Theory of Accounting

Class Presentation

Why do countries adopt international financial standards Ramanna (2009)

Introduction
As of 2007, at least 40 countries continue to require domestically developed accounting standards over IFRS, and this list includes some large economies like Brazil, Canada, China, Japan, India, and the US.

This paper investigates why there is heterogeneity in countries decisions to adopt IFRS; in other words, why some countries adopt IFRS while others do not.

They focus our analysis on a sample of 102 non-EU countries and examine IFRS adoption over the period 2002 through 2007.2

They exclude the EU member states from their tests because their decision to adopt IFRS was closely tied to the establishment of the IASB itself (EC, 2000).

Introduction
Factors which can affect the adoption and what they venture to test Does IFRS adoption for a given country in a given year increases with the number of IFRS adopters in its geographical region and with IFRS adoption among its trade partners? The net political value of IFRS? whether economies with high levels of or expected increases in foreign investment and trade are more likely to adopt IFRS, due to reduction in information costs? Does it affect the quality of countries domestic governance institutions?

Hypothesis for IFRS adoption

Considerations for each of the factors

Net economic value of IFRS The value from having a shared body of accounting standards The relative quality of local governance institutions

Net political value of IFRS

International power politics

Culture politics

Synchronization value of IFRS

Conclusion

1. They find evidence consistent with the likelihood of IFRS adoption for a given country increasing with the number of IFRS adopters in its geographical region and with IFRS adoption among its trade partners
The result is significant for at least two reasons: (1) it suggests countries internalize the network effects of IFRS in their adoption decisions; and (2) it suggests that as the network benefits from IFRS get large, countries may adopt the international standards

They find no evidence that the level of and expected changes in foreign investment and trade affect the likelihood of adoption. Thus, they cannot confirm that IFRS lowers information costs in more globalized economies.

Conclusion

There is evidence in the data consistent with the proposition that powerful countries dont want to adopt since they dont want to cede authority to the EU.

However, they do not find evidence of cultural differences between adopters and nonadopters

They have evidence that the best governed and most powerful non-EU countries were, as of 2007, less likely to adopt IFRS. This suggests that several countries still perceived IFRS as being costly.

Thank You