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The adoption of IFRS, comparability of financial statements and foreign investors’ ownership

Aria Farah Mita (Department of Accounting, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)
Sidharta Utama (Department of Accounting, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)
Fitriany (Department of Accounting, Faculty of Economics and Business, Universitas Indonesia, Depok, Indonesia)
Etty R. Wulandari (Indonesia Financial Services Authority, Jakarta, Indonesia)

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 6 August 2018

Issue publication date: 6 August 2018

2933

Abstract

Purpose

The purpose of this paper is to examine the indirect effect of the International Financial Reporting Standard (IFRS) adoption in increasing the foreign investors’ ownership through the improvement of comparability of financial statements.

Design/methodology/approach

This study employs listed companies in 18 countries across Europe, Asia, Africa, and Australia with an observation period from 2003 to 2012. Unlike previous studies, this study uses a continuous variable to measure the level of IFRS adoption which is measured at the country level. This study includes countries that do not fully adopt the IFRS, partially adopt, make some delays in adoption or some modifications to IFRS.

Findings

The results show that the level of IFRS adoption has a positive effect on the comparability of financial statements. The level of IFRS adoption indirectly increases the foreign investors’ ownership through the comparability of financial statements. These results are consistent with proponents for IFRS adoption which argue that the adoption improves the comparability of financial statements that in turn attracts greater cross-border investment.

Research limitations/implications

The findings of this study need to be interpreted with caution due to limitations. Although this research provides a detail measurement on the IFRS adoption, this study only looks at three general items of difference in adopting the IFRS. “Differences in text” used in this research has not quantified detail differences for each adopted standards. Therefore, future research can use a more in-depth measurement of the IFRS adoption level that considers differences or exceptions of accounting treatment.

Practical implications

The results suggest that the standards setting bodies’ (IASB) strategy on promoting the IFRS and objectives to develop a standard that leads to increase the financial statement comparability have been achieved. This research shows that the IFRS adoption plays a role in ensuring the financial statement quality in terms of its comparability. It implies that the standard-setting bodies in every country, as one of the responsible institutions regulating the business environment, can be entrusted with a greater role in order to ensure better financial information quality.

Originality/value

This study introduces novel measurement that is more detailed in measuring the IFRS adoption level instead of applying the discrete variable approach (“adopt” and “not adopt”) performed by previous studies (DeFond et al., 2011; Tan et al., 2011; Lee and Fargher, 2010). This study does not only cover some EU countries but also covers some countries in Asia, Africa, and Australia, so it can be better at capturing the variation of the IFRS adoption outside the EU. This broader coverage will show the consistency of the benefits of IFRS adoption. This study is most closely related to that of DeFond et al. (2011). This research extends DeFond’s study with some important differences as follows: it uses output-based and firm-specific measurement of the comparability from DeFranco et al. (2011), which is deemed to be more appropriate because it represents the qualitative characteristics of financial statements from a user’s perspective, i.e., investors, who evaluate historical performance and predict future performance in their investment decisions; it uses a broader scope of institutional investors; and it covers IFRS adoption in countries outside the EU for a longer observation period.

Keywords

Citation

Mita, A.F., Utama, S., Fitriany, F. and Wulandari, E.R. (2018), "The adoption of IFRS, comparability of financial statements and foreign investors’ ownership", Asian Review of Accounting, Vol. 26 No. 3, pp. 391-411. https://doi.org/10.1108/ARA-04-2017-0064

Publisher

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Emerald Publishing Limited

Copyright © 2018, Emerald Publishing Limited

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