IFRS and Economic Management

the final section involves literature that discuss the determinants of IFRS adoption within a jurisdiction, the impact of accounting harmonization across borders, as well as the effect of IFRS adoption on income tax.

Both of these demonstrate the relationship between government and corporations and to some extent general investors. Though not specifically covered in this literature review, it’s also important to remember that the government issues debt securities, which mean government, would be affected by IFRS implementation when acting in the marketplace, albeit at the level of government investors not individual investors. Both taxation and securities fall into the realm of self-interest which may lead the government to work against their principals or constituencies. The multi-agency relationship becomes even more complex and mired if you consider nation states which operate as communist regimes full of corruption, such as mentioned in the first section of chapter two. This will be covered in greater detail in chapter three as we look specifically at Russia and China which true investor protections can’t be assumed. Most of the literature reviewed in this section however works to help reinforce the existence of the multi-agent relationship and the validity of my points.

31 | P a g e The work of (Tarca, 2012) perhaps more than any other researcher, helps to support the topics presented in this thesis. While not one of the initial resources when researching this topic, overlap eventually brought her research to the forefront. Tarca, an academic fellow researcher at the IFRS institute, undertook an extensive empirical analysis of the arguments for accounting standardization, via IFRS implementation and provided a thorough summary appropriate for this paper. Among Tarca’s primary determinations was that IFRS improve efficiency in capital markets, and promote cross border trade. In looking at the infrastructure that supports IFRS, the researcher states that capacity and institutional incentives are key to successful implementation. Furthermore, a strong framework that encompasses legal protection, adequate monitoring and knowledgeable representation is vital. Of interest is the fact that Tarca identifies that whereas IFRS benefits can easily be presented for firms in developing countries, and developed nations the benefits tend to be for the market or nation as a whole. As a result, the benefits to firms may vary significantly at the national level. Tarca also suggests that global benefits from the use of IFRS are beginning to emerge. This study not only coincides with the topics in this paper but unwittingly presents data in a manner which clearly presents the existence of a multi-agency relationship through the deep interconnectedness of the investors, companies and government.

The research of (Holthausen, 2008) studied the impact of accounting standards on financial reporting outcomes. By analyzing recent legal literature identified that measures of both public enforcement and private enforcement are closely correlated with capital market outcomes and therefore enforcement has a significant effect on how adoption affects financial reporting, so much so that enforcement varies widely across countries and regions. Holthausen poses the question as to whether or not regulators will offer their own interpretations and guidance on IFRS which will in turn influence differences in the standards across countries. In short he makes clear that, financial reporting is an endogenous outcome of political and market forces within a country.

32 | P a g e The determinants for the adoption of IFRS in developing countries were researched by (Zehri and Chouaibi, 2013). Their objective was to identify the factors that clarify the choice to apply IFRS in developing countries. They sampled 74 developing countries and their empirical results showed the highest tendency towards adoption came from countries experiencing high economic growth, utilizing a legal system of common-law and possessing an advanced education system (tertiary education). Other factors that were analyzed included culture, the existence of capital markets, the political system and how globalized the country. However, they ultimately determined that the institutional environment and macroeconomic data for the primary influences on IFRS adoption in developing countries. These results support other research that suggests the driving factors behind IFRS adoption differs between developing and developed countries

(De George, 2013) thoroughly examined the impact of accounting harmonization on cross-border capital markets. The study included approximate 14,000 firms from more than 35 countries with data spanning a decade. De George carefully controlled for common macro-economic exposures and bilateral trade in order to identify incidences of extreme negative market returns cost to local non-adopting countries as a result of cross-border IFRS adopter interactions. The researcher demonstrated that volatility of liquidity shocks, beyond what economic expectations. De George’s research indicates that liquidity shocks that originate from cross border countries inevitably magnify in intensity as they reach local markets. De George states that while prior studies have shown the common benefits of IFRS adoption in broadening access to foreign capital through comparability, familiarity and reductions in information asymmetry, the increased foreign investment opens up domestic markets to the threat of cross-border contagion, (De George, 2013) . This impact, which De George suggests can outweigh the benefits provided by IFRS adoption, is something substantial for standard setters and decision-makers within IFRS adopting jurisdiction to consider.

(Wendt, et al., 2005) inspected the influence between financial and tax accounting following the integration of mandatory IFRS implementation in 2002. Wendt, et al. allude to the fact that compared GAAP advance of IFRS as a tax base derives from the creation of a common use tax system in the EU. That said, not all IFRS standards were adopted for the purposes of taxation. Wendt, C., et al. points out that only those

33 | P a g e standards convenient for taxation purposes and applicable under the realization principal were adopted for taxation purposes. Wendt, C., et al. states unequivocally that utilizing a common tax base will help reduce compliance costs which stem from 25 different tax bases throughout the EU (Wendt, C., et al., 2005). The researchers identify such points as depreciation, evaluation of inventories, and provisions for liabilities has some of the deduction expenses that would be affected. However, as they point out, the nominal tax rate is the most significant and these considerable dispersions of tax burden would not alter significantly. They postulate that simply harmonizing tax accounting rules cannot alleviate the differences in corporate tax burden. Such results would require a reduction in the nominal tax rate while leaving the effective tax burdens unchanged.

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