authors reviewed the literature on the effects of International Financial Reporting Standards (IFRS) adoption and provided a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing.

Abstract: This paper reviews the literature on the effects of International Financial Reporting Standards (IFRS) adoption. It aims to provide a cohesive picture of empirical archival literature on how IFRS adoption affects: financial reporting quality, capital markets, corporate decision making, stewardship and governance, debt contracting, and auditing. In addition, we also present discussion of studies that focus on specific attributes of IFRS, and also provide detailed discussion of research design choices and empirical issues researchers face when evaluating IFRS adoption effects. We broadly summarize the development of the IFRS literature as follows: The majority of early studies paint IFRS as bringing significant benefits to adopting firms and countries in terms of (i) improved transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better comparability of financial reports, and (v) increased following by foreign analysts. However, these documented benefits tended to vary significantly across firms and countries. More recent studies now attribute at least some of the earlier documented benefits to factors other than adoption of new accounting standards per se, such as enforcement changes. Other recent studies examining the effects of IFRS on the inclusion of accounting numbers in formal contracts point out that IFRS has lowered the contractibility of accounting numbers. Finally, we observe substantial variation in empirical designs across papers which makes it difficult to reconcile differences in their conclusions.

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TABLE 4 - IFRS adoption dates by country between 2001 and 2013

Table 3: Most commonly used data sources

Full text

Emmanuel T. De George, Xi Li and Lakshmanan
Shivakumar
A review of the IFRS adoption literature
Article (Accepted version)
(Refereed)
Original citation:
De George, Emmanuel T., Li, Xi and Shivakumar, Lakshmanan (2016) A review of the IFRS
adoption literature. Review of Accounting Studies, 21 (3). pp. 898-1004. ISSN 1380-6653
DOI: 10.1007/s11142-016-9363-1
© 2016 Springer
This version available at: http://eprints.lse.ac.uk/67599/
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A review of the IFRS adoption literature
Emmanuel T. De George
London Business School
Regent’s Park
London, NW1 4SA
United Kingdom
edegeorge@london.edu
Xi Li
Fox School of Business, Temple University
Philadelphia, PA 19122
London School of Economics and Political Science
Houghton Street, London WC2A 2AE
xili@temple.edu
Lakshmanan Shivakumar
London Business School
Regent’s Park
London, NW1 4SA
United Kingdom
lshivakumar@london.edu
May, 2016
Forthcoming, Review of Accounting Studies
We thank Mary Barth, Ulf Bruggeman, Elizabeth Gordon, Martin Glaum, Luzi Hail (discussant),
Sudarshan Jayaraman, Bjorn Jorgensen, Alon Kalay, Peter Pope, Karthik Ramanna, Nemit Shroff,
Brian Singleton-Green, Stephen Taylor, Rodrigo Verdi, Martin Walker, Holly Yang, Stephen Zeff,
participants at the 2015 Review of Accounting Studies Conference, and an anonymous reviewer for
their comments and suggestions. We also thank Han-Up Park for research assistance.

1
1. Introduction
This year marks the 11
th
anniversary since the European Union (EU) mandated International
Financial Reporting Standards (IFRS) for all companies listed on the main European stock exchanges.
Since its adoption by the EU, IFRS has had its share of supporters and critics. One of its greatest
successes has been its global adoption, with tens of thousands of firms in over 100 countries currently
reporting under, or at least closely linking their local accounting standards to, IFRS. The greatest
criticisms leveled against IFRS have come from practitioners, who have argued against the fair value
requirements and the transparency and governance structure of the board that issues the standards.
1
In
this paper, we review the academic literature related to IFRS adoption, with a primary focus on
understanding its effects and consequences.
Although the 2005 adoption of IFRS was a major regulatory transition affecting several tens
of thousands of companies worldwide, its costs and benefits were initially unclear. The debates over
the consequences of IFRS adoption at the time were largely constrained to conjectural statements due
to lack of data (e.g., Ball 2006; Schipper 2003). Now, with the hindsight of over 10 years of IFRS
reporting, we review the academic literature to compile and evaluate the available empirical evidence
on the effects of IFRS adoption.
The simultaneous mandatory adoption of IFRS by a large number of countries has provided
empirical researchers with an unprecedented experiment to study the consequences of accounting
standard setting and how these consequences vary across institutional and legal regimes. However, its
effects on academic research have gone beyond simply providing a useful context for researchers. It
has also kindled interest in cross-country accounting research and provided an opportunity for greater
involvement of researchers from across the globe. Not surprisingly, a vast literature focusing on IFRS
adoption has emerged.
If we had to summarize the development of the IFRS literature, the majority of early studies
paint IFRS as significantly benefiting adopting firms and countries in terms of (i) improved
transparency, (ii) lower costs of capital, (iii) improved cross-country investments, (iv) better
comparability of financial reports, and (v) increased following by foreign analysts. Although many of
these studies include caveats about drawing strong inferences about the role of IFRS in causing the
observed outcomes, these tend to be minimal and often ignored by subsequent research.
2
These
studies also typically do not clarify whether the terms “IFRS mandate” or “IFRS adoption” refer
simply to the act of adopting new standards or include concurrent improvements in the enforcement of
1
Stojilkovic (2011) and Jarolim and Oppinger (2012) discuss these criticisms. See also Financial Director,
“Long Road Ahead as IASB remedies governance concerns,” April 14, 2014.
2
The initial evidence on IFRS effects could also be affected by the publication bias prevalent in social science
research, whereby significant results tend to be published, as opposed to studies that fail to reject the null.

2
financial reports. More recent studies attempt to narrow down the sources of the observed benefits of
IFRS adoption and conclude that at least some of the earlier documented benefits are not driven by the
adoption of new accounting standards per se. Other recent studies examining the effects of IFRS on
the inclusion of accounting numbers in formal contracts (which we refer to as the contracting role of
accounting) point out that IFRS has lowered the contractibility of accounting numbers.
3
Given the rather limited evidence indicating that IFRS conveys unambiguous benefits to
adopters and financial statement users, the widespread adoption by many countries over a short period
is somewhat surprising. One possible explanation, identified by Ramanna and Sletten (2014), is that
IFRS adoption is self-reinforcing. The perceived benefits, in terms of lowering cross-border
transaction costs, increase for a given country as more jurisdictions with economic ties to that country
adopt IFRS. Ramanna and Sletten (2014) empirically show that their hypothesis partly explains the
prevalence of IFRS adoption.
A variety of other reviews of IFRS-related research have been published. Soderstrom and Sun
(2007) provide an early review of studies focusing mainly on the voluntary adoption of International
Accounting Standards
4
(IAS) or reconciliations between IAS and US generally accepted accounting
principles (GAAP). Hail, Leuz, and Wysocki (2010) review IFRS studies to determine the
implications of US firms potentially switching to IFRS. In particular, they study the effects of
potential IFRS adoption by the US on reporting quality, costs, and the capital market. Pope and
McLeay (2011) review the empirical IFRS studies emerging from the INTACCT research program
and discuss implementation of IFRS in the EU. Bruggemann, Hitz, and Sellhorn (2013) provide an
overview of the various IFRS studies without considering the details of individual studies. A review
by the financial reporting faculty at the Institute of Chartered Accountants in England and Wales
(ICAEW) summarizes the empirical literature related to the effects of mandatory IFRS adoption from
the perspective of EU countries (ICAEW 2015). This review also discusses the background of IFRS
legislation. Ahmed, Chalmers, and Khlif (2013) conduct a meta-analysis of the IFRS literature,
drawing from a wide range of journals and working papers. However, their analysis is limited to
studies examining the effects of IFRS adoption on value relevance, discretionary accruals, and analyst
forecasts. Their meta-analysis mainly focuses on quantifying the adoption effects documented in prior
studies. More recently, Leuz and Wysocki (2016) review the financial reporting regulation literature,
drawing on both US and international evidence. Although their focus is not on IFRS per se but more
3
Throughout this review, we distinguish between the contracting and valuation roles of accounting numbers,
with the former referring to the use of accounting numbers within formal contracts (such as in debt covenants)
and the latter referring to the use of accounting numbers for valuation decisions. We classify the effects of
accounting on the initiation and terms of contracts under the valuation role.
4
IAS were issued by the International Accounting Standards Committee (IASC) until 2000. In 2001, the IASC
was succeeded by the International Accounting Standards Board (IASB), which adopted the earlier-issued IAS
and started issuing new standards as IFRS. Throughout this review, we use the acronyms IFRS and IAS
interchangeably to describe IFRS.

3
broadly on the economic effects of disclosure regulation and reporting standards, they provide a brief
synthesis of the empirical findings associated with IFRS adoption. In particular, they discuss the
empirical challenges that researchers face when employing the IFRS setting and highlight the
limitations of drawing causal inferences in regulation research more generally.
In contrast to the preceding reviews, our review is not directed at a specific IFRS-related
question or issue or restricted to a specific geography. It is more comprehensive and provides a
relatively broad coverage of IFRS research topics. We let the data dictate our selection of IFRS-
related topics. We cover all of the topics addressed by IFRS-adoption-related papers published in the
following five accounting journals between 1999 and 2015: Contemporary Accounting Research,
Journal of Accounting and Economics, Journal of Accounting Research, Review of Accounting
Studies, and The Accounting Review.
5
We identify IFRS articles published in these journals by
searching for the keywords “International Accounting Standards,” “IAS,” or “IFRS” in each title and
text. The topics identified from this process include the effects of IFRS adoption on (i) financial
reporting, (ii) capital market outcomes, (iii) corporate decision-making, (iv) stewardship and
governance, (v) debt contracting, and (vi) auditing. We exclude one study pertaining to taxes due to
the limited expertise of authors in that area.
6
The review covers all other papers published in the five
aforementioned accounting journals. Although it also covers IFRS papers published in other journals,
its coverage of these other journals is not intended to be complete.
Although our primary focus is on studies based on mandatory adoption, we also review and
incorporate evidence from early studies of voluntary adoption. In addition, we link findings from
IFRS research to the theoretical and empirical findings reported in other contexts, typically in the US,
to help readers appreciate the relevance of these studies and to provide insights into how inferences
vary across contexts. In addition to published articles, we incorporate several working papers for
certain topics that lack a large body of published works.
Our objective is to provide a cohesive picture of the empirical archival literature related to
IFRS adoption. With this in mind, we emphasize similarities and differences across the various
studies in terms of not only their findings but also their hypothesis development, methodological
choices, and samples. In synthesizing the empirical findings, we outline the theoretical underpinnings
and arguments linking IFRS adoption to the given economic or reporting outcomes or both. In
addition, we discuss studies that focus on specific attributes of IFRS and provide a detailed discussion
of the research design choices and empirical issues researchers face in the IFRS setting.
5
Our search period starts in 1999, as we find no published papers related to IAS in these journals before then.
6
Chan, Lin, and Mo (2010) examine the effect of IFRS adoption on tax non-compliance.

Frequently asked questions

Q1. What are the contributions mentioned in the paper "A review of the ifrs adoption literature" ?

Copyright © and Moral Rights for the papers on this site are retained by the individual authors and/or other copyright owners. You may not engage in further distribution of the material or use it for any profit-making activities or any commercial gain. 

Q2. What are the future works mentioned in the paper "A review of the ifrs adoption literature" ?

A fruitful avenue for future research is to evaluate whether and how each attribute of IFRS affects valuation, stewardship, and contracting roles differently. 

Q3. What are the two mechanisms used to link quality of accounting information with cost of capital?

Two mechanisms are generally employed to link quality of accounting information withliquidity and cost of capital: estimation risk and information asymmetry, both of which are oftenreferred to as “information risk.” 

Q4. What is the advantage of the comparability measure?

A clear advantage of this measure is that it does not rely on stock returns as a lone proxy for economic outcomes and allows a variety of accounting items to be considered simultaneously for comparability. 

Q5. Why are the authors careful not to make any causal claim about the relationship between IAS and US?

49 Due to the endogenous feature of firms’ voluntary adoption decision, the authors are careful not to make any causal claim about the relationship between IAS/US GAAP adoption and changes in earnings performance sensitivity. 

Q6. What are the key drivers of the differences between financial numbers reported under Chinese GAAP and those reported?

Based on a sample of 103 Chinese B-share companies from 1999 to 2004, they document that the incentives of audit committees, along with regulatory enforcement, are the key drivers narrowing the differences between financial numbers reported under Chinese GAAP and those reported under Chinese equivalents of IFRS. 

Q7. What is the effect of greater information content on investors’ responses to earnings announcements?

greater information content increases the heterogeneity in investors’ responses to earnings news, leading to increased trading around earnings announcements. 

Q8. What are the main reasons for the positive association between IFRS reconciliation numbers and earnings announcement returns?

Horton and Serafeim (2010) also report a positive association between IFRS reconciliation numbers and earnings announcement returns and document that this relationship is primarily driven by adjustments pertaining to goodwill and deferred taxes. 

Q9. How did the authors find that the firms that previously used the amortized cost model under local?

Using a sample of 172 European real estate firms during 2001–2008, they adopt a difference-in-differences design and find that the firms that previously used the amortized cost model under local GAAP exhibited greater declines in audit fees when forced to adopt fair value accounting under IFRS relative to the firms that were already using the fair value model under local GAAP. 

Q10. How do they link the increase in accounting-based RPE to greater earnings comparability?

They also link the increase in accounting-based RPE to greater earnings comparability by documenting that the effect is stronger among firms with greater foreign sales and those with fewer comparable domestic peers. 

Q11. What would have allowed banks to use reclassification to avoid recognizing unrealized losses?

This would have allowed banks to use reclassification to switch away from fair value accounting for assets that decreased in value during the financial crisis and avoid recognizing unrealized losses.