Question

''Financial reporting practices are unlikely to converge globally, despite efforts to harmonize financial reporting standards, '' (adapted from Leuz, 2010).

Explain and critically discuss this statement in light of obstacles to uniform IFRS adoption across different countries and regions. Support your discussion with examples and insights from different academic studies.

Answer 1

Challenges of IFRS Adoption

Few of the studies have given contradictory views questioning the relevance of IFRS adoption in developing and emerging economies.Rong-Ruey, D (2006) argued that one single set of accounting standards cannot reflect the differences in national business practices arising from differences in institutions and cultures.
In countries where the quality of governance institutions is relatively high, IFRS adoption is likely to be less attractive as high quality institutions represent high opportunity and switching costs to adopting international accounting standards.
Sawan, N and Alsagga, I (2013) have found that cultural, political and business differences may also continue to impose significant obstacles in the progress towards a single global financial communication system because a single set of accounting standards cannot reflect the differences in national business practices arising from differences in institutions and cultures.
Michas (2010) Alp and Ustuntage (2009) and Zhang et al. ,(2007) are of the view that, the implementation of IFRSs by developing countries comes with a lot of challenges. Some of the challenges include the complexity of the standards, fair value issues, cost, regulation, lack of technical skills and knowledge in standards, inadequate education and training of accountants (Schachler et al., 2012; Laga, 2012; Masoud, 2014). According to Obazee (2007), challenges are cultural issues, mental models, legal impediments, educational needs and political influences.
A study by Ionaşcu et al (2011) revealed that lack of active markets needed for fair values determination may reduce the quality of accounting information presented in financial statements prepared in accordance with the IFRSs. Another challenge identified was that because IFRSs is principle-based, it may create avenue for earning management (Hong 2008; Chand, Patel & Patel 2005; Jeanjean & Stolowy 2008).
According to Rong- Ruey Duh (2006), the challenges of IFRS adoption includes the ability of accountants to interpret standards, and the knowledge level of financial statement users, preparers, auditors and regulators in accounting information.
According to Obazee, 2007 as reported by (Odia,.J.O. and Ogiedu, K.O. 2013) The principal impeding factors in the adoption process of IFRS in Europe, America and the rest of the world are not necessarily technical but cultural issues, mental models, legal impediments, educational needs and political influences
The implementation challenges include: timely interpretation of standards, continuous amendment to IFRS, accounting knowledge and expertise possessed by financial statement users, preparers, auditors and regulators, and managerial incentive (Ball, Robin & Wu 2000).
From the foregoing, it can be deduced that the obstacles met in the process of IFRS implementation in the emerging economies include the following:
1. the lack of relevant specific knowledge and of practical experience;
2. the need of training and consultancy services;
3. difficulties encountered in using the fair value concept;
4. the transition costs.