Academic journal article Australasian Accounting Business & Finance Journal

IFRS Mandatory Adoption Effect on Information Asymmetry: Immediate or Delayed?

Academic journal article Australasian Accounting Business & Finance Journal

IFRS Mandatory Adoption Effect on Information Asymmetry: Immediate or Delayed?

Article excerpt

(ProQuest: ... denotes formulae omitted.)

Introduction

The large number of relationships between stakeholders, caused by outside openness of firms, creates information asymmetry. To solve this problem, it is necessary to establish means of control. One of these means is to improve information disclosure system, formulate the rules of disclosure of information systems. Listed companies must be in accordance with the relevant regulations, true, complete, accurate and timely disclosure of information, and consciously accept the broad masse of investors and the general public oversight. In this case, financial reporting can represent a source of reducing information asymmetry. Financial information reliability and relevance depend on accounting principles used. Furthermore, for a better comparability of results, it is necessary to provide a regulatory framework at the international level for the publication of financial information in order to make the properly decision. This framework generates a reduction of information asymmetry.

IFRS mandatory adoption is of great interest to managers and investors and its effect on the informational content of accounting earnings is been much debated by academics in recent years. The primary question discussed is whether information asymmetry was affected by the application of international standards. Even if more and more countries adopt the International Financial Reporting Standards, there is a continuing debate around the benefits of their application on the information content of earnings taking into account the learning effect.

According to Philippe Danjou, Chief of Accountant business in the AMF (Financial Markets Authority), the adoption of IFRS introduced a new estimation philosophy and upgrading business performance. They have a considerable impact, in terms of quality and quantity of information disclosed, on the financial reporting of companies and they change the meaning and the significance of several indicators used by investors. In the same vein, Dicko and Khemakhem (2010) stipulate that the IFRS adoption has certainly been a source of increasing of frequency and number of published financial statements. But even if the superiority of IFRS relating to the amount of information disclosed was undeniable, previous work has shown two divergent reflections concerning the information disclosed quality. Some researchers have therefore considered that IFRS improves the information content of accounting numbers because they lead companies to disclose more and better information and limit discretionary accounting choices. However, others consider that IFRS adoption is likely to reduce the information content of accounting numbers because it limits the number of authorized accounting policies.

Indeed, the IFRS standards provide require high quality, transparent and comparable information in financial statements and other reports to help investors in all global markets and other users to make economic decisions (Epstein & Mirza, 1999). This postulate is in line with the main objective of these new standards. To do this, IFRS are based on a new and important principle; fair value instead of historical cost.

Fair value facilitates decision making of investors who are always in search of latest information (Ball, 2006). According to this author, the market value because it synthesizes the latest expectations of various economic agents, is incomparably more informative than historical cost. This view is widely defended by Mistral, (2003) which states that the principle of fair value is certainly more useful and appropriate to measure assets and liabilities as historical cost.

This principle permits the provision of relevant information about financial instruments because it allows the better reflection of company events and economic conditions in a timely way and provides a good basis for the analysis and forecasting of future cash flows. According to the IASB, it offers to users of the financial statements the ability to appreciate the consequences of investment and funding strategies undertaken by a firm. …

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