IFRS Mandatory Adoption and Earnings Quality in an Emerging Market: The Case of Ecuador
DOI:
https://doi.org/10.25097/rep.n38.2023.01Keywords:
IFRS, earnings quality, asymmetric timelines of loss recognitionAbstract
This paper examines changes in earnings quality, including accruals, earnings smoothing, and asymmetric loss recognition schedules, following the mandatory adoption of IFRS in Ecuador. Using 5,436 year-firm observations, we employ a differences-in-differences approach, comparing the effect of IFRS on an initial group of adopters (publicly traded companies) with non-adopters (small and medium-sized enterprises) with essentially the same financial reporting requirements. Our findings indicate a decrease in accrual levels and more timely recognition of losses, with no evidence of changes in earnings smoothing. These results suggest that companies use the increased flexibility of IFRS to meet debt holders' demand for timely loss recognition. The decrease in accruals suggests earnings management for tax purposes. This study contributes to the literature on IFRS and earnings quality by using a more robust research design and providing evidence on the consequences of IFRS adoption in an emerging market dominated by debt capital and family-owned firms.
Downloads
References
Ahmed, A. S., Neel, M. and Wang, D. (2013). ‘Does Mandatory Adoption of IFRS Improve Accounting Quality? Preliminary Evidence’, Contemporary Accounting Research, Vol. 30, No. 4, 1344-1372.
André, P., Filip, A. and Paugam, L. (2015). “The Effect of Mandatory IFRS Adoption on Conditional Conservatism in Europe.”. Journal of Business Finance and Accounting, Vol. 42, Nos. 3–4, 482–514.
Ball, R., Robin, A. and Shuang Wu, J. (2003). Incentives versus standards: properties of accounting income in four East Asian countries. Journal of Accounting and Economics, 36(1-3, 235-270.
Ball, R. and Shivakumar, L. (2005). “Earnings Quality in UK Private Firms: Comparative Loss Recognition Timeliness”, Journal of Accounting and Economics, Vol. 39, 83-128.
Ball, R. and Shivakumar, L. (2006). The role of accruals in asymmetrically timely gain and loss recognition. Journal of Accounting Research, 44(2), 207-242.
Barth, M., Landsman, W. and Lang, M. (2008). “International Accounting Standards and Accounting Quality”, Journal of Accounting Research, Vol. 46, No. 3, 467-498.
Basu, S. (1997). “The conservatism principle and the asymmetric timeliness of earnings”. Journal of Accounting and Economics, Vol. 24, No. 1, 3-37.
Bolsa de Valores Quito (2010). Informe mensual sobre las negociaciones en la BVQ.
Burgstahler, D., Hail, L. and Leuz, C. (2006). ‘The Importance of Reporting Incentives: Earnings Management in European Private and Public Firms’, The Accounting Review, Vol.81, No.5, 983-1016.
Bushman, R. and Piotroski, J. (2006). ‘Financial Reporting Incentives for Conservative Accounting: The Influence of Legal and Political Institutions’, Journal of Accounting and Economics, Vol.42, Nos.1&2, 107-148.
Camino, M. S. and Bermudez, B. N. (2018). “Las Empresas Familiares en el Ecuador: Definición y aplicación metodológica”. X-Pedientes Económicos, Vol. 2, No. 3, 46–72.
Capkun, V., Collins, D. and Jeanjean, T. (2016). “The effect of IAS/IFRS adoption on earnings management (smoothing): A closer look at competing explanations”. Journal of Accounting and Public Policy, Vol. 35, No. 4, 352–394.
Capkun, V. and Collins, D. W. (2018). “The Effects of IFRS Adoption on Observed Earnings Smoothness Properties: The Confounding Effects of Changes in Timely Gain and Loss Recognition”. European Accounting Review, Vol. 27, No. 5, 797–815.
Cardona Montoya, J. C., Gómez Sánchez, A. F. and Cano Morales, A. M. (2019). “The impact of international financial reporting standards on accounting quality: Evidence from Latin America and the Caribbean”. Contaduria y Administracion, Vol. 64, No. 4, pp.1–34.
Chen, H., Tang, Q., Jiang, Y. and Lin, Z. (2010). “The role of international financial reporting standards in accounting quality: Evidence from the European Union”. Journal of International Financial Management and Accounting, Vol. 21, No.3, 220–278.
Christensen, H., Lee, E. and Walker, M. (2015). ‘Incentives or Standards: What Determines Accounting Quality Changes around IFRS Adoption?’, European Accounting Review, Vol.24, No.1, 31-61.
Chua, Y. L., Cheong, C. S. and Gould, G. (2012). “The impact of mandatory IFRS adoption on accounting quality: Evidence from Australia”. Journal of International Accounting Research, Vol. 11 No. 1, 119–146.
Cussatt, M., Huang, L. & Pollard, T. (2018). Accounting quality under U.S. GAAP versus IFRS: The case of Germany. Journal of International Accounting Research, 17(3), 21-41.
De George, E.T., Ferguson, C. B. and Spear, N. A. (2013). “How much does IFRS Cost? IFRS adoption and audit fees”. The Accounting Review, Vol.88, No. 2, 429-462.
de Moura, A. A. F., Altuwaijri, A. and Gupta, J. (2020). “Did mandatory IFRS adoption affect the cost of capital in Latin American countries?”. Journal of International Accounting, Auditing and Taxation, 38. 100301
Dechow, P. (1994). ‘Accounting Earnings and Cash Flows as Measures of Firm Performance: The Role of Accounting Accruals’, Journal of Accounting and Economics, Vol.18, No.1, 3-42.
Eiler, L.A., Miranda-Lopez, J. and Tama-Sweet, I. (2021). "The impact of IFRS on earnings management: evidence from Mexico", Journal of Accounting in Emerging Economies, Vol. 12 No. 1, 77-96.
Filipin, R., Tixeira, S.A., Bezerra, F.A. and Da Cunha, P. R. (2012). “Análise do nível de conservadorismo condicional das empresas brasileiras listadas na bm&fbovespa após a adoção dos IFRS”. Revista de Contabilidade e Controladoria, Vol 4, No. 2, 24-36.
Fortin, H., Hirata Barros, A.C. and Cutler, K. (2010) Accounting for Growth in Latin America and the Caribbean: Improving Corporate Financial Reporting to Support Regional Economic Development, Washington D.C.: The World Bank
Fox, A., Hannah, G., Helliar, C. and Veneziani, M. (2013). "The costs and benefits of IFRS implementation in the UK and Italy", Journal of Applied Accounting Research, Vol. 14 No. 1, 86-101.
Garcia Lara, J.M., Garcia Osma, B. and Mora A. (2005). ‘The Effect of Earnings Management on the Asymmetric Timeliness of Earnings’, Journal of Business Finance and Accounting, Vol.32, Nos.3&4, 691-726.
Hail, L., Leuz, C. and Wysocki, P. (2010). ‘Global Accounting Convergence and the Potential Adoption of IFRS by the U.S. (Part I): Conceptual Underpinnings and Economic Analysis‘, Accounting Horizons, Vol. 24, No. 3, 355-394.
Hellman, N., Nilsson, H., Tylaite, M. and Vural, D. (2022). “The Impact of an IFRS for SMEs-Based Standard on Financial Reporting Properties and Cost of Debt Financing: Evidence from Swedish Private Firms”. European Accounting Review, Vol. 31, No. 5, 1175–1205.
Higgins, S., Lont, D. and Scott, T. (2106). “Longer term audit costs of IFRS and the differential impact of implied auditor cost structures”. Accounting and Finance, Vol. 56, No. 1, 165-203.
Iatridis, G. (2010). International Financial Reporting Standards and the quality of financial statement information. International Review of Financial Analysis, 19(3), 193-204.
Instituto Nacional de Estadistica y Censos (2012). Clasificación Nacional de Actividades) CIIU 4.0, Accessed on 25 of May 2013, http://www.inec.gob.ec/estadisticas/SIN/metodologias/CIIU%204.0.pdf
Isidro, H. and I. Raonic (2012). ‘Firm Incentives, Institutional Complexity and the Quality of “Harmonized” Accounting Numbers’, The International Journal of Accounting, Vol.47, No.4, 407-436.
Jara Bertin, M. and Arias Moya, J. T. (2013). “The effect of mandatory IFRS adoption on accounting conservatism of reported earnings”. Academia Revista Latinoamericana de Administración, Vol. 26, No. 1, 139–169.
Kaufman, D., Kraay A. and Mastruzzi, M. (2009). ‘Governance Matters VIII: Aggregate and Individual Governance Indicators 1996-2008’, Policy Research Working Paper 4978, World Bank.
KPMG (2009), Normas Internacionales de Informacion Financiera – Principales Aspectos de su Adopción Comparada con las NEC
Lang, M., Smith Raedy, J., and Wilson, W. (2006). ‘Earnings Management and Cross Listing: Are Reconciled Earnings Comparabe to US Earnings?’, Journal of Accounting and Economics, Vol.42, Nos.1&2, 255-283.
Leuz, C., Nanda, D. and Wysocki, P. (2003). ‘Earnings Management and Investor Protection: An International Comparison’, Journal of Financial Economics, Vol.69, No.3, 505-527.
Liu, C., Yao, L. J., Hu, N. and Liu, L. (2011). “The impact of ifrs on accounting quality in a regulated market: An empirical study of China”. Journal of Accounting, Auditing and Finance, Vol. 26, No. 4, 659–676.
Lopez, H., Jara, M. and Cabello, A. (2020). “IFRS adoption and accounting conservatism in Latin America”. Academia Revista Latinoamericana de Administracion, Vol. 33, Nos. 3–4, 301–320.
McNichols, M. (2002). ‘Discussion of ‘The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors’’, The Accounting Review, Vol.77, Supplement, 61-69.
Muñoz, C (2014). ‘Determinants of Ownership Concentration in Ecuador’, Working Paper, ESPAE Graduate School of Management.
Paananen, M. and Lin, H. (2009). “The development of accounting quality of IAS and IFRS over time: The case of Germany”. Journal of International Accounting Research, Vol. 8, No. 1, 31–55.
Palepu, K., Healy, P. and Peek, E. (2010). Business Analysis and Valuation, IFRS Edition, Hampshire, UK: Cengage Learning, 2nd edition
Rodríguez García, M. del P., Cortez Alejandro, K. A., Méndez Sáenz, A. B. and Garza Sánchez, H. H. (2017). “Does an IFRS adoption increase value relevance and earnings timeliness in Latin America?” Emerging Markets Review, Vol.30, 155–168.
Servicio de Rentas Internas (2012). Guía Referencial para la Conciliación entre Formulario 101 (Declaración del Impuesto a la Renta y Presentación de Balances Formulario Único Sociedades y Establecimientos Permanentes) y el Formulario para la Presentación de Estados Financieros bajo NIIF Emitido por la Superintendencia de Compañías
Superintendencia de compañías, valores y seguros (2006). Resolución No.06.Q.ICI.004, Registro Oficial No.348.
Superintendencia de compañías, valores y seguros (2008). Resolución No.08.G.DSC.010, Registro Oficial No.498.
Worldbank (2005). Report on the observance of Standard and Codes (ROSC), Accessed on 26 of March 2010, http://www.worldbank.org/ifa/Ecuador--AAROSCMarch04FINAL.pdf
Zeghal, D., Chtourou, S. M. and Fourati, Y. M. (2012). “The effect of mandatory adoption of IFRS on earnings quality: Evidence from the European union”. Journal of International Accounting Research, Vol. 11, No. 2, 1–25.
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 Economy and Politics Journal
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
The Journal declines any responsibility for possible conflicts derived from the authorship of the works that are published in it.
The University of Cuenca in Ecuador conserves the patrimonial rights (copyright) of the published works and will favor the reuse of the same ones, these can be: copy, use, diffuse, transmit and expose publicly.
Unless otherwise indicated, all contents of the electronic edition are distributed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
