IFRS ADOPTION: THE ROLE OF LEGAL SYSTEM AND FOREIGN DIRECT INVESTMENT
TABLE OF CONTENTS
CHAPTER ONE: INTRODUCTION
Background to the study
Statement of the research problem
Objectives of the study
Scope of the study
Significance of the study
Limitation of the study
Organization of the study
Operational definition of terms
CHAPTER TWO: LITERATURE REVIEW
Historical background of IFRS (IFRS(1)3
Overview of adoption of international financial reporting standard (IFRS (3)
IFRS and quality of accounting information (IFRS (3)
Effect of country culture on international financial reporting standard adoption (IFRS(1)4 and (IFRS 8)
Why do countries adopt IFRS?
Need to adopt IFRS (IFRS(1)3
Foreign direct investment and IFRS adoption (IFRS(1)2
Adoption of IFRS in some countries
CHAPTER THREE: RESEARCH METHODOLOGY
The research design
Population and sample of the study
Sources of data
Measurement of variables
Method of data analysis
CHAPTER FOUR: DATA PRESENTATION AND ANALYSIS
4.2 Presentation and Analysis of Results
4.3 Test of Hypotheses
CHAPTER FIVE: SUMMARY, FINDINGS, CONCLUSION AND RECOMMENDATION
5.3 Summary of Findings
BACKGROUND TO THE STUDY
There is a growing demand for credible financial information to meet the needs of stakeholders who have operational interest in financial reporting. Information emanating from financial reporting is regarded as credible and useful when it faithfully represents the “economic substance” of an organization in terms of relevance, reliability and comparability (Spiceland, Sepe and Tomassini (2001).
It is in recognition of the need to have quality financial reports that the adoption of International Financial Reporting Standards (IFRS) is taking firm root among countries around the world. One of such countries is Egypt which has officially adopted IFRS since 1997.
Key international donor/lending institutions such the World Bank (WB) and International Monetary Fund (IMF) exert pressures on developing and transitional countries to adopt International Financial Reporting Standards (IFRS) as part of their reform programmes (Points and Cunningham, 1998; Mir and Rahaman, 2005). They argue that the application and implementation of internationally accepted accounting standards is necessary to command the confidence of investors. However, the relevance of IFRS to developing and transitional countries has been questioned by a growing number of scholars (e.g. Mensah, 1981; Ndubizu, 1984; Longden et al., 2001). For example, Wallace and Briston (1993) argue that: developing countries continue to adopt foreign accounting and educational systems. This is often expensive, and the adopting country has little control over the relevance of imported accounting…The biggest problem developing countries have is that of too many foreign ‘experts’ marketing half-baked solutions to problems that neither they nor the recipient nations understand. Donor agencies should collaborate more closely with the recipient country to ensure that their assistance is delivered only in accordance with national accounting development plans.
The inappropriateness of IFRS in developing and transitional countries has been reflected in the high level of non-compliance with these standards (Abd-Elsalam and Weetman, 2003; Dahawy and Conover, 2007). For example, Solas (1994) examined the extent of financial information disclosure by Jordanian companies according to the requirements of IFRS. He concluded that disclosure was not at an acceptable level. In a world sample of companies, Street and Gray (2001) found a significant extent of non-compliance with IFRS.
In early 1990s Egypt has undertaken a privatization programme due to the external pressures from international donors (the WB and IMF). As part of this programme, Egypt adopted IFRS since 1997. A new Capital Market Law No. 95 of 1992 was issued and Its Executive Regulations required adherence to IFRS in 1993. After issuing an official Arabic translation of the standards by the Minister of Economy in 1997, the requirement to apply IFRS became fully mandatory for the first time. The decision of the Egyptian government to mandate an immediate implementation of IFRS allowed neither the listed companies nor the accounting profession adequate time to adapt to the ‘new’ standards. This results in low or non-compliance with their requirements. Abd-Elsalam and Weetman (2003), for instance, focused on the application of IFRS in the period immediately after they became mandatory in Egypt. They observed a low degree of compliance with IFRS in most listed companies in Egypt. They explained this behaviour in terms of relative unfamiliarity with IFRS requirements and non-availability of an authoritative translation or language effect. Dahawy and Conover (2007) observed the same behaviour and explained it by cultural reasons, especially secrecy. They found that listed companies in Egypt were ‘selective in their choice of what to comply with and what not.’ Both Abd-Elsalam and Weetman (2003) and Dahawy and Conover (2007) are based on analyzing the disclosures of the annual financial reports of listed companies in the Egyptian Stock Market.
In the light of this, the researcher intends to investigate the adoption of IFRS in developing countries, using Egypt as a Case Study.
STATEMENT OF THE RESEARCH PROBLEM
The major challenges surrounding the enforcing uniform accounting standards is feasible given that countries differ considerably in almost all faces. The structure of national economies, the legal framework, the tax system, the political environment and the level of development of the accounting profession and all significant factors that influences the extent to which these international standards can be implemented across countries consequently, significant cost are likely to occur from transitioning to IFRS. For the purpose of the study the following research question were formulated:
What is the relationship between decision to adopt IFRS by a country and legal system of the country?
What is the relationship between decision to adopt IFRS by a country and foreign direct investment?
OBJECTIVES OF THE STUDY
The research objectives are:
To find out the relationship between decision to adopt IFRS by a country and legal system of the country.
To examine the relationship between decision to adopt IFRS by a country and foreign direct investment.
The following hypotheses have been formulated to serve as a base for this research;
There is a positive relationship between decision to adopt IFRS by a country and legal system of the country.
There is a positive relationship between decision to adopt IFRS by a country and foreign direct investment.
SCOPE OF THE STUDY
This research work is an empirical study on IFRS Adoption: the Role of Legal system and Foreign Direct Investment. The population of the study is entire 56 countries in Africa, while the sample is restricted to 30 selected countries in Africa.
The length of period covered by the study is 2007 – 2011.
Geographically, the study will be conducted in Benin City, Edo State.
SIGNIFICANCE OF THE STUDY
This research work on its conclusion, together with whatever solution or findings that may arise, will prove useful to some particular group of persons or otherwise for various reasons in accordance with their varying needs.
Stakeholders: This study will be important and beneficial to stakeholders to know the essence of the IFRS Adoption and legal system of a country.
The Government: It will acquaint the government of the importance of IFRS Adoption and legal system of a country and how it should be properly managed.
The public: This study will help to restore the lost confidence of the public as regard the IFRS Adoption and legal system of a country.
Academic/future researcher: Both academic and other future researchers in this similar subject matter will find it a useful source of learning and research.
LIMITATION OF THE STUDY
In the course of carry out this study, the researcher encountered some constraints such as finance, time, the response rate of the respondents.
Access to Current Data: Also most management staff would not want to discuss relevant information about their firms. Even most government establishments did not want to disclose very current data in relation to this aspect of study. This again played a major constraint on this study.
ORGANIZATION OF THE STUDY
The study is divided into five (5) chapters. These are briefly outlined below.
Chapter One: Introduction
This is concerned with the background or reasons for the study, the statement of the problem, the research objectives, etc.
Chapter Two: Literature Review
This reviews related literature in the study area with the purpose of developing a theoretical framework for the study.
Chapter Three: Research Design and Methodology
This looks at the research design, data collection and data analysis procedures.
Chapter Four: Results and Discussion
This interprets the analysis in Chapter three.
Chapter Five: Summary, Recommendations and Conclusion
Here, we provide the research findings, recommendations and conclusion.
OPERATIONAL DEFINITION OF TERMS
IFRS = A set of international accounting standards stating how particular types of transactions and other events should be reported in financial statements. IFRS are issued by the International Accounting Standards Board
Adoption = The action or fact of adopting or being adopted.
LGS = Legal system
FDI = Foreign direct investment
Abd-Elalam, O. H. and Weetman, P. (2003), ‘Introducing International Accounting Standards to An Emerging Capital Market: Relative Familiarity and Language Effect in Egypt’, Journal of International Accounting, Auditing & Taxation, 12:63-84.
Dahawy, K. and Conover, T. (2007), ‘Accounting Disclosure in Companies Listed on the Egyptian Stock Exchange’, Middle Eastern Finance and Economics, 1:5-20.
Mir, M. Z. and Rahaman, A. S. (2005), ‘The Adoption of International Accounting Standards in Bangladesh’, Accounting, Auditing & Accountability Journal, 18(6): 816-841.
Points, R. and Cunningham, R. (1998), ‘The Application of International Accounting Standards in Transitional Societies and Developing Countries’, Advances in International Accounting, 1:3-16.
Solas, C. (2004), ‘Financial Reporting Practice in Jordan: An Empirical Test’, Advances in International Accounting, 7:43 – 60.
Spiceland, J. D, J. F. Sepe and L. A. Tomassini (2001), Intermediate Accounting. New York. McGraw-Hill.
Street, D. and Gray, S. (2001), Observance of International Accounting Standards: Factors Explaining Non-Compliance (London: Association of Chartered Certified Accountants, ACCA Research Report (74).
Wallace, R. and Briston, R. (1993), ‘Improving the Accounting Infrastructure in Developing Countries’, Research in Third World Accounting, 2:201-24.
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