Finance

Since the beginning of the 1970’s and the internationalization of the exchanges, it became more and more important for financial statements users (investors, companies, stakeholders etc.) to suppress accounting measurement differences between countries.

Globalization obliged companies to seek investors outside their respective national markets. Nevertheless, they had to face several differences such as national accounting, disclosure or auditing; obviously it was difficult for them to analyze information. Differences were creating and still create an asymmetry in the information between companies and foreign investors. It is difficult to trust, invest or follow an entity when you do not understand the financial information. It is more cost, more time but also less confidence.

In an effort of harmonization, nine countries created the International Accounting Standards Committee (IASC) in 1973. Their goal was to develop International Accounting Standards (IAS) and promoting the use and application of these standards. The IASC was replaced in 2001 by the International Accounting Standard Board (IASB) and changed the name of IAS into IFRS: International Financial Reporting Standards.

In 2005, the European Union (EU) obliged all of the companies that published consolidated accounts (over 6000 ) to use the IFRS for reporting. This is a major step toward the acceptance of the IFRS. Indeed, the EU is composed by several countries, several languages and so several accounting standards. This measure allowed an increase of the transactions and an improvement of these transactions inside the union because of their relevance, comparability, understanding and reliability. Along with the EU, some countries such as Australia and South Africa also adopted the IFRS for reporting the same year.

The efforts to reduce international accounting disparities seem pretty obvious according to the benefits companies could gain. However, it also exist some limits to this change.

In order to answer the question set we will divide our work in two main parts. In the first one we will discuss about the positive impacts of IFRS on the capital market and the financial statement users. Then, in the second part, we will highlight the limits of the IFRS’ application.

I/ Advantages of adopting IFRS

The possible benefits using IFRS can be unimaginable. Indeed, the use of a simple set of high standard quality by every company in the world will allow numerous advantages. In this part of the report, we will try to cite and describe each one.

First of all and, IFRS allow the most important thing: a greater transparency and comparability. Having the same standards throughout the world allow financial statement users a better understanding. A difference of standards can slow down investors to put their money into the firm. Indeed, reading a report that they cannot fully understand will be a huge brake. Therefore, if every company uses the same norms, the same language, it will decrease the asymmetry between each actor.

IFRS seem to have an informational content more important than the national GAAP (Generally accepted accounting principles) . In this study (in French in the text), the authors give the example of companies in France and find out that financial information have better qualities. Indeed, the IFRS give a better explanation of the current situation of the company and are also more representative of what happen in the market values. Another study from Kinnunen et al. (2000) focuses on both frames of reference proves that it can be relevant. The national market; Finnish, and the international market are analyzed. The first one concerns the national investors while the second one concerns the foreign investors. They demonstrate that both can be acceptable but also prove that there is a superiority of the results obtained with the IFRS. In another report , the authors also mention different examples of studies such as Weissenberger et al. (2004) concerning German firms opting for IFRS / US Gaap or even Bartov et al. (2005) who prove that IFRS have higher value relevance. Beuselinck et al. (2009), claim that IFRS adoption “reveals new firm-specific information” and that it is also reducing “the surprise in future disclosures”. Horton et al. (2012) conclude by saying that IFRS improved information environment “by increasing both information quality and comparability”.

A second advantage of IFRS would be the cost reduction and the diminution of geographic boundaries. Indeed to understand something they do not know; stakeholders have to spend money to translate it in their own accounting model. It represents a money loss but also a time loss . For example, if a big company has a subsidiary that prepares financial statement regardless of the IFRS, this company will have to spend money to translate it. On the opposite side, if the subsidiary prepares IFRS-based financial statements, it will lower financial reporting costs.

Moreover, translating could affect the quality information due to the language and accounting differences. Financial statement users can misunderstand or confuse the information. A simple and unique set of high standard quality would avoid this kind of problems. That will also allow companies to “centralize accounting training and could easily set up centralized financial support centers” . Indeed, it has a cost in money and time to train people. A better way to be efficient would be to centralize all trainings.

Beside the cost reduction, it also erases geographic boundaries between the countries which allow a better transfer of knowledge and skills around the globe. Yu, G. (2010) concludes his research pointing out “ that recent efforts to harmonize accounting standards have promoted cross-border investments not only by reducing the information processing cost of public financial statements, but also by reducing the effect of other private information barriers.” In other words, a worldwide accounting standards will give more transparency, less costs and better information for strategic and investment decision making and therefore increase the cross-border investments. In a global world like today, this last point is important and could allow in the developing countries to receive more foreign investments using IFRS. Indeed, Gordon et al. (2012) studied 124 countries during the 1996-2009 periods and demonstrate that IFRS have a direct impact on foreign investments.

As another advantage, we can mention the fact that IFRS will facilitate cross-borders mergers and acquisitions. Francis et al. (2012) based their study on this subject. They analyzed data from 32 countries between 1998 and 2004. They found out that the volume of M&A between similar accounting standards companies was higher. They demonstrate that “high

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