why do countries adopt ifrs?

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  • 8/13/2019 Why Do Countries Adopt IFRS?

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    Why do countries adoptInternational Financial Reporting Standards?

    International Financial Reporting Standards (IFRS) are the accounting standardsand interpretations that are published by the International Accounting Standards Board.

    The IFRS development was the duty of the International Accounting Standards Board(IASB).It was created in 1973 by professional accountancy bodies of nine countries

    (Germany, Australia, Canada, USA, France, Japan, Mexico, Netherlands and UnitedKingdom) with the purpose of issuing accounting standards to be used for preparing andpresenting financial statements and to promote their acceptance and application in theworld.

    This article develop hypotheses on why countries choose to adopt IFRS.

    1. The economic theory of networks is intended to capture direct pecuniary benefits as

    they ase usually conceived in economic models of networks.The decision to adopt IFRS can be analyzed as a decision to adopt a product with networkeffects. Network theory suggests that there are generally two factors to consider inadopting network-dependent products:

    The direct value is the autarky value of the product, while The network-related value is called the syncronization value. The synchronization

    value of a product is also known as the value from network effects.

    2. Applying the economic theory of networks to country-level IFRS adoption Acountrys decision to adopt IFRS can be expressed as follows:

    The potential direct benefit arises from economic and political factors:

    The economic value of local GAAP 1 refers explicity

    to the ability of extant accounting standards to facilitate

    the efficient allocation of capital in an economy.

    The political value of local GAAP refers to political

    benefits from having local authority over standard setting.

    1 GAAP = Generally accepted accounting principles

    Grouping together theeconomic benefits ofIFRS with the economic

    benefits of local GAAP,we can rewrite equationas follows:

    Autarky Value of IFRS + Synchronization Value of IFRS > Value of Local GAAP

    Net Economic Value o IFRS + Net Political Value o IFRS + S nchronization Value o IFRS > 0

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    In this equation we note that a country can adopt IFRS even if the economic benefits fromsuch standards are inferior to those from locally developed GAAP.

    Why do countries adopt IFRS?

    In the case of the IFRS adoption decision by a country, the authors argue the direct benefitsare reprezented by:

    1. The net economic value of IFRS . The net economic value of IFRS to a country arisesout of two factors:

    The value from having a shared body of accounting standards . IFRS aredeveloped specifically for wide international use. Supporters of IFRS argue that byadopting a common body of international standards, countries can expect to lowerthe cost of information processing and auditing to capital market participants. If theadoption of IFRS is expected to lower information costs to capital markets, weexpect countries more depended on foreign capital and trade to value theseeconomic benefits more.

    The relative quality of local governance institutions. The relative quality of localaccounting standards is an important determinated in the decision to adopt IFRS.Local accounting standards are part of a complex system of governance institutionsthat include auditor training, auditing standards, enforcement, the protection ofproperty rights, government corruption and the role of the press.

    Countries where local governance instittions are not well developed, are likely to sufferfrom corrupt, slow-moving or ineffectual governments that are resistant to or incapable ofchange. Countries with week institutions are failed states, where the adoption of IFRS isunlikely to be of any interest or consequence.

    2. The net political value of IFRS over local standards. If a country chooses to adoptIFRS, it must either engage in the political process to try to shape the nature of the

    international standards, or cede the standard setting role to other political players. It isreasonable to expect that more powerful countries are less likely to adopt IFRS, while lesspowerful countries are more likely to adopt IFRS.

    With respect to culture politcs , the perception of IFRS as a European institution is likely toaffect the international standards acceptance in a country. In countries that are culturallymore accepting of European institutions, international accounting standards can be morepolitically feasible. In conclusion, countries that are culturally closer to Europe are morelikely to adopt IFRS.

    3. Synchronization value of IFRS. Speaking about the synchronization value of IFRS it

    refers to key idea in network theory: a network-dependent product becomes moreappealing as more countries adopt it.

    Economic network theory predicts that in addition to network benefits (that issynchronization value), a product with network effects can be adopted due to its directbenefits (that is autarky value). In the case of the IFRS adoption decision by a country theauthors argue the direct benefits are represented by both the net economic and netpolitical value of IFRS over local standards.