Adoption of International Financial Reporting Standard (IFRS) and its Consequences on Financial Reporting Quality: A Review

Abstract

Purpose: The broad adoption of IFRS around the world, aided by the IAS Regulation in 2002, created a critical foundation for numerous academic studies that examined various viewpoints on voluntary or obligatory IFRS adoption. As a result, this study aims to provide a comprehensive image of the advantages and disadvantages of IFRS implementation, as well as the implications for financial reporting quality. We highlight two financial reporting performance indices, Earning Management (EM) and Value Relevance (VR), to determine the possible effect of IFRS implementation on the quality of financial reporting activities. Methodology: This paper examines the literature on the implications of mandatory or voluntary implementation of IFRS and the impact on accounting reporting quality that is expected to result from the transition. This paper takes a retrospective view, focusing on accounting research published in leading accounting journals and selective working papers, intending to understand the discussion on IFRS adoption and accounting quality in literature. Findings: Review findings suggest that IFRS adoption is expected to deliver benefits in improving the consistency of financial statements, including value relevance and earnings control. According to published literature, IFRS adoption would be more effective if it is backed by good legal protections, qualified experts, as well as appropriate supervision and compliance. Moreover, empirical evidence has shown that the advantages of IFRS are not universally recognized across countries. Overall, this study suggests that accounting consistency cannot be measured solely in terms of IFRS implementation, whether optional or obligatory. Limitations: This study is solely based on the qualitative review of the prominently published literature and also limits its focus on the two primary financial reporting quality metrics which could be extended. Moreover, macro-level determinants of IFRS's impact on reporting quality could be analyzed. Practical Implications: This study adds to the current literature by including a much-needed summary overview of the significance of IFRS adoption in accounting quality metrics in a global context, which will help researchers explore the IFRS framework further. Originality: This paper presented the measures used by studies to determine accounting reporting quality, summarizes the factors that contribute to accounting quality, and contributes to improving the quality assessment of financial reporting information.