Using an exploratory interpretive research approach and International Financial Reporting Standards (IFRS) 13 as a case study, this article investigates the factors that affect the decision to adopt a specific IFRS early. The research findings are significant as very little interpretive research has been performed on financial reporting from a South African perspective. The findings reveal that the majority of the interviewees did not elect to adopt IFRS 13 early. Technical constraints – such as the need to provide additional accounting disclosure – discouraged the early adoption of the standard. Factors such as the effect of adoption on earnings, decisions made by competitors and the relevance of the standard to business operations were also considered as part of this decision. Perhaps most significant is the logic of resistance to new standards evidenced by a general dismissal of the view that IFRS 13 provides more useful information to users of financial statements.
Research shows that there are benefits of voluntarily adopting International Financial Reporting Standards (IFRS) (Barth et al.
IFRS 13 was implemented in January 2013. It clarifies how to measure fair value rather than expand the use of fair value accounting (Tran
Although previous research considers the adoption of IFRS by developing countries, such as South Africa (Zeghal & Mhedhbi
In order to assess what factors preparers of financial information consider when deciding whether to adopt a standard early or not, prior research is used to provide a frame of reference. As little research has been conducted on adoption of a particular standard; the adoption of IFRS as a whole has been considered below to form a basis for further discussion.
In a study performed by Jermakowicz and Gornik-Tomaszewski (
As staff training proved to be a critical factor to convert to IFRS, interviewees participating in this study were questioned on whether or not staff training remained relevant for the decision to adopt IFRS 13 early.
The main difficulties in implementing IFRS in entities listed in the European Union (EU) include the complex nature of IFRS, the lack of IFRS implementation guidance and lack of uniform interpretation (Capkun et al.
In this context, this article assesses whether or not implementation guidance and a lack of uniform interpretation of IFRS 13 affected the decision of local preparers to adopt the standard before its effective date.
The adoption of IFRS by developing countries, such as South Africa, may depend on a number of factors, namely, economic growth, level of education of preparers of financial information, the degree of external openness, cultural membership and the existence of a capital market (Zeghal & Mhedhbi
As the prior research has reported mixed results on the relevance of education, culture and economic factors for the decision to adopt IFRS, these are specifically considered in this study.
IFRS applies a principles-based approach and common-law institutional logic to accounting which requires more disclosure of information and restricts accounting choices available to managers using IFRS than most local accounting standards (Ashbaugh
As there is uncertainty about the costs and benefits of the additional accounting disclosure required by IFRS (something which IFRS 13 deals with extensively), this factor is included in the interview agenda.
As a number of South African listed entities are listed in the EU (JSE
This provides evidence that EU regulations may have a significant impact on an entity’s decision to adopt IFRS standards early. As the EU is required to endorse a standard before it can be adopted by an entity (Abela & Mora
Numerous studies have found that earnings management plays a key role in an entity’s decision to adopt a standard (e.g. Barth, Landsman & Land
There is a large body of research dealing with the determinants and consequences of earnings management when firms’ change their basis of performance (e.g. Barth et al.
In the year in which IFRS is adopted by an entity, it provides very little narrative disclosure on the change, suggesting that the conversion to IFRS has little relevance for overall business operations (Stent, Bradbury & Hooks
Standards used for different industries are equivalent to a business model approach. This approach to accounting, although not specifically defined by the IASB (
… the chosen system of inputs, business activities, outputs and outcomes that aims to create value over the short, medium and long-term. (p. 3)
This approach is increasingly used by the IASB, resulting in changes to the accounting for financial instruments, investment property, inventory, fixed assets and segmental reporting (Danjou
Resistance to IFRS is evidenced by an unwillingness to adopt or comply with a standard or accounting system (Saidin, Badara & Danrimi
Research shows that resistance manifests itself in the decision to delay the introduction of new prescriptions because of a belief that management’s existing practices are adequate (Tremblay & Gendron
Because of the fact that many jurisdictions, including South Africa, mandate compliance with IFRS for listed companies (
Another factor when electing whether or not to adopt a standard early is a company’s competitors (Gietzmann & Trombetta
As discussed in the ‘Introduction’ section, there is a large body of work which deals with the adoption of IFRS as whole (Barth et al.
A semi-structured interviewing process was used to explore the opinions of the interviewees (Qu & Dumay
As recommended by Rowley (
Data analysis followed a three-step approach: data reduction, data display and verification (O’Dwyer et al.
Throughout the interview process, it was necessary to reconsider all the data received from the interviews in order to ensure that all themes were identified and correctly interpreted (Tuckett
Interviewees discussed a number of factors that were relevant for deciding whether or not to adopt IFRS 13 early. These were aggregated by the researchers and are presented below. The order in which the factors are presented does not necessarily indicate their importance or relevance. In general, audit experts and preparers discussed the same factors. There were no discernible differences between the two respondent groups. Finally, the same factors were considered by respondents who decided to adopt IFRS 13 early and those who chose not to do so. The only difference was that early adopters felt that the benefits of applying IFRS 13 before its effective date would exceed the costs of early adoption, while those who delayed application held the opposite view.
Staff training seems to have played a role in the decision to adopt IFRS 13 early for some preparers. Training was necessary to ensure that staff members were up-to-date with the technical aspects and accounting requirements of IFRS 13. Preparers of financial information look to auditors for this technical training, stating:
‘When we became aware of [
In this light, an audit expert noted:
‘Management look to the auditors for [
Technical training provided by auditors does not suggest that auditors should advise whether or not a standard should be adopted early or make managerial decisions in this regard. To the contrary, this training provides assistance to the preparers of financial information so that they can make their own decisions. Moreover, it appears that the auditors play an informative rather than prescriptive role to ensure that preparers are aware of possible effects on the entities. As a result, the role played by auditors is supportive in nature. Although interviewees admitted to keeping the need for staff training in mind when deciding whether or not to adopt a standard early, interviewees did not feel that this was a dominant factor in their decision. This appears to be inconsistent with Jermakowicz and Gornik-Tomaszewski (
Except for one interviewee, respondents were unanimous that the implementation guidance supporting IFRS 13 did not play a role in the decision to adopt the standard early. One interviewee stated:
‘Guidance material typically doesn’t go through the same process; it doesn’t get the same attention from the Board, if the Board even looks at it. So it might be a staff member’s view on how to adopt a certain standard which is a very challenging place to be. I think where guidance is necessary, there is enough.’
Most interviewees found that, in applying IFRS 13, material interpretation issues were not identified and that adequate interpretation guidance was provided by the IASB. These findings are contrary to those of Jermakowicz and Gornik-Tomaszewski (
All interviewees were unanimous in stating that cultural, educational and economic factors did not play a role in the entities’ decision to adopt IFRS 13 early. One particular interviewee felt the financial reporting was in a very mature phase, not allowing other factors to contribute to such a decision:
‘I think our [
To date, the South African accounting profession is recognised internationally for its strength in reporting standards (Marais
It should, however, be noted that interviewees have similar professional backgrounds and come from a single jurisdiction making it difficult to conclude definitively on the effects of cultural, educational or economic factors on the decision to adopt IFRS 13 early. Related to this, a small sample size means that findings cannot be generalised. Finally, most of the prior research which finds that cultural, educational and economic factors affect the corporate reporting deal with adoption of entire reporting standards rather than a single accounting standard (Khlif et al.
Preparers of financial information found that the additional accounting disclosures play an important role in deciding whether or not to adopt IFRS 13 early:
‘To have early adopted, you have to have provided that disclosure and that would be seen as a barrier to early adoption.’
This statement is important because the introduction of IFRS 13 has resulted in an increase in disclosure (IFRS Foundation
International as well as national regulators can play an extremely important role in an entity’s decision to adopt accounting standards early:
‘… One of the other inhibitors is Europe. European companies can only adopt once endorsed by the European regulator so it is not automatic like it is here … Unless the EFRAG has endorsed, you actually cannot early adopt. So you are stuck between a rock and a hard place because you are stuck in this limbo position where you can’t early adopt, particularly if you have European shareholders. So I think that is one of the other issues around early adoption.’
This provides evidence that preparers of financial information are restricted from early adoption of new standards depending on the requirements of their ultimate holding company and international regulatory requirements. Contrary to international regulations, it is interesting to note that South African regulators do not play a pertinent role in the decision to early adopt:
‘You will see in other jurisdictions that they are a lot more involved in that process. I don’t know that [
Other interviewees reiterated these views when deciding whether or not to adopt early:
‘… if you look at South African regulators from a financial statement perspective, they do not interfere in financial reporting. They don’t believe it is their place. They will ask questions around information coming out of financial reporting but much more from a regulatory perspective.’
When interviewees were asked if they managed their earnings, preparers unanimously responded in the negative. This result is to be expected. When, however, interviewees were probed on the impact which a new standard might have on reported profits, it became clear that companies are aware of the effect which accounting standards have on earnings and take this into account when deciding whether or not to adopt an accounting standard early. For example, when explaining their views on delaying the introduction of IFRS 13, two preparers pointed out:
‘It depends on the nature of the client and [
Similarly:
‘We need to assess what the impact [
These interviewees have indicated two important points. Firstly, the approach taken regarding early adoption is dependent on the effect this will have on the reported earnings for the entity. Secondly, managers like earnings to be stable. This finding is in line with Hunt (
IFRS 13 does not introduce a requirement to use fair value accounting. It provides guidance on how to measure fair value when required by another standard and stipulates additional disclosure requirements (IASB
‘I think you need to consider that because we are a listed entity you always need to look at the market and what does the market expect. If I have a bad year this year and I can early adopt a standard that can tank [
Overall, while interviews did not admit to purposefully managing earnings, they confirmed that market expectations play a vital role in deciding whether or not to adopt an accounting standard (such as IFRS 13) early. In addition, where competitors have not early adopted a particular standard, entities are reluctant to be the first to ‘take the plunge for fear of market reactions’ (see also the ‘Competitors’ section). For example, one interviewee, who felt that she was a market leader and was inclined to adopt IFRS 13 early, delayed doing so because her competitors had not early adopted the standard and there was a concern that the market would misinterpret the decision to apply IFRS 13 before the effective date.
Accounting is often seen to be a compliance exercise that is independent of the business operations (see the ‘Literature review’ section). Interviewees had mixed views on this point. Most believed that some aspects within IFRS had a clear link to business operations. Consider, for instance, the following comment:
‘There is definitely a link to business operations. For example, for the defined benefit plans I mentioned earlier, this standard gave us information about a liability within our business that we were not aware of. So this information can tell us things about our business that we didn’t know and provide us with guidance on how to account for this.’
This statement highlights the ‘active role’ that financial reporting and IFRS can play in an entity’s operations ‘actively shaping organisational affairs’ (Hopwood
I think it [
Nevertheless, interviewees also felt that many standards are not always important for their financial statements. This arose owing to the particular standard having little relevance for their entity. As such, application of the IFRS becomes a compliance exercise:
‘I think some of the things [
In other words, when IFRS 13 was not seen as directly relevant owing to the limited number of fair value measures currently in use by the respective firm, the decision to adopt IFRS 13 early was not justified on the basis of the business operations or the information needs of the users. Interviewees felt that the importance of providing added information by means of additional disclosure is not a primary consideration. Instead, early adoption was justified on the grounds that the standard is not expected to have a significant effect on their operations. When IFRS 13 was seen as directly relevant to the entity – owing to more frequent use of fair value measurements – interviewees appear to have merely applied the ‘rules’ in IFRS 13 rather than using professional judgement to assess the impact that the standard may have on their particular entity and how users would benefit from the decision to adopt the standard early.
A number of the interviewees referred to the concept of different reporting standards for different entities. There is an element of compliance driving the application of IFRS. Respondents questioned whether it would be more suitable to amend standard requirements to allow leeway for the different industries. Although the practical issues of such standards were considered and debated, interviewees unanimously agreed that this would be an ideal option.
In one instance, an interviewee who worked in a manufacturing firm questioned whether it was necessary for them to disclose the same information that a consulting firm discloses. As the manufacturing entity relied significantly on property, plant and equipment, the interviewee considered it necessary to disclose additional information relating to these assets. On the contrary, the interviewee stated that a consulting firm should not need to provide this additional detail as those assets were not part of the core of business operations. In agreement with this, other interviewees stated that disclosure of additional information required by IFRS adds significant amounts of unnecessary work which does not necessarily reflect the operations of their business. These interviewees were of the opinion that industry-specific standards would reduce this compliance burden. Consider the following comments:
‘IFRS needs to be tailored to the business and if [
‘… [
These views point to the benefits of a business model approach (Maroun
‘In the UK they have changed their national GAAP and brought in a new UK GAAP. And what they did is they based it on IFRS for SMEs. And now that has no disclosure for financial standards – nothing like IFRS 13. So it has all the principles of IFRS 13 from a measurement side but then none of the disclosure. Then they said that they were not happy with that and then they put in additional disclosure for financial institutions. So there you have it two-tiered. And I think that there is a lot of merit in that. The thing we can’t forget is that we have these big accounting teams at the big institutions who can churn out these disclosures. What about the next tier down – the subsidiary of a big international corporation? What about big privately held companies? IFRS for SMEs is not for everyone so you either have no disclosure or all this disclosure.’
Fair value accounting has been a requirement found in different accounting standards for a number of years (Bushee
One way to show dissatisfaction with a particular accounting standard is not to adopt the standard before the effective date. Although interviewees did not explicitly state that they applied a logic of resistance, this was implied by their annoyance with the ‘short-term mentality’ of the ‘investment community’:
‘I think it has more to do with the investment community, the short-term mentality is the problem here and I think in a way fair value does that and it caters for that because it is for a moment in time. Even if I look at the impairment test and those sorts of things, it is at that moment in time. Is it a fair presentation? At that moment in time, possibly, but that is a short-term view. I don’t know if there is a better way of doing it. The further out you look, the less meaning it has anyways, it’s hard to balance.’
This appears to be consistent with the findings in Shaffer (
‘So in general, my entity does not early adopt any new [standards] or anything like that.’
‘I guess the critical thing is [
‘… we don’t think it adds value and it more likely confuses the uses of financial information.’
‘It is not in our nature to adopt. We will adopt when the standard comes into effect.’
These interviewees express doubt about whether or not IFRS 13 provides benefit to the users of financial information. Interviewees also used words such as ‘had to’, ‘force to’, ‘onerous’ and ‘burdensome’ when referring to the adoption of IFRS 13. This reaffirms that the standard was adopted for compliance reasons rather than a genuine view that it enhanced the usefulness of the financial statements (cf. IASB
‘… no one wants to take the first leap. No one wants to be the first guy to do it and potentially get it wrong.’
This suggests that early adoption of IFRS standards requires an in-depth understanding of the standard and a willingness to adopt the standard (Liu et al.
During the interview process, all of the interviewees considered the actions of competitors before deciding whether or not to adopt IFRS 13 early. For some interviewees, the actions of competitors appeared to be a dominant consideration while, for others, this appeared superficial. Some of the reasons provided for considering the decisions of competitors included comparability of information between entities within the same industry, delaying the process for additional guidance to be received and an unwillingness to take the lead.
With regards to adopting IFRS 13 early, interviewees said:
‘… it is also an unwillingness to be the trail blazer – the one going through all of that and making those decisions on untested accounting literature. Rather everyone just go ahead together.’
‘Interpretation and the amount of work is [
These statements appear to be in line with Fields, Lys and Vincent (
One particular interviewee, who did not elect to adopt IFRS 13 early, stated that the main consideration was the shareholders, although competitors’ actions were also relevant:
‘But we will consider what our competitors will do. We will also consider [
In addition, when asked why the entity did not adopt IFRS 13 early, the interviewee stated:
‘I don’t think that there is any benefit for our users in early adopting [
This statement also appears to be consistent with Holthausen and Leftwich (
This study adds to the existing scholarly word dealing with the adoption of IFRS as a basis for preparing financial statements. Much of the prior research discusses the factors that influence the early adoption of IFRS as a whole rather than as a specific IFRS. In particular, the factors that influence the early adoption of IFRS 13 have not explicitly been considered in detail by the IASB and FASB (IASB
This research finds that the availability of implementation guidance available, differences in the interpretations of the standard, cultural membership, level of education and the maturity of capital markets did not appear to play any role in preparers’ decision to adopt IFRS 13 early or refrain from doing so (these views were confirmed by audit managers and partners). The effects of international regulation were, however, relevant. Entities were unable to adopt IFRS 13 until it was endorsed by the applicable regulator when they or their ultimate parent was listed outside of South Africa.
In general, preparers appeared to be unwilling to adopt IFRS 13 early as they felt that this standard was not particularly relevant to their business operations. Their position on IFRS 13 also points to a strong logic of resistance. This logic of resistance was present throughout the interview process. Unsurprisingly, respondents did not expressly state that they would depart from the requirements of IFRS 13 or only apply the standard superficially. Nevertheless, their comments on the challenges of early adoption of the standard suggested that they disputed the view that the benefits of IFRS 13 would exceed the costs. It was also clear that the standard would be applied when it became effective to demonstrate compliance with IFRS rather than because of a belief in the benefits of codifying the measurement and disclosure of fair values.
Preparers of financial information also appeared to be unwilling to adopt IFRS 13 early owing to the potential effects on earnings, as well as the additional information disclosed to competitors. Although interviewees (both preparers and audit experts) denied managing their earnings, they stated that volatility in earnings was a consideration when determining whether or not to adopt IFRS 13 early. This shows the existence of earnings management in the application of IFRS. Together with this, interviewees also appeared to delay the adoption of IFRS 13 owing to the additional disclosure requirements. These disclosures were perceived by interviewees as an erosion of their competitive advantage and also something that would result in added scrutiny and accountability which could be deferred by delaying the application of the new standard.
The findings are summarised in
Factors that influence early adoption decision in the interviewees opinions.
Major themes identified through the prior literature | Did the interviewees find that these factors influenced their decision? | Differences in opinions noted between preparers and auditors |
---|---|---|
Staff training | Yes | No |
Implementation guidance and interpretation of the standard | No | No |
Cultural, educational and economic factors | No | No |
Accounting disclosure | Yes | No |
Earnings management | Yes | No |
Compliance with IFRS | Yes | No |
Standards for different industries | Yes | No |
Resistance | Yes | No |
Competitors | Yes | No |
Overall, this study addresses the need for practical fieldwork studies on financial reporting. To the authors’ knowledge, it is the first to examine early adoption and the effects of IFRS 13 in South Africa. The study identifies a number of factors that influence the adoption of IFRS 13 for South African preparers. Although the study does not prove that these factors influence the early adoption decision exclusively, it does identify factors that South African preparers felt influenced their decision to voluntary adopt IFRS 13. It is, however, important to note the findings presented in this article are subject to limitations.
The exploratory nature of this study, and the relatively small group of respondents, means that the findings cannot necessarily be generalised. As a result, future researchers should examine whether or not the factors identified in this study are applicable to other developing countries and whether or not early adoption of IFRS 13 varies among preparers.
Related to this, the research has not considered the viewpoints of other stakeholders. Future research will be needed to gain a more comprehensive understanding by considering how the decision to adopt an IFRS early is interpreted by different users of annual and/or integrated reports.
This study questions neither the objective of IFRS 13 nor its ability to provide relevant and reliable information to users. This should be examined by future researchers.
It was found that preparers of financial information were reluctant to adopt IFRS 13 early because of additional disclosure requirements. Future researchers should assess whether additional disclosure leads to more review by regulators, auditors and investors, and discourages preparers from providing these disclosures.
Variations in the responses received from different types of entities such as manufacturing and retail entities were not considered. Future researchers can investigate whether entity types and differences in industry conditions affect the decision to adopt a standard before its effective date.
Lastly, and related to the above, there is the need to consider whether differences in cultural backgrounds and gender play a role in an entity’s decision to adopt specific IFRS.
It is important to note that although a range of participants has been selected for this process, the focus of the interviews is on specific factors that affect voluntary adoption. As such, where audit managers have been interviewed, these managers focussed on specific client knowledge. It is necessary to interview a range of participants owing to a limitation of access to personnel working in listed entities. As a result, secondary information received from audit managers is relied upon.
Number of audit managers and preparers’ of financial information interviewed.
Audit managers | Preparers’ of financial information |
---|---|
6 participants | 6 participants |
Relatively small sample sizes are inherent to qualitative research (Rowley
The authors declare that they have no financial or personal relationships which may have inappropriately influenced them in writing this article.
N.S. authored the article, A.P. edited the article and W.M. performed the final review.
List of abbreviations and acronyms with the
Abbreviations and acronyms | Description |
---|---|
CFO | Chief financial officer |
Companies Act | |
Conceptual Framework | Conceptual Framework for Financial Reporting |
EFRAG | European Financial Reporting Advisory Group |
EU | European Union |
FAS | Financial accounting standards |
FASB | Financial Accounting Standards Board |
GAAP | Generally Accepted Accounting Principles |
HEPS | Headline earnings per share |
IASB | International Accounting Standards Board |
IFRS | International Financial Reporting Standards |
IFRS 13 | International Financial Reporting Standards 13: Fair Value Measurement |
IFRS for SMEs | International Financial Reporting Standards for Small and Medium Entities |
IT | Information technology |
JSE | Johannesburg Securities Exchange |
PLC | Public limited company |
SAICA | South Africa Institute of Chartered Accountants |
SEC | Securities and Exchange Commission (of the United States) |
USA | United States of America |