Microsoft Word - 5884-21149-1-SM _1_-writer2-new.doc Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 216 The Compliance of Methods of Implementation of IFRS: Study of the Impact on the Relevance of Accounting Information Mohamed Rachid Ouezzani Departement of Management, National School Of trade and Management of Tangier,Morocco Youssef Alami Departement of Management National School Of trade and Management of Tangier, Morocco Received: June 28, 2014 Accepted: Oct. 4, 2014 Published: December 1, 2014 doi:10.5296/ajfa.v6i2.5884 URL: http://dx.doi.org/10.5296/ajfa.v6i2.5884 Abstract During the last two decades, many countries have chosen to implement the IFRS for at least one category of firms. According to Zeef and Nobes (2010), the implementation of IFRS can be classified into four methods. Thus, countries as Israel and South Africa have adopted the method “implementation process”, others as Canada, Australia and the European Union have opted for the method called “Standard by Standard” while that Switzerland applies the “optional” method; China has chosen the “Not Fully converged” method. The analysis of these methods of implementation of IFRS demonstrates that these latter differ in terms of degree of compliance with the IFRS as issued by the IASB. This difference of compliance with the IFRS led us to wonder if it affects the quality of accounting information through its qualitative characteristic the “relevance”. To answer this question, we use an empirical model that we apply to a sample of listed companies from six countries opting for different methods of implementation of IFRS. The significant results found demonstrates that the compliance of methods of implementation of IFRS influences positively the relevance of accounting information and that this relevance is better for the listed companies of countries which have chosen a compliant method of implementation with the IFRS as issued by the IASB. These results complement the previous studies on the relevance of accounting information following the transition to IFRS and give Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 217 new significant proves on the impact of IFRS on the relevance of accounting information. Keywords: IFRS, Implementation, Method, Compliance, Impact Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 218 1. Introduction The number of countries that have adopted for the IFRS is important. According to the survey of the IFRS Foundation, over 115 countries require or permit the application of IFRS for at least one category of firms. The number of these countries increases every year. The European Union has been a pioneer in this domain with its adoption of the regulation 1606/2002 making mandatory the application of IFRS as adopted by the Union for the publication of consolidated financial statements of listed companies. The adoption of this regulation by the European Union was a solution to several problems of harmonization. Indeed, this union of countries includes constantly new countries adopting divergent national accounting standards. Although several regulations have been adopted by the European Union in the past, the accounting harmonization between the countries constituting this Union remained inefficient. The implementation of IFRS by the European Union was an ideal solution for this problem of accounting harmonization. Following this decision of the European Union, several other countries have chosen to implement the IFRS. Some of these countries have started the process of implementation early while others are until now in the phase of study of project of implementation of IFRS. In fact, the introduction of IFRS requires a certain preparation and the establishment of a strategy of implementation. Thus, after the studies established by the countries wishing to implement the IFRS, these latter have opted for the suitable methods of implementation. Several factors may explain the choice of the method of implementation of IFRS by a country. In fact the countries that entirely trust the international standard setter have opted for an advanced method of implementation named by Zeef and Nobes “due process” or have chosen the sub-method “IFRS as issued by the IASB”; others countries wishing to keep some control over standards applied by their companies have opted for the sub-method “fully convergence with IFRS” or the sub-method “IFRS with deletions”; countries wishing to give their firms the choice between two or more repositories have opted for the “optional” implementation; those wanting to conserve certain accounting standards have opted for the method “Not fully converged”. According to their compliance with the IFRS as issued by the IASB, these methods have been classified by Zeef and Nobes (2010) into 3 categories: The first category includes the methods that are “compliant”, the second contains those “Possibly compliant” and the last one the methods “Unlikely compliant”. This classification has prompted us to ask the following question: Is that the compliance of methods of implementation of IFRS with the IFRS issued by the IASB influences the relevance of accounting information? To answer this question, we have examined the various methods of implementation of IFRS enunciated by Zeef and Nobes (2008, 2010) that we introduce in the first section accompanied by a review of literature of studies on the relevance of accounting information. Through this literature review, we have examined the different models used by the previous studies and have chosen the model that provides the best results in terms of significance. Thus, we have opted for the model of Ohlson (1995). Next, we have formulated the research Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 219 hypotheses that we explain in the third section. In the fourth section we present the methodology as well as the sample selected. This later is constituted by companies listed on the stock market of six countries that have chosen different methods of implementation of IFRS. The significant results found that we report in the last section shows that the compliance of methods of implementation of IFRS influences- the relevance of accounting information. Also, they demonstrate that the relevance of accounting information is better in countries opting for compliant methods of implementation of IFRS with the IFRS issued by the IASB. 2. Literature Review 2.1. Methods of implementation of IFRS The objective of the IASB is to make of IFRS an international accounting and financial standards. This is practically realized as enunciated by Gelard Gilbert. Indeed, this former member of the IASB made this statement on the basis of results of a study published by the IFRS Foundation. Based on the declarations of accounting standards authorities of 122 countries, this study has been established under the direction of Pacter (2014). It shows that the IFRS are today 'mandatory or widely used in more than 115 countries around the world. According to the results found, from 122 countries, 101 require the use of IFRS for all or almost all domestic public interest entities (listed companies and financial institutions). Some countries, such as Australia, New Zealand and Hong Kong have adopted the IFRS as national standards. Two additional countries, Indonesia and Thailand, are in the process of adoption of IFRS. In addition to 101 countries, 10 countries including India, Japan, Switzerland and Singapore allow but not require the use of IFRS. Saudi Arabia and Uzbekistan require the IFRS only for the financial institutions. In terms of number of companies adopting the IFRS, it is very difficult to get statistics. In addition to the 8,000 listed companies of Europe and the many foreign companies listed on the U.S. market that use the IFRS, the other entities which are unlisted and who have also adopted the IFRS make this operation difficult to establish. In fact, it requires making a detailed analysis by country. In terms of companies concerned by the implementation of IFRS, most of countries that have required the IFRS, have made this requirement for the listed companies (excluding some financial institutions). Also, over 90% of the 101 countries that require the IFRS for listed companies require or permit these standards for most unlisted companies. Concerning the IFRS for SMEs, the analysis of the report published by the IFRS Foundation reveals that 57 out of the 122 countries require or permit the norm IFRS for SMEs and 16 other countries are currently considering this option. Also, the content analysis of report of the IFRS foundation shows that a large part of countries that have adopted the IFRS, have made very few changes to the text produced by the IASB. These changes are often considered temporary, as is the case in Europe concerning the IAS 39 underlined by the former member of the IASB Gilbert Gelard. In addition, the Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 220 report of the IFRS foundation stipulates that some countries or regions have differed the dates of application of certain standards, in particular the recent IFRS 10, IFRS 11 and the IFRS 12. In terms of methods of implementation of IFRS, Zeef and Nobes (2010) have established a classification of these methods for listed companies and have retained four methods of implementation. Thus, according to these authors the implementation of IFRS conducted in South Africa and Israel is an implementation “due process”. It is the most advanced level of implementation and the most fairly close to IFRS issued by the IASB. By this method, the standards published by the process are automatically adopted by the country and applied by the firms concerned. The second method of implementation of IFRS is called “Standard by Standard”. This latter is divided into 3 sub-methods: The first one is called “IFRS as Issued by the IASB”. It is considered as conform to IFRS issued by the IASB and consists in the adoption of IFRS published by the International normalizer after an automatic passage through the regulation. The only example given by the authors is the Canada. The second Sub-Method is called “Fully converged with IFRS”. It is adopted in Australia, New Zealand and Honk Kong and consists on making a complete convergence of national standards with IFRS. The third sub -method called “As Issued by the IASB with deletions” consists on the application of standards adopted locally. It is considered by Zeef and Nobes as possibly conform to IFRS Issued by the IASB. The third method of implementation of IFRS is adopted in Switzerland and named “optional” method. It aims to provide to the companies of the country the option to adopt IFRS or to choose another accounting referential. As for the sub-method “IFRS as Issued by the IASB with deletions”, this method is considered as possibly compliant with the IFRS Issued by the IASB. The fourth method of implementation of IFRS is called “Not Fully converged”. It is considered as Unlikely with the IFRS Issued by the IASB. Indeed, trough this method, the normalizer leaves intact some standards. China is an example of countries adopting this method. In terms of dates of implementation of IFRS, this later differs. For countries as South Africa, Israel and the E.U., the IFRS must be applied by the concerned companies the 1st January 2005 while that in Canada the retained date is the 1st January 2011. However, for these countries, the entities were obliged to collect data according to IFRS since the opening exercise of the last year of implementation of IFRS. In China which has opted for an incomplete convergence, the date of application of the New Chinese accounting standards is the 1st January 2007 with no requirement to collect data according to the new converged accounting standards since the opening exercise of the last year of the implementation. Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 221 Figure 1. Methods of Implementation of IFRS for listed companies established by Zeef and Nobes The figure 1 illustrates the classification established by Zeff and Nobes (2010) of methods of implementation of IFRS. It shows the four methods of implementation of IFRS for listed companies: “Due Process”, “Standard By Standard” with its 3 sub-methods, “Optional” and the “Not Fully Converged” implementation. It demonstrates the compliance of these methods and sub-methods of implementation with the IFRS issued by the IASB and gives some examples of adopters’ countries. 2.2. The Relevance of accounting information The study of the relevance of accounting information for the determination of the continuous informational value (called utility of accounting approach) has retained the attention of several researchers in accounting since the work of Fischer (1911). Generally two approaches were chosen by the researchers for the treatment of this subject: The utilitarian approach and the economic approach. 2.2.1. The Utilitarian approach of measure of the Value The utilitarian approach considers accounting as a principal provider of financial information. This approach has been criticized for its inability to predict the economic and the financial difficulties of firms. Researches that have used this approach can be classified into two categories: Those measuring the results and those searching to aggregate the measure of the financial value. For the researchers using the results for the determination of the value of the company, these latter consider the accounting profits as a “proxy” of the financial value of the company. The supporters of this approach argue the idea that the accounting profit is the only relevant determinant of the value of a firm. The empirical studies analyzing the relevance of accounting information trough this approach have been significantly influenced by the studies of Fisher (1911), Lindhall (1933) and Hicks (1946). These researches aim to determine the capacity of the accounting information to help the investors to make decisions as specified by Easton et al. (1992). Thus, they have evaluated the informational content of the accounting Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 222 information by the study of the reaction of financial market after the announcement of accounting income. The majority of these empirical studies have adopted the methodologies of “reaction studies” or “event studies”. Other researchers have used the results for the determination of the value of the company. These latter have used another approach called the approach measuring the “true value”. This approach is centered on the methodology of “association studies”. The object of this methodology highlighted by Beaver and al (1980, 1989) and Collins and Kothari (1989) is to reduce the margin of error of models analyzing the relationship between the accounting information and the market value. These studies dissect the value of the company into three components: the “true value” which is the perfect measurement, the “systematic error” that measures the factors that are not identified by the explanatory variables and the “random error” that represent the hazard that distorts the measure of the value. The second category of researches using the utilitarian approach to measure the global financial value has exploited the complementarity between the various determinants of the value. This approach is called “abnormal profit”. Thanks to works of Ohlson (1995) and Feltham and Ohlson (1995) this approach initiated by Preinreich (1938) has been revived. The researches using this approach can be split in two typologies: The first one is called “imperfect measurement approach of the value” and the second one is named “evaluation by the abnormal earnings approach”. The objective of the approach of the imperfect measurement is to remedy to weaknesses of the informational content of accounting earnings in various contexts. It has led the accounting researchers to identify other determinants of accounting value (Dumontier and Raffournier, 2002). In fact, the empirical studies using this approach as highlighted by Walker (1997) reject the idea of measure of the value only by the results and consider the result as a measure among others. Two orientations are identified: The first one is focused on seeking the alternatives determinants of profit and is based on "comparative studies associations”. It consists in the comparison of various determinants of the accounting information with the result and the informational content of these determinants with the quality of the representation of the regression. The second orientation considers that the profit is not the only variable to explain the stock market value, but there are other determinants that allow accountants to further clarify the information content of the value. The approach of evaluation of a firm by the abnormal earnings expresses the value of a company by the amount of capital invested and the future wealth created by the entity. Reflected in accounting terms, the model becomes equal to the sum of the book value of equity and the actualized abnormal earnings. The first work considering this approach is Ohlson (1995) and Feltham and Ohlson (1995). These authors start from a logic based on the distribution of wealth to guide their analysis to the measure of the wealth created by the use of the model of abnormal earnings. Bernard (1995) explains that the evaluation by the abnormal earnings approach is considered as a "mixed" approach because it includes several information from the balance sheet and the income statement. Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 223 2.2.2. The Economic approach of measure of the Value The economic approach of the measure of the value of a firm implies that the accounting information is an economic good that is traded on a market. It supposes therefore an economic rationality. The supply and the demand of information by an economic agent are used to enable a rational choice between several possibilities. In this sense the economic agent will opt for the possibility that maximize its usefulness. At this stage of analysis, the information is fed into decision models. Thus, the information is relevant if its measure of the expected utility is uppermost (Salanie, 1994). If we transpose the economic logic to accountancy, the supply and the demand of accounting information are dependent on various heterogeneous behaviors of producers and users of accounting information. Walker (1988) considers that the economic approach of measure of the value provides a "scientific" vision of the accounting information because it helps to solve the problems raised mainly by the followers of the positive accounting theory (Jensen 1976, p 11). In terms of period and purpose, this approach can be divided into three phases: a first phase that has marked the accounting researches of the 70s and the 80s wishing to establish a theoretical basis of the value. Next, a second phase has begun in the late of the 80s. Its objective is to examine the influence of the alternatives on the choice of policies of evaluation of the company by borrowing the economic concepts of information. A third phase has focused on the study of the asymmetry of the information between managers / investors and investors / investors (Walker 1988). 2.2.3. Comparison between the approaches and choice of the appropriate model The economic approach of measure of the accounting information aims to implement a new accounting research methodology for the evaluation of a company. In the assumption of an efficiency of information and a rationality of economic agents, the economic approach offers a "theoretical basis" model for the measure of the value of a firm. Indeed, this approach wants to remedy to weaknesses of the utilitarian approach. The reflections of Feltham (1968) and Butterworth (1972) on a possible merger between the economic approach of accounting information and the utilitarian approach via the reconciliation between the economic measure and the accounting value of the company has retained the interest of several searchers. In terms of number and importance of results, the utilitarian approach of measure of the accounting information remains the dominant approach in terms of number and results of research. In comparison with the economic approach, the empirical studies of the utilitarian approach have succeed to explain the information content of the stock prices in a fairly meaningful way. Some models reached a maximum of 90% as illustrated by the table 1 below. Asian Journal of Finance & Accounting ISSN 1946-052X 2014, Vol. 6, No. 2 www.macrothink.org/ajfa 224 Table 1. Results of some important previous studies on the relevance of accounting information Author Study Period Country Sample Results Model Used Bernard (1995) 1978-1993 United States Between 670 et 712 Firm/Year. 29%