Costs of Mandatory IFRS: Evidence of Reduced Accrual Reliability

Cheng Y. Lai, Yang Li, Yaowen Shan, Stephen L. Taylor
2013 Social Science Research Network  
This study investigates the impact of mandatory adoption of International Financial Reporting Standards (IFRS) on accrual reliability (Richardson et al. 2005) . Using a large sample of Australian firm years drawn from before and after the mandatory adoption of IFRS, we find that accrual reliability declined significantly after mandatory IFRS implementation. Working capital, non-current operating, and financing accruals all contribute to this decline. We also find that brand name audit firms
more » ... ., the Big four) are able to significantly attenuate any decrease in accrual reliability during the post-IFRS period. Our results contrast with evidence identifying benefits of mandatory IFRS such as increased value relevance, but are consistent with at least some degree of trade-off between relevance and reliability. Such trade-offs seem to have been largely ignored in prior examinations of the impact of mandatory IFRS. 1 The FASB's conceptual framework defines reliability as encompassing representational faithfulness, verifiability and neutrality, while the IASB definition encompasses faithful representation, substance over form, neutrality, prudence, and completeness. Both the FASB and the IASB recently renamed "reliability" as "faithful representation", which encompasses verifiability, neutrality and completeness. The substitution proved unpopular with respondents, who expressed interest in retaining reliability as a primary quality. However, this modification does not affect our study because we examine features of reliability unrelated with the change. We therefore use the more familiar term, namely reliability.
doi:10.2139/ssrn.2334811 fatcat:idalxh4ikbebzk7n2jcv6d3j4m