IFRS - 10 Years Later: Accounting and Business Research

Accounting and Business Research
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IFRS – 10 years later
Ray Ball
To cite this article: Ray Ball (2016) IFRS – 10 years later, Accounting and Business Research,
46:5, 545-571, DOI: 10.1080/00014788.2016.1182710
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Accounting and Business Research, 2016
Vol. 46, No. 5, 545 –571, http://dx.doi.org/10.1080/00014788.2016.1182710
IFRS – 10 years later
RAY BALL∗
The University of Chicago Booth School of Business, Chicago, IL, USA
A decade ago, the near-simultaneous adoption of International Financial Reporting Standards

(IFRS) in over 100 countries could fairly have been described as a brave new world in financial
reporting. Any systems innovation, and especially an innovation of such importance and
magnitude, thrusts those involved (companies, users, and accountants) into the unknown.
There was good reason to expect success, based largely on widespread enthusiasm for
international standards and, behind that, recognition of the strong forces of globalization.
Nevertheless, there were risks involved and there was limited a priori evidence to guide the
decision-makers. A decade later, this is still the case. Globalization remains a potent
economic and political force, and drives the demand for globalization in accounting.
Nevertheless, most political and commercial activity remains local, so adoption of uniform
rules does not by itself lead to uniform reporting behavior around the world. For many of
the claimed benefits of IFRS adoption to be realized, uniform implementation would have to
occur in a wide range of countries, which seems unlikely and requires more than simply
creating regulatory enforcement mechanisms. Some evidence of actual outcomes from IFRS
adoption has come to light, but, as will be argued below, by and large the evidence to date
is not very useful. The IASB’s (International Accounting Standards Board) valuation-centric
Conceptual Framework leads it to pay little or no heed to the use of accounting information
in contracting, despite the lip service recent amendments pay to even the narrower notion of
stewardship. So IFRS adoption is an innovation of historical proportions whose worldwide
effects remain somewhat uncertain. The essay concludes with comments on the status of
China and the US.
Keywords: conceptual framework; contracting; enforcement; fair value; IFRS; stewardship;
transparency; unintended consequences
1. Introduction
The widespread adoption of International Financial Reporting Standards (IFRS) a decade ago
constitutes a truly historical innovation in financial reporting. All innovations are at least to
some degree leaps of faith, and can only be based on prior expectations gleaned from evidence
and from reasoning, so their outcomes never are completely as anticipated. In the case of
IFRS, prior expectations were high. There were clear reasons and prior evidence of a substantial
political and economic demand for accounting globalization, so expectations were very high at
∗
Email: ray.ball@chicagobooth.edu
# 2016 Informa UK Limited, trading as Taylor & Francis Group

546 R. Ball
the outset, probably too high. There were some equally clear reasons and prior evidence to be
cautious, and to expect limits to globalization in actual financial reporting practice, as distinct
from standards, though these reservations were seldom expressed in the public commentary.
Against this background, the Institute of Chartered Accountants in England and Wales
(ICAEW) commissioned the 2015 PD Leake Lecture which forms the basis of this essay, the
objective being to provide a 10-year retrospective on the big bang events of 2005. In that
sense, it provides a retrospective on the 2005 PD Leake Lecture published in this journal (Ball
2006). While the essay makes several observations on what can (and, perhaps more importantly,
cannot) be learned from the research evidence, it is not a literature survey, of which there have
been several already (e.g. Negash 2009, Brüggemann et al. 2013, Mohammadrezaei et al.
2013, European Commission 2014, 2015, ICAEW 2014, De George et al. 2015, Kaaya 2015).
Instead, the essay attempts to provide a perspective for assessing the outcomes from IFRS adop-
tion, both present and future.
2. Then and now: summarizing the perspectives in 2005 and 2015

The perspective in 2005 was that IFRS were generally perceived to be high-quality standards,
whatever that may be, but that they were incomplete. Ten years later, they remain viewed as of
high quality and they are substantially more complete. There already was widespread adoption
of IFRS in 2005, and that remains the case today. In the meantime, exactly what adoption
means in various regimes has been clarified to a large degree by a systematic review of adopters
that was conducted by the International Accounting Standards Board (IASB) and a more nuanced
review by Nobes (2006, 2013), described below. There remain a handful of holdout countries,
most notably the US, but the overall record of formal adoption by jurisdictions is impressive
indeed.
A priori, there were many conjectured benefits from IFRS adoption, including more efficient
cross-border transacting, enhanced informativeness of financial reports (increased transparency),
greater inter-company comparability of financial data, better asset prices (efficiency), lower cost
of capital, and balance sheets that facilitate more efficient contracting between companies and
lenders. Whether these benefits have in fact materialized is difficult to say. For reasons discussed
below, there is limited evidence to go on, and many of the studies are flawed or have been
misconstrued.
At the outset, there also were many concerns. One concern was that what constitutes adoption
might vary considerably across regimes, which might carve out or modify particular standards to
accommodate domestic economic, political, or legal issues, but this has not transpired to a signifi-
cant degree. Formal adoption has been remarkably uniform.
Whether the newly adopted standards would actually be implemented uniformly was a
concern, and remains so. While globalization is a potent force, it has its limits. Political and econ-
omic forces are what create the incentives of the actors who determine what actually transpires in
financial reporting (managers, auditors, boards, regulators, courts, analysts, press, educators) to
push for implementation of adopted rules; the same forces determine – over a very long
period – the complex institutional structure within which they act. But politics and commerce
are in large and varying degrees local (Ball 1995, 2006), as distinct from global, leading to incen-
tives and institutional structures that are likely to differ across IFRS adopting countries and to
implementation that is likely to differ also as a consequence. Formal adoption of uniform rules
by jurisdictions does not by itself lead to uniform reporting behavior. For many of the claimed
benefits of IFRS adoption to be realized, consistent implementation across regimes would have
to occur, and in view of the formidable variation in local economic and political influences on
financial reporting practice by companies, that seems highly unlikely.
Accounting and Business Research 547
One benefit of widespread adoption has been that in some quarters (notably, Europe) adoption
has been associated with increased attention being given to governmental regulatory enforcement
mechanisms. However, this has not occurred to the same degree on a worldwide basis. Even then,
in countries that established or strengthened regulatory enforcement mechanisms that is no guar-
antee of actual implementation in practice.
Another set of concerns a decade ago arose from the substantial shift to fair value accounting
that IFRS adoption brought to many countries for the first time. The major concerns were the sub-
jectivity inherent when fair value estimates are not based on market prices, and the liquidity
assumptions implicit even when they are. The concern was highlighted as follows (Ball 2006):
Fair value accounting has not yet been tested by a major financial crisis, when lenders in particular
could discover that ‘fair value’ means ‘fair weather value’. The test came soon afterward, with
good but mixed results. In the meantime, some unanticipated concerns have arisen about the
effect of fair value accounting in contracting contexts (debt, compensation, supply, licensing,
etc.), and some early evidence has supported those concerns.
Finally, there were concerns that the Conceptual Framework project could yet cause IASB/
Financial Accounting Standards Board (FASB) some grief (it has already) and there were
some longer term concerns (which have not changed substantially). The latter include the
effect on the IFRS brand name of permitting its use by regimes without a strong interest in
implementation and with low financial reporting quality, and the composition of IASB govern-
ance in the long term.
The 2005 perspective was summarized as only time will tell. While in the meantime we have
some garnered more evidence to go on, in 2015 it still is early days.
3. IFRS generally are viewed as high-quality standards

The general perception in 2005 was that IFRS were high-quality standards, whatever that may be,
but that they were incomplete. Ten years later, they remain viewed as being of high quality, and
they are substantially more complete. Completion of several new standards (notably, on revenue
recognition, leases, and financial instruments) has dragged on longer than initially envisaged, in
large part due to the accounting issues thrown up during the Global Financial Crisis and to the
complicated politics arising from the convergence project between the IASB and the US standard
setting body, the FASB. While it has taken longer than expected to get there, few commentators
would now view the topic area coverage of IFRS as incomplete.
Despite the almost universal agreement that the IASB has produced a set of standards that
deserve the sobriquet high quality, it is not entirely clear what that means, or even that different
commentators use it to describe the same properties of the standards. From various conversations,
I have concluded that the four main properties of IFRS that underlie this general assessment
are:
(1) The IFRS standards were developed largely outside of governmental bodies and were not
designed primarily to meet political criteria or to correspond with tax accounting rules;
(2) The standards are largely designed to make financial statements reflect the economic sub-
stance – rather than the legal form – of a company’s financial affairs;
(3) Greater use is made of fair value accounting as distinct from historical cost, potentially
making IFRS balance sheets and earnings more informative and recording economic
gains and losses in a more timely fashion; and
(4) The standards are designed to curtail managers’ discretion to manipulate provisions in
ways that were considered valid under many of the adopting countries’ prior rules, for
example, with the objective of smoothing reported earnings or hiding losses.
548 R. Ball
These properties are not independent. One commonly heard way of summarizing them is to
say that IFRS are designed to increase financial reporting transparency, which can be interpreted
loosely as providing more complete and accurate information about the company’s financial
affairs. Expectations of increased transparency led to considerable optimism for the future of
financial reporting under IFRS, and the optimism was fueled by widespread formal adoption
of IFRS around the world.
4. Potential benefits of IFRS adoption

There were numerous expected benefits of IFRS adoption that were espoused by commentators of
all stripes, including accounting firms, standard setters, politicians, administrators, the press, man-
agers, analysts, and academics. Most of the expected benefits involve the efficiency of markets.
As noted earlier, the benefits of any systems innovation when it is undertaken are expectations,
not known facts.
. Asset markets. Many of the potential benefits of IFRS were thought to lie in the equity and
debt markets. Increased financial statement transparency promises higher information quality
and reduced information risk to shareholders, and also to lenders. The benefits could occur by
the direct channel of providing more information in the financial statements, or indirectly by
reducing the cost or increasing the credibility of information supplied through other channels.
For example, standardization of accounting rules could reduce the cost of analysts’ research.
Uniform accounting rules also could increase comparability across firms in different
countries, and reduce the cost of creating standardized international financial databases.
From a social welfare perspective, the anticipated outcome would be better public infor-
mation and hence more accurate valuation in the equity and debt markets (i.e. better prices).
. Cost of capital to public corporations. A related and widely touted potential benefit of IFRS
adoption was a reduction in the cost of capital to public companies. The reasoning here was
that if more information becomes available to investors, their investments will be perceived
to be less risky, and as a consequence investors will require a lower return from investing.
From a social welfare perspective, the anticipated outcome would be increased wealth, due
to increased valuation of existing capital and increased capital creation.
. Corporate governance. IFRS adoption was expected to improve corporate governance via
several channels. Providing managers with information that is timelier and more accurate
could improve decision-making. Rendering managers’ actions and their consequences
more transparent could enhance monitoring by boards, investors, analysts, rating agencies,
press, etc. Facilitating cross-border mergers, both actual and threatened, could increase the
competition to manage the firm. In many adopting jurisdictions’ prior domestic rules, there
were no impairment standards comparable to IAS 36 and IAS 38, so timelier loss recog-
nition was expected. This could lead managers to face the music and fix bad decisions
earlier; furthermore, the prospect of timelier loss recognition could incent them to undertake
fewer pet projects, trophy acquisitions and ill-considered investments in the first place.1
From a social welfare perspective, the anticipated outcome from all these channels
would be a more efficient market for corporate control and hence more efficient operating,
investment and financing decisions.
. Markets generally. IFRS adoption was expected to reduce the cost of cross-border contract-
ing with suppliers, labour, customers, lenders, investors, etc., and hence to expand the quan-
tity of international transacting in all of the markets in which public corporations
participate. From a social welfare perspective, the anticipated outcome would be increased
efficiency of markets generally.
All things considered, the perceived benefits of widespread IFRS adoption in 2005 were sub-
stantial, being spread across numerous markets and countries, and as a result the event was associ-
ated with great enthusiasm.
A decade later, it is still too early to identify the extent and character of the actual benefits that
have been obtained. I will argue below that demonstrating the magnitude or for that matter the
existence of these benefits is elusive, despite several optimistic attempts to do so. It is not even
clear who the ultimate beneficiaries of IFRS adoption would be, or where the benefits could be
observed by researchers.
5. Widespread formal adoption by jurisdictions

By 2005 there already was widespread formal adoption by jurisdictions of IFRS for public com-
panies, and that remains the case. In the meantime, exactly what adoption means in various jur-
isdictions has been clarified to a large degree by a systematic review of 140 countries that was
conducted by the IASB, which is summarized in Table 1.2 The analysis covers approximately
70% of all countries worldwide in terms of numbers, including most countries of substantial
size. Salient statistics include:
. 116 of the 140 reviewed countries (83%) require essentially all public companies to report
using IFRS. They are listed in Table 2.
. Not surprisingly, the highest frequency of adoption (98%) is in Europe.
. The 116 adopting countries cover 58% of the world’s GDP.
. An additional 12 countries permit but do not require public companies to report under
IFRS. Four other countries either are in process of adopting or substantially converging
to IFRS, or require IFRS for financial institutions only. These are listed in Table 3.
. Only 8 of the 140 countries (6%) have retained domestic standards for public companies.
They also are listed in Table 3.
. The four most populous countries (China, India, Indonesia, and the US) to date have not
adopted IFRS. This also is the case for the three largest economies (China, Japan, and
the US).
. While China has not formally adopted IFRS, it has signed memoranda with the IASB in 2005
and again in 2015, endorsing convergence. China’s case is discussed further in Section 12.
. The US has retained US GAAP, at least for the foreseeable future and perhaps indefinitely.
Nevertheless, the US Securities and Exchange Commission (SEC) permits nearly 500
foreign companies with securities that are traded in the US to report under IFRS without
requiring a Section 20-F reconciliation to US GAAP.3 In terms of both the number and
the aggregate capitalization of the firms involved, this makes the US one of the world’s
Table 1. Status of IFRS adoptiona.

IFRS status No. of countries
Require 116
Permit but not require 12
Miscellaneous 4
Retain national standards 8
Total analyzed by IASB 140
a
Source: Analysis conducted by IASB, reported at http://www.ifrs.org/Use-around-the-world/Pages/Analysis-of-the-
IFRS-jurisdictional-profiles.aspx, accessed 10 September 2015.
550 R. Ball
Table 2. The 116/140 countries that require IFRSa.

Afghanistan Finland Norway
Albania France Oman
Angola Georgia Pakistan
Anguilla Germany Palestine
Antigua and Barbuda Ghana Peru
Argentina Greece Philippines
Armenia Grenada Poland
Australia Guyana Portugal
Austria Hong Kong Romania
Azerbaijan Hungary Russia
Bahamas Iceland Rwanda
Bahrain Iraq Saint Lucia
Bangladesh Ireland Serbia
Barbados Israel Sierra Leone
Belarus Italy Singapore
Belgium Jamaica Slovakia
Belize Jordan Slovenia
Bhutan Kenya South Africa
Bosnia and Herzegovina Korea (South) Spain
Botswana Kosovo Sri Lanka
Brazil Latvia St Kitts and Nevis
Brunei Darussalam Lesotho St Vincent and the Grenadines
Bulgaria Liechtenstein Swaziland
Cambodia Lithuania Sweden
Canada Luxembourg Syria
Chile Macedonia Taiwan
Colombia Malaysia Tanzania
Costa Rica Maldives Trinidad & Tobago
Croatia Malta Turkey
Cyprus Mauritius Uganda
Czech Republic Mexico Ukraine
Denmark Moldova United Arab Emirates
Dominica Mongolia UK
Dominican Republic Montserrat Uruguay
Ecuador Myanmar Venezuela
El Salvador Nepal Yemen
Estonia Netherlands Zambia
European Union New Zealand Zimbabwe
Fiji Nigeria
a
Source: http://www.ifrs.org/Use-around-the-world/Pages/Analysis-of-the-IFRS-jurisdictional-profiles.aspx, accessed 10
September 2015. Includes the EU. In addition, Thailand currently is in the process of full adoption.
largest IFRS adopters. Some conjectures on future US decisions on IFRS for domestic com-
panies are offered in Section 13.
Thus, while there remain a handful of holdout countries, most notably China and the US, the
overall record of formal adoption is impressive indeed.
6. Forces against uniformity in reporting practice

Even complete global IFRS adoption by jurisdictions would not in itself imply uniformity in how
companies around the world actually report. This section explores the limits to globalization and
two major two sources of slippage between formal adoption and reporting practice: uneven
Table 3. The 24 jurisdictions that have not adopted IFRSa.

Status Number Jurisdictions
Permit, rather than require IFRS 12 Bermuda, Cayman Islands, Guatemala, Honduras,
India, Japan, Madagascar, Nicaragua, Panama,
Paraguay, Suriname, Switzerland
Require IFRS for financial institutions but 2 Saudi Arabia, Uzbekistan
not for listed companies
In process of adopting IFRS in full 1 Thailand
In process of converging national 1 Indonesia
standards substantially (but not entirely)
with IFRS
Use national or regional standards 8 Bolivia, China, Egypt, Guinea-Bissau, Macao,
Niger, US, Vietnam
a
Source: http://www.ifrs.org/Use-around-the-world/Pages/Analysis-of-the-IFRS-jurisdictional-profiles.aspx, accessed 10
September 2015.
adoption of IFRS as issued by the IASB; and uneven implementation of the adopted standards.
The simple fact that most economic and political forces remain local rather than global lead
one to expect considerable slippage: that is, to expect substantial variation across jurisdictions
at the coal face, in actual reporting.4
Why is this an important issue? It is important because mere adoption of IFRS is considerably
less costly than building, maintaining, and operating the complex institutional structure required
for adoption to translate into practice. For example, consider the gold standard of complete com-
parability, the hypothetical property of financial reporting that two otherwise identical companies
reporting in different jurisdictions would report identical financial statements. Achieving this
ideal is by no means guaranteed by formal adoption alone: it requires adoption of identical ver-
sions of IFRS and their consistent implementation across jurisdictions.
6.1. Limits to globalization

By way of background, it is helpful to reflect on why increased convergence in accounting stan-
dards has occurred, and why it has occurred in present times. The underlying force behind
increased globalization in accounting is increased globalization of the markets in which financial
statement information is used (capital, product, supply, labor, corporate control), and increased
globalization of the political forces that also influence financial reporting. Increased cross-
border transacting in all markets increases the demand for convergence in accounting language
and reporting standards.5 In parallel, political processes have become more trans-national, most
notably in Europe.
However, despite substantially increased globalization over recent decades, the world still is
in many ways more local than global. This is the case for important variables such as the roles of
various stakeholders in the economy and in politics; the contexts in which financial statement
information is used; and the complex web of institutions (legal, professional, corporate, edu-
cational, etc.) that interact with and complement financial reporting standards in determining
actual reporting practice. The conclusion is that local forces will continue to exert an influence
on actual financial reporting practice, and that the degree of influence could be considerable in
many countries and circumstances. The fundamental limit to uniform IFRS adoption and
implementation therefore is that – despite their increased global character – the incentives of
parties influencing financial reporting practice (managers, auditors, regulators, courts, boards,
552 R. Ball
block shareholders, politicians, analysts, rating agencies, press, etc.) remain primarily local. There
are limits to globalization.
It is worth noting that the European perspective on this issue is atypical. During the past five or
six decades, the European Union (EU) and its precursor bodies has converged member countries’
markets and governments to a substantially greater degree than has occurred elsewhere. But as
recent events have demonstrated, even within Europe local considerations – across countries
and even across regions within countries – have demonstrated the limits to the notion of
uniform standards.
It perhaps is no coincidence that so far domestic standards have been retained by the world’s
four most populous countries (China, India, Indonesia, and the US), and its three largest econom-
ies (China, Japan, and the US). These countries presumably encounter larger than average dom-
estic political and economic forces.
Against this background, I now explore the largest constraints on uniform financial reporting
practice: uneven adoption of IFRS as issued by the IASB; and uneven implementation of the
adopted standards.
6.2. Uneven adoption

One concern at the outset (Ball 2006) was that countries would adopt different versions of IFRS,
to the point where the notion of the standards being truly international could be questioned. For
example, countries or regions could carve out particular standards or parts of standards that are
domestically unacceptable economically or politically, simply by adopting their own version of
IFRS. Alternatively, countries could modify particular standards by changing those provisions
in the standards that were found to be unacceptable. A case in point is IFRS as Adopted by
the EU, which differ in several respects from IFRS as Issued by the IASB. The most prominent
difference is the EU’s modification of IAS 39 on financial instruments to soften the impact of that
standard on financial institutions’ balance sheets during the Global Financial Crisis. Even differ-
ences in commercial concepts, language and institutions can lead to variation in how IFRS as
Issued by the IASB translate into local standards.
This concern has proven to be largely if not entirely ill-founded. Setting aside enforcement for
the moment, a remarkable feature of the formal adoption by more than 100 jurisdictions to date
has been the degree of its uniformity. Nevertheless, the IASB survey quoted in section five does
appear to paint a somewhat optimistic picture. The Nobes (2006, 2013) survey details a more
nuanced reality, revealing variation across jurisdictions in the exact version of IFRS formally
adopted, in the translation of IFRS into national languages and concepts, in selection by compa-
nies from among the optional treatments afforded by IFRS, in enforcement, and in accounting
methods choices made when the standard offers alternatives. How important these differences
are in terms of affecting the financial numbers that firms report in practice – and their compar-
ability across jurisdictions – is another matter.
Even if different versions of IFRS have been adopted, the variance in standards across juris-
dictions is considerably lower after 2005 than previously. Increased globalization of accounting
standards is a fact. At the same time, jurisdictional differences in standards have persisted.
National political and economic forces also are strong (Ball 1995, 2006), and it would be fanciful
to assume they are not.
6.3. Uneven implementation

Actual implementation of the formally adopted standards is another matter entirely. There are
valid reasons to expect cross-jurisdictional differences in implementation to exist and perhaps
to be substantial. First, financial reporting involves a considerable degree of estimation and judg-
ment, particularly so under IFRS. Second, the complex market, political and general institutional
forces that come to bear on how corporate managers report to the public remain largely local, and
differ substantially among countries. Third, actual implementation is not guaranteed by establish-
ing regulatory enforcement mechanisms, and requires all of the forces that affect how managers
report to be aligned. I discuss each in turn.
6.3.1. The role of estimation and discretion

All accounting accruals involve some degree of judgment about future cash flows. As some
accounting scandals have revealed, even counting cash (Parmalat) and operating cash flow
(Enron) can be manipulated, but it is in the accruals adjustments to cash flow where the role of
judgment primarily applies. All working capital accruals (such as unearned revenues, bad debt
allowances, income tax expense and inventory valuation adjustments) involve estimates of
future outcomes. Longer-cycle accruals such as asset impairment charges, loss provisions,
health care and pension costs and liabilities, deferred tax valuation adjustments, and bank loan
loss provisions involve estimates of outcomes at more distant future dates. Consequently, there
is much leeway in practice in how all accounting standards are implemented.
This is especially the case with IFRS, for several reasons. The IASB has designed IFRS stan-
dards that – especially relative to US GAAP – outline broad principles rather than detailed rules,
and hence provide more latitude in implementation. Whether this is deliberately designed to
provide the IASB’s wide range of constituents a wide range of choices in implementation is
another matter, but whatever the motive it does provide greater discretion.
In addition, Nobes (2013, Table 2) identifies 31 choices among alternative accounting
methods that are offered in IFRS. For example, IAS 16 and IAS 38 provide a choice between
reporting certain long-lived assets at cost or at fair value. While the choices typically are con-
strained (e.g. they cannot be changed frequently), they provide an additional layer of discretion
to managers. Nobes (2013, section 5.2) surveys evidence indicating that the choices made vary
along national lines, further testament to the thesis that economic and political forces remain
local as well as global.
IFRS also make considerable use of fair value accounting, which books assets and liabilities at
amounts that are conceived via hypothetical transactions. Fair values are accounting accruals, not
actual arm’s length market transactions, allowing implementation differences. Even for short-
cycle items such as financial instruments, only a minority of the IFRS adopting countries
possess deep financial markets. Consequently, the reliability of fair values in many jurisdictions
is affected by thin trading, illiquidity, wide spreads, subjective mark to model estimates and even
government-administered prices. The jurisdictions in which this is the greatest problem tend to
have the weakest enforcement institutions (audit profession, legal protections, regulation,
boards, analysts, press, etc.) and greatest political involvement.
For longer-cycle items such as property, plant, and equipment, exercising the option to fair
value builds an entirely different level of judgment into the financials. Fair-valuing long-cycle
assets involves forecasting cash flows over substantial horizons, an exercise that requires judg-
ment and provides managers with discretion over the private information they reveal. Similarly,
asset impairment charges are long-cycle accruals and they play a more prominent role in IFRS
than in many adopting countries’ prior domestic standards. Because these accruals utilize
manager and auditor judgment, they are subject to local political and economic influence.
The conclusion is that rules alone do not determine actual reporting practice. Estimation and
discretion are required. This point appears to have been under-appreciated when expectations of
cross-regime comparability were formed around the time of IFRS adoption.
554 R. Ball
6.3.2. Local politics, economics, and institutions

Without pointing fingers at specific countries, it should be clear that the list of formal adopters in
Table 3 includes regimes where there is little incentive for high reporting quality in practice (e.g.
for low earnings management, timely loss recognition, high transparency) and even little toler-
ance of it. Does anyone really believe that implementation will be of equal standard in all of
the countries? Many of the countries counted among the 116 adopters simply do not have the
infrastructure to enforce actual implementation, even if they wanted to. Many will not want to,
due to domestic political and economic factors.
6.3.3. Evidence on incentives versus standards

In addition to the above a priori reasoning, there now is considerable evidence that differences
in IFRS implementation do in fact matter. Ball et al. (2000b, 2003) report financial reporting
quality measures in China and four East Asian countries that are more consistent with the
domestic incentives of those influencing actual reporting practice than they are with the
countries’ adopted accounting standards, including IAS (the precursor to IFRS). This is
described as the primacy of incentives over standards. Following in this tradition, Daske
et al. (2008) observe benefits to investors (increased market liquidity and Tobin’s q,
reduced cost of capital) from IFRS adoption only in countries with strong legal enforcement
mechanisms and where firms have incentives to be transparent. The presumption underlying
these capital market measures is that they reflect the quality of information available to inves-
tors. Daske et al. (2013) distinguish between firms with high and low reporting quality incen-
tives, which they classify as serious and label voluntary IFRS adoptions. They report that the
former are associated with market liquidity and cost of capital benefits, but the latter are not.
From a study of German IFRS adopting firms, Christensen et al. (2015) conclude that when
higher quality accounting standards are mandated, accounting quality improvements are only
observed in firms with incentives to comply. Cascino and Gassen (2015) study the effect of
IFRS adoption on compliance and comparability among German and Italian firms. They con-
clude that incentives (measured at the firm, region, and country levels) affect compliance and
that only firms with high compliance measures experience substantial increases in
comparability.
6.3.4. Implementation and regulatory enforcement mechanisms

The literature surveyed in the previous section underscores the importance of incentives in the
implementation of international standards. The emerging consensus is that changes in rules
have little effect on financial reporting quality without incentives of preparers to actually
implement them. How are incentives affected by the establishment of governmental (regulatory)
enforcement mechanisms?
Here too there is evidence. Christensen et al. (2013) use liquidity in the market for companies’
shares to measure the quality of information available to investors. They observe liquidity
increases around IFRS adoption only within the EU. Within the EU, liquidity increases occur
only in the five countries with substantial concurrent improvements in regulatory enforcement.
Benefits were greatest for companies whose prior domestic standards differed most from IFRS,
provided they operated in a strong regulatory jurisdiction.
An unexpected benefit of IFRS adoption in Europe has been increased attention being given to
enforcement mechanisms. But even within the EU, at the time of IFRS adoption its member states
declined to establish a supra-national body to scrutinize financial reporting, and instead asked the
Committee of Securities Regulators to develop common enforcement standards for the separate
national bodies.
Enforcement by regulators is but a subset of enforcement mechanisms generally, which
include internal and external auditing, as well as monitoring by boards, security analysts,
whistle-blowers, private parties on the other side of irregular transactions, short sellers, the
plaintiffs bar, and the press. For example, accounting fraud in the US typically comes to
light through mechanisms other than the SEC (Dyck et al. 2010). The quality and indepen-
dence of these mechanisms varies across jurisdictions. Many factors can cause them to
differ, including a corrupt or ineffective or underfunded policing body, unsympathetic or inef-
fectual legal systems, and explicit or implicit political pressures or mandates to take it easy on
poor quality reporting. These factors are likely to vary considerably across the 116 IFRS adopt-
ing countries – another reason for uniform adoption to not translate into uniform reporting
practice.
6.3.5. Implementation and transparency

A commonly perceived benefit of adopting IFRS standards is increased transparency about the
company’s financial affairs. But uneven implementation across regimes raises the question of
whether widespread IFRS adoption means that differences in implementation now substitute –
at least to some degree – for previous differences in adopted rules.6 Stated alternatively, to
what extent does widespread IFRS adoption sweep real differences in reporting practice under
the rug? Can uneven implementation of uniform rules actually reduce transparency and increase
user information processing costs, by burying actual reporting differences across regimes at the
less transparent level of implementation, as distinct from the more open level of using different
standards?
6.4. One policy implication: institutions are complements

The experience to date with widespread IFRS adoption highlights the complexity of the regime-
level web of complementary economic, political, legal, and social institutions that affect financial
reporting behavior. Institutional complementarity implies that turning one dial at a time tends to
have limited effectiveness. In the specific context of IFRS adoption, the evidence indicates that
changing the rules is ineffective by itself: more dials need turning before the players involved
believe it is in their interests to actually increase reporting quality.
This perspective would seem particularly relevant for the numerical majority of the 116 IFRS
adopting regimes listed in Table 3 that have limited infrastructure. Indulging in the luxury of
citing myself (Ball 2001, p. 128):
An economically efficient public financial reporting and disclosure system requires the following
infrastructure: training an audit profession of adequate numbers, professional ability, and indepen-
dence from managers to certify reliably the quality of financial statements; separating as far as poss-
ible the systems of public financial reporting and corporate income taxation, so that tax objectives do
not distort financial information; reforming the structure of corporate ownership and governance to
achieve an open-market process with a genuine demand for reliable public information; establishing
a system for setting and maintaining high-quality, independent accounting standards; and, perhaps
most important of all, establishing an effective, independent legal system for detecting and penalizing
fraud, manipulation, and failure to comply with standards of accounting and other disclosure, includ-
ing provision for private litigation by stockholders and lenders who are adversely affected by deficient
financial reporting and disclosure. The scope of these requirements is unavoidably wide, because the
accounting infrastructure complements the overall economic, legal, and political infrastructure in all
countries.
556 R. Ball
Put simply, uniform accounting standards do not guarantee uniform reporting practice, because
many regimes lack the complementary infrastructure for that to occur.
7. Other concerns about IFRS adoption

Naturally, any substantial systems innovation when it is undertaken comes with concerns which,
like the expected benefits, are not known facts at the time, and mostly remain conjectural for some
time. It would be unusual if IFRS adoption was an exception, even though public commentators
generally expressed few concerns in the lead-up to 2005. With this in mind, the current section
attempts to provide a counterbalance to the almost unqualified enthusiasm with which that historic
event was received.7
7.1. One global brand name

A longer-term concern of widespread IFRS adoption arises from allowing countries to use the
IFRS label, regardless of how interested they are in high-quality financial reporting and
whether they possess the institutional structure to achieve it. One potential effect is dilution of
the IFRS brand name. Another is that a uniform IFRS label discards information about reporting
quality differences.
This raises the question of why countries with endogenously low financial reporting quality
would adopt IFRS in the first place. Some insight is provided by the Spence (1973) signaling
model, which holds that a signal needs to come at some cost to be credible. Suppose that all
regimes have hitherto only been able to place their own labels on their firms’ financial reporting
(i.e. certifying that they meet endogenous domestic standards). Suppose there subsequently arises
an opportunity to relabel their firms’ financial reporting as meeting the standards of IFRS, which
all regimes view as a signal of high quality. Suppose it is costless to adopt the new label. What
regime will decline to adopt it? What low-quality regime will continue to voluntarily attach a low-
quality label to their financial reporting?
The question then becomes the extent to which the 116 IFRS adopting regimes have backed
up their implicit claim of high quality by incurring costs to actually obtain high quality. Adoption
per se is low-cost: it merely requires a legislative or administrative act. In even can be argued to
come at a negative cost, since the regime now need not incur the cost of operating its own stan-
dard-setting body. Further, low-quality regimes that adopt IFRS need not incur all the costs of
actually implementing the new standards. They are more likely to have weak institutions (be
without a strong audit profession, independent boards, effective courts, etc.).
These issues are not central in the current debate, but could become important over time.
7.2. Reduced competition in standard setting

Competition among alternative economic systems, including financial reporting systems, is con-
ducive to healthy innovation. History is replete with examples of one system learning from the
institutional structure of a competing system, the most famous example in accounting being
the near worldwide adoption of the Italian method of double entry bookkeeping. It is worth
noting that this is how a variety of code law countries, including most of Continental Europe,
came to adopt – in the form of IFRS – a set of standards that are founded on common law
notions such as them being developed by a non-government body, high reporting transparency,
the role of economic substance over legal form, and separation from tax accounting rules.8 In
my view, adopting uniform worldwide standards invites risky centralization and reduced
innovation.
7.3. Conceptual framework

The IASB has put considerable effort into developing a conceptual framework, which it currently
describes as follows:9
The Conceptual Framework describes the objective of, and the concepts for, general purpose financial
reporting. It is a practical tool that:
a. assists the IASB to develop Standards that are based on consistent concepts;
b. assists preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or event, or when a Standard allows a choice of accounting policy; and
c. assists others to understand and interpret the Standards.
The desirability of a conceptual framework is taken for granted by many. One source of demand
for such a framework is discomfort with a case-based approach to standard setting. Another
source is those who place a high value on a coherent logical hierarchy of authorities, ranging
from abstract premises to detailed rules and practices.
My own view is that conceptual framework is a Hayekian (1988) conceit, a delusion, and a
snare. It is a conceit because the world is complex and untidy, and not organized by a small
set of ideas like a conceptual framework. So I am comfortable with a process of common law
case-based adjudication of issues as they arise, which can appear untidy, and I am skeptical of
centralized planning of activities (industries?) like worldwide financial reporting.
Does (say) the worldwide automobile industry need a centralized planning document to
design and make vehicles that buyers of different types find useful? Do law, medicine, engineer-
ing, and other professions (begging the question of whether accounting still can be described as a
profession) have universal conceptual frameworks?
A conceptual framework in accounting also has proven to be a delusion, despite attempts over
at least half a century to prove otherwise. As well documented in Zeff (1999), the US experience
with conceptual frameworks over a considerable period of time has not been very positive. In the
1960s, the Accounting Principles Board of the American Institute of Certified Public Accountants
published a series of Accounting Research Studies that were designed to lay the foundation for
such a framework, but they had little impact on its rule-making, or on reporting practice. A
similar fate met the 1973 Trueblood Report and the FASB’s six Statements of Financial Account-
ing Concepts issued from 1978 to 1985. In 2004, the FASB and the IASB commenced a joint
project to develop a common conceptual framework, the first phase of which was completed in
2010. Since then, the FASB appears to have lost interest in working on a conceptual framework,
and has busied itself in rule-making. The IASB by all accounts remains keen on having one, but as
its description of the project cited above shows, by 2015 it has dropped international convergence
as an objective of the Framework.10
Finally, a conceptual framework can prove to be a snare, because it can incent the planner that
adopts and – and becomes deeply committed to it – to ignore evidence of its unintentional con-
sequences. No planner’s framework is foolproof. None can anticipate all the future events it will
be required to address, and as a consequence solutions that would seem optimal under the circum-
stances can be blocked due to their inconsistency with the framework.
An important example of the undesirable consequences of imposing such a matrix on rule-
making is the role of financial reporting in contracting contexts, including (but by no means
limited to) its role in stewardship and more widely in contracting. This issue appears to have
caused some tension between the IASB and those commenting on earlier drafts of its framework,
and to have led the Board to make several clumsy patches to it. The saga is discussed further in the
following two sections.
558 R. Ball
7.4. Summary of concerns

While I have spent more time discussing the concerns associated with widespread IFRS adoption
than on summarizing the expected benefits, that is not because I believe they are in some sense
weightier. Rather, it is because the concerns are less obvious and have been given less exposure in
the public discourse.
As is the case with expected benefits, a decade later it is still too early to evaluate most of the
concerns raised, some of which pertain to long term effects. One concern expressed in Ball (2006)
– that countries would adopt substantially different versions of IFRS – has proven to be some-
what over-stated, even if justified to a degree. Another – that countries would enforce and
implement IFRS differently – has proven to be well-founded. But it remains early days.
8. Unintended consequence: IFRS and the use of accounting information in contracting

The Law of Unintended Consequences reminds us that purposeful intervention in a complex
system normally leads to unanticipated outcomes, both good and bad, however well-intentioned
the intervention may be.11 So it would be surprising if a substantial system intervention like IFRS
did not lead to some blind alleys.
A case in point originates in the vexed difference between the value relevance and costly con-
tracting perspectives on financial reporting. It is a fundamental proposition that the optimal
accounting system depends on the use made of the information it produces. The proposition is
demonstrated by Gjesdal (1981), who compares accounting information in firm valuation and
with its use in stewardship, or contracting with managers.
In its Conceptual Framework project, which seeks a unitary perspective on financial reporting,
the IASB has struggled to reconcile these competing demands. It initially adopted a valuation-
centric approach to financial reporting and consequently treated stewardship as unimportant.
Its reasoning was outlined in a Discussion Paper on which comments were solicited (IASB
2006, } BC1.40 and BC1.41):
The relationship of an entity’s management and its owners is essentially the same as that of an agent
(management) that acts on behalf of a principal (shareholders or other owners). The economic inter-
ests of management may not always be the same as those of shareholders. Members of management
may have the ability to take advantage of their position in various ways, for example, to enrich them-
selves unjustifiably (that is, beyond agreed-upon remuneration) at the expense of owners.
Some of the concern about stewardship seems to stem from the potential tension between the interests of
management and those of shareholders. The boards acknowledge that those are important issues that
standard-setters need to keep in mind. Financial reports generally are useful to those with the responsi-
bility for making decisions about management remuneration and monitoring management’s dealings
with an entity’s owners because financial reports include the effects of all transactions engaged in by
management on behalf of owners, as well as transactions between the entity and members of its manage-
ment. But providing information for the specific purpose of helping to decide what constitutes excessive
remuneration or unjust enrichment is not the purpose of financial reporting.
This position received substantial negative feedback. In an analysis of the comments received,
Accounting Standards Board et al. (2007) noted that 78% of those addressing stewardship
stated it should be a separate objective of financial reporting. Respondents stated that the
absence of a stewardship objective would weaken shareholder rights, would give excessive
emphasis to the secondary market for companies’ shares, as distinct from real decisions within
firms, and would have other undesirable effects.
The IASB responded with a revised draft (IASB 2015a) using the term stewardship 18 times,
but falling short of endorsing it as a distinct reporting objective and incorporating it in a seemingly
perfunctory manner. The Board expressed the reasoning behind its current position as follows
(IASB 2015b, } BC1.10):
For the following reasons, the IASB rejected the idea of identifying the provision of information to
help assess management’s stewardship as an additional, and equally prominent, objective of financial
reporting:
(a) information about management’s stewardship is part of the information used to make
decisions about whether to buy, sell or hold an investment (i.e. resource allocation
decisions). . . . ; and
(b) introducing an additional primary objective of financial reporting could be confusing.
The first-listed reason seems an attempt to finesse the valuation-stewardship divide by defining
stewardship as a subset of valuation. This sleight of hand allows the Board to retain a unitary
objective of financial reporting, under which the only game in town is valuation.
Taking a valuation perspective on stewardship ignores important dimensions of how account-
ing information is used in contracting with managers. Contracts between firms and its managers
commonly provide accounting-based mechanisms to better align the incentives of managers and
owners. Firms commonly contract with managers based on variables such as revenue, net income
(before or after special items, discontinued operations, depreciation and amortization, interest,
taxes, etc.), rate of return on assets, and rate of return on equity, for example, by paying
bonuses if target levels are obtained. This use of accounting information – in contracting with
managers – cannot readily be shoe-horned into valuation.
More importantly, the Board’s position ignores important uses of accounting information in a
wider range of contexts than contracting with managers. These include debt, supply, royalties,
licensing, dealership, and other commercial arrangements. These contractual uses of accounting
information do not constitute valuation. For example, debt pricing is a different (though related)
matter than debt covenant design. It appears that important uses of financial statements in con-
tracting contexts are difficult to fit into the Board’s valuation-centric world view, so they are
pushed to the side.
The second reason given by the IASB for downgrading stewardship (that otherwise it could be
confusing) underscores the notion that the world as a complex and untidy place that cannot orga-
nized by a small set of ideas in a single document like a Conceptual Framework. It denies the
reality that rule-makers sometimes have to balance competing demands on financial reporting
that are not reconcilable to a small set of ideas and that might imply that different rules are
optimal.
Some insight into these issues comes from the relation between IFRS introduction and the use
of accounting information in debt contracting, the topic of the two following sections.
9. IFRS introduction and accounting information in debt contracting

As outlined in Section 3, IFRS introduction is generally believed to have increased financial
reporting transparency, meaning that IFRS-compliant financials are more informative about the
firms’ financial affairs. Assuming that is so, would that improve financial statements from the per-
spective of all users?
Here there arises the distinction between transparency and contractibility. Even if IFRS finan-
cials are more informative, that does not necessarily make them more useful in contracting.
Indeed, in the context of debt contracting, IFRS standards introduce some potential drawbacks.12
Many of these drawbacks could well apply in other contracting contexts, but the discussion that
follows is addressed toward debt contracting alone.
560 R. Ball
Relative to the prior domestic standards of IFRS-adopting countries, the new standards
provide borrowing firms with more discretion over the reported numbers that would be used in
accounting-based debt covenants. First, IFRS make considerably more use of fair value account-
ing measurements. The subjectivity involved in estimating fair values, particularly for longer-
cycle assets, impairs contractibility. Second, many IFRS standards provide borrowers with
choice among accounting methods, as documented in Nobes (2013). Third, IFRS are prin-
ciples-based, providing fewer implementation rules and accordingly giving managers wider dis-
cretion in implementation.
In addition, fair value accounting incorporates into firms’ earnings a larger number of shocks
to firms’ asset values. While this might render balance sheets more informative, the shocks that
are incorporated into earnings are transitory.13 Thus, a gain or loss in value that is incorporated
into current-period earnings will not repeat in future earnings. This renders current earnings a
poorer predictor of future earnings. For longer-term debt, this reduces the usefulness of earnings
as a predictor of future debt service capacity.
IAS 39 (revised in IFRS 9) gives firms the option to fair value certain of their own liabil-
ities. Debt is an agreement to repay principal and interest at the historically contracted rate.
The amortized cost method records the present value of that obligation, discounted at the his-
torical contractual rate. Consequently, a balance sheet that records assets at cost less any
impairment and liabilities at amortized cost provides an effective mechanism to trigger new
rights to lenders when the ratio of assets to liabilities falls. Debt is not an agreement to
repay fair value. The effectiveness of a contractual trigger mechanism based on balance
sheet leverage is much reduced when debt can be written down to fair value whenever
credit quality deteriorates.
One possible response from lenders and borrowers would be to exclude some earnings and
balance sheet components from the contractual definitions of earnings and balance sheet quan-
tities, as studied by Li (2010). However, the audited financial statements provided to lenders
do not always provide sufficient information to do so. Another possibility would be to contract
on the basis of frozen GAAP, which would require keeping parallel sets of records under prior
domestic standards. This would lose feasibility over time as newer internal accountants and exter-
nal auditors are not trained in old methods and old software becomes obsolete. It would require
multiple accounts to be kept for companies making multiple debt issuances at different points in
time.
For many firms, the more efficient response would be to simply reduce the use of accounting-
based covenants such as leverage and interest coverage restrictions, and perhaps substitute non-
accounting covenants such as restrictions on new investment, asset sales, and new debt issuance.
What is the evidence?
A study of 3037 new debt issuances over 2001 – 2010 investigated how their contractual
terms changed after the 2005 IFRS adoption date. It compared 1362 new issuances in 22
IFRS-adopting countries (the treatment sample) with 1675 new issuances in 21 non-IFRS-
adopting countries (the control sample).14 There was a substantial fall of approximately 50%
in accounting covenant use post-adoption. Conversely, there was an increase in non-accounting
covenant use. For banks, the reduction in accounting covenant use after IFRS adoption was
considerably larger, with the prime suspect being banks’ greater use of fair value accounting
for assets and liabilities.
As will be discussed in the following section, there are limits to what can be concluded from
early evidence of IFRS adoption effects, but the results described above do provide some food for
thought about the IASB/FASB focus on valuation uses of financial reporting at the exclusion of
contracting uses.
10. Conservatism, prudence, and conditional conservatism

A related issue is the position of the IASB and FASB on the concepts of conservatism, prudence,
and conditional conservatism. Conservatism has long been a well-known attribute of accounting,
and the notion that it is linked to the use of accounting information in the debt market goes back at
least as far as Gilman (1939). Conditional conservatism refers to timelier financial-statement rec-
ognition of losses than gains. An extensive and long-standing literature holds that this asymmetry
in accounting is due in large part to the use of financial statement information in debt contracting,
and also to its use in firms contracting with managers. The literature includes Leftwich (1983),
Watts and Zimmerman (1986), Ball et al. (2000a), Ball (2001), Holthausen and Watts (2001),
Ahmed et al. (2002), Watts (2003a,b), Ball and Shivakumar (2005, 2006), Beatty et al. (2008),
Wittenberg-Moerman (2008), Zhang (2008), and Aier et al. (2014).
Nevertheless, it is fair to say that the IASB and FASB have tried to expunge the term conser-
vatism from their vocabulary and have only reluctantly – after receiving substantial negative
feedback – recently embraced the term prudence in its stead. Even then, the new approach
involves internal contradictions.
The draft Conceptual Framework states (IASB 2015a, p. 2.15): To be a perfectly faithful rep-
resentation [of economic phenomena], a depiction would have three characteristics. It would be
complete, neutral, and free from error. Responding to criticism that an earlier draft did not endorse
conservatism, the Board introduced the concept of prudence (conservatism being on the outer as a
term), and attempted to reconcile it with its neutrality criterion as follows (IASB 2015a, p. 2.18):
Neutrality is supported by the exercise of prudence. Prudence is the exercise of caution when making
judgements under conditions of uncertainty. The exercise of prudence means that assets and income
are not overstated and liabilities and expenses are not understated. Equally, the exercise of prudence
does not allow for the understatement of assets and income or the overstatement of liabilities and
expenses, because such mis-statements can lead to the overstatement of income or the understatement
of expenses in future periods.
This attempt to reconcile neutrality and prudence/conservatism is unconvincing. To me at least,

the concepts are inconsistent.
The position also is inconsistent with the IASB’s own standard-setting. IAS 36 requires asset
impairments to fair value (i.e. downward revaluations), but does not require upward revaluations.
Similarly, IAS 38 requires intangible asset impairments, but not revaluations generally. While IAS
16 provides a fair value option for property, plant, and equipment that is symmetric, and IAS 36
allows impairment reversals, there is a distinct asymmetry in these rules that is inconsistent with
neutrality and is more consistent with conditional conservatism.
11. Some comments on research and IFRS standard-setting

A particularly pleasing feature of the public discourse surrounding IFRS over past decades has been
the extent to which academic research has addressed issues of interest to those involved in standard-
setting, and the extent to which those involved in standard-setting have taken note of the research.
The advocacy of using current market prices by early scholars such as Chambers (1966) set the
stage for the current emphasis on fair value accounting by the IASB and the FASB. More recently,
the Boards appear to have begun to digest the implications of research on contracting and steward-
ship, which seem to have influenced revisions in the Conceptual Framework, if not substantially.
There already is a large and growing academic literature focused on the effects of IFRS adop-
tion, which makes for a natural marriage between standard setting and research. For standard
setters, wholesale revision of the accounting standards by any jurisdiction is a leap into the
562 R. Ball
unknown, so subsequent evidence of its consequences – both intended and unintended – is poten-
tially very useful to those responsible for the decision. For researchers, the 2005 adoption event pro-
vides a rare quasi-experiment involving a very substantial change in financial reporting in many
countries and by a very large number of public firms. So it is not surprising that the event has pre-
cipitated a substantial body of research, including some commissioned or surveyed by accounting
bodies such as the Association of Chartered Certified Accountants (ACCA) and the ICAEW. In
reviewing its decade-earlier decision to adopt IFRS, the European Commission (2014, 2015)
undertook an extensive and detailed survey of the literature on its effects. So, in the particular
context of IFRS, there is considerable evidence of research informing standard setting.
Nevertheless, this section offers some cautionary observations about the use of research in the
context of establishing and evaluating IFRS. The observations are not intended to place a damper
on this pleasing process, but rather to inject a note of realism into it. The observations concern the
limitations in the data used in collecting evidence of effects of IFRS adoption.
11.1. Data limitations

Several characteristics of the available data limit the inferences that can reliably be drawn from
them, including:
(a) As noted in Section 2, it still is early days. Only 10 years have passed since the big 2005
adoption event, which gives researchers only 8 – 9 years of post-IFRS data to study.
(b) One half or more of the post-IFRS data are affected by the Global Financial Crisis and
subsequent economic malaise.
(c) Other institutional changes occurred around the time of IFRS adoption, including
changes in enforcement. Confounding events make it difficult to identify IFRS effects
per se.
(d) Because many countries and firms adopted IFRS essentially simultaneously, it is easy for
the researcher to overstate the statistical significance or reliability of estimated effects
(i.e. to understate the standard errors).
(e) The short- and long-run effects of innovations can differ, sometimes substantially. One
process is diffusion, in which an innovation spreads over time. At the other extreme is
correction, in which initial enthusiasm wanes and consequently adoption effects fall
over time. Which model applies to IFRS adoption? How representative are initial
effects of long-run effects?
(f) Even if substantial in aggregate, many beneficial effects of IFRS adoption are likely
to be spread across the adopting economies, and to be small and difficult or imposs-
ible to observe in individual firms. Examples include the effects of: standardization of
concepts and language; standardized structure of financial statements; and reduced
costs of maintaining international databases. Similarly, the costs of training a new
generation of accountants and users, akin to the costs of learning a new language,
are not easily measurable and likely do not lie in the firm-level data typically
studied by researchers.
11.2. Flawed or incomplete theory underlying the tests conducted

An additional limitation of available research is that the theory as to where researchers would see
the costs and benefits of IFRS adoption is not well developed. I will illustrate this point in the
context of two areas of research: value relevance and cost of capital studies.
11.2.1. Value relevance studies

Ball and Brown (1968) first demonstrated the value relevance of accounting information, in the
form of an association between changes in companies’ market values and changes in the earnings
numbers produced by the actual financial reporting system in place at the time. But applying a
value relevance criterion to evaluate accounting innovations such as IFRS adoption is another
matter entirely.15
An example of applying a value relevance criterion to evaluate IFRS adoption is the Lee et al.
(2013) report on China converging its reporting standards to IFRS in 2007. The report was com-
missioned by the ACCA. It purports to show that convergence increases value relevance, particu-
larly for companies with greater legal, governance, and commercial incentives for high-quality
financial reporting. The criterion is justified as follows:
Value-relevance analysis examines the association between the share price of firms and the accounting
information they issue, such as book value and earnings. It is inferred here that the higher the associ-
ation, the more useful the accounting numbers issued by firms are to the valuation decisions of inves-
tors, who are an important group of end-users of financial statement information.
The inference is far from clear.16 The major problem with using correlation with share prices
as a benchmark is that it takes share prices as exogenous. A positive result in this study could
simply mean that as a result of convergence companies are now booking into their accounts
more of the information that investors already bid into share prices. Why would investors care
about how closely earnings or book values correlate with share prices, if they already know
the prices?
The appropriate welfare-economic criterion for assessing a financial reporting innovation is not
whether it leads to a higher association with share prices. Rather, it is are the prices better? That is,
do the prices incorporate more information than hitherto and thus provide better signals to investors
and firms? In contrast, a simple correlation with prices takes the prices as an exogenous benchmark.
I am aware of no studies of IFRS adoption that asks the correct question.
This point is illustrated by the following extreme hypothetical example. Suppose the account-
ing rules required every public firm to set the book value of equity on its balance sheet equal to the
total market value of its equity at the close of trading on the balance date (price times number of
shares), and record earnings as change in market value, adjusted for dividend distributions and net
capital contributions. These hypothetical rules would receive the highest possible value relevance
score: a perfect correlation between book and market, and a perfect correlation between earnings
and returns. But the reported accounting numbers would add nothing to what is known already:
they simply would duplicate prices, would be economically redundant, and would do nothing to
improve prices (see Ball 2001, Ball et al. 2008). This hypothetical scenario illustrates the general
result that value relevance scores are not by themselves informative about the benefits to investors
from systems innovations such as IFRS.
11.2.2. Cost of capital studies

One claimed benefit of IFRS adoption (discussed in Section 5.2) is that investors will require a
lower return from investing because firms are now more transparent and investment in them is
perceived to be less risky. Equivalently, expected future earnings would sell at a higher price
post-IFRS. This story is too simple. The effects of IFRS introduction cannot be analyzed by con-
sidering a single firm in isolation.
For example, if all the firms in an industry adopt IFRS and all benefit from higher transpar-
ency, the effect is to reduce the industry supply price of capital. Competition among firms in the
564 R. Ball
industry then passes the benefit on to consumers in the form of reduced product prices. Funda-
mental economics suggests the ultimate beneficiaries may be consumers, not firms or investors,
suggesting that researchers studying firms’ capital costs might be looking in the wrong place.
Further, IFRS adoption is a macroeconomic event involving all public firms in more than 100
countries. Increased global transparency means that all firms initially would face a lower supply
price of capital, but in response they would be expected to expand investment, increasing the
demand for capital and its supply price. This suggests that the expected net effect of IFRS adop-
tion on capital costs might not be large, and would be reflected in the quantity rather than the price
of new investment (see Garcı́a Lara et al. 2016).
12. The case of China

China has not formally adopted IFRS, but signed a memorandum with the IASB in November
2005 endorsing convergence of its domestic Accounting Standards for Business Enterprises
(ASBE). This memorandum was updated in November 2015, for example, by announcing a
joint working group to advance the use of IFRS in the country. Soon after the first agreement,
in early 2006 China announced a revision to ASBE that incorporated IFRS.
One might conclude that China is almost an IFRS-adopting jurisdiction. This is the impression
one might garner from the IASB’s detailed review, which it summarized by answering its question
What is the jurisdiction’s status of adoption? with China has adopted national accounting stan-
dards that are substantially converged with IFRS.17 However, China retained its domestic rules
on accounting for related-party transactions, government subsidies and the reversal of impair-
ments of depreciable assets. These are areas of great domestic political and economic significance
in China. Especially for politically connected enterprises, the difference between ASBE and IFRS
treatments could have substantial effects on their financial statements and on their financial report-
ing quality. For example, related-party transactions are considerably more common in China than
in most western countries, and consequently reported numbers are rendered more malleable by the
ability of related parties to vary the terms on which they transact.
Implementation is another problem area. China does not yet possess the institutional struc-
tures that are complementary to high-quality accounting standards. For example, in formal
terms China has adopted fair value accounting. Implementation of fair value rules is problematic
even for short-cycle assets such as marketable securities, because the Chinese government con-
trols the price of many unlisted securities. In general, a combination of political incentives to
massage the numbers, weak corporate governance, weak shareholder rights, a compliant press,
and inconsistent regulatory enforcement leads one to conclude that China’s substantial conver-
gence exists more in form than in substance.
The case of China illustrates the importance of national political and economic forces. It also
highlights the limitations of scoring convergence by counting the number of common standards,
as distinct from measuring actual outcomes in the financial statements (Ball et al. 2000a).
13. Whither the US?

The US has retained US GAAP for domestic-domiciled firms, at least for the foreseeable future
and perhaps indefinitely. Options that have been floated range from retaining the status quo to
abandoning GAAP in favour of IFRS, with several intermediate possibilities.18 The outcome is
impossible to predict, so I will confine my remarks to outlining some of the major factors involved
in the decision.
(1) The ultimate decision lies with the SEC. The Commission was created by Securities
Exchange Act of 1934, and has responsibility for oversight of accounting and auditing
for companies with securities publicly traded in US markets.
(2) The SEC conducts an economic analysis of most major initiatives. In its evaluation of the
options concerning IFRS, it would be expected to take into account benefits such as those
listed in section four above, as well as costs. Hail et al. (2010, Abstract) describe the
elements of an IFRS cost/benefit analysis as follows:
Our analysis shows that the decision to adopt IFRS mainly involves a cost-benefit trade-off
between (1) recurring, albeit modest, comparability benefits for investors; (2) recurring
future cost savings that will largely accrue to multinational companies; and (3) one-time tran-
sition costs borne by all firms and the U.S. economy as a whole, including those from adjust-
ments to U.S. institutions.
For example, smaller companies and those without foreign operations are more likely to
oppose IFRS, due to positive costs and the absence of perceived benefits.
(3) The SEC decision on IFRS will involve political considerations as well as economic. The
Commission and its budgets are products of Federal legislation, requiring it to pay close
attention to the political winds. Despite the following (tongue in cheek?) statement on its
website, the Commission’s governance structure is subject to substantial political
influence:19
The Securities and Exchange Commission has five Commissioners who are appointed by the
President of the United States with the advice and consent of the Senate. Their terms last five
years and are staggered so that one Commissioner’s term ends on June 5 of each year. To ensure
that the Commission remains non-partisan, no more than three Commissioners may belong to
the same political party. The President also designates one of the Commissioners as Chairman,
the SEC’s top executive.
The reality is that the political party controlling the White House appoints a majority of the
Commissioners, including the chair, and two Commissioners are associated with the other
party (e.g. three Democrats and two Republicans). The parties have different views on the
role of regulation, so the outcome on IFRS might depend on who is in government at the
time the decision is made.
(4) It is hard to imagine the US Government ceding complete sovereignty over accounting
standards to a body that is answerable to over 100 countries.
(a) On economic grounds alone, it would seem unwise to comply with an equilibrium
arising from all of those countries’ political and economic interests.
(b) On political grounds, and depending on the party in power, there is aversion to
ceding authority over the US economy to a foreign organization.
Sovereignty is one of several reasons the FASB (or a reconstituted successor body) most
likely will remain in place. Other reasons are discussed below.
(5) It also is hard to imagine the SEC locking itself into the Conceptual Framework, with all
the unforeseen consequences that could emerge. That would be a surrender of sovereignty
to a document over which it might not be able to exercise substantial influence in future.
Because the IASB is beholden to the Framework, the SEC therefore would seem unlikely
to fully adopt IFRS as issued by the IASB.
566 R. Ball
(6) Equally, the SEC seems unlikely to completely retain the complete status quo. It permits
foreign companies with securities that are traded in the US to report under IFRS without
requiring a Section 20-F reconciliation to US GAAP. But it requires domestic companies
to file under US GAAP and, if they also issue IFRS compliant reports (for example,
because they issue securities that are traded in other jurisdictions), it requires them
provide a reconciliation of IFRS financials to GAAP. US multinationals have complained
about the inequity of being required to provide three documents (GAAP, IFRS, and a
reconciliation) but their international competitors only being required to file one. At a
minimum, the reconciliation requirement would seem likely to be withdrawn.
(7) There are many IFRS-GAAP differences that appear to be unresolvable, despite the con-
siderable effort the two bodies have put into the converging their standards. To date, the
problem areas have been leases, financial instruments, insurance contracts, and the Con-
ceptual Framework. This reflects the fact that the FASB and IASB have different political
and economic constituencies to answer to. It is a graphic illustration of the general point
that politics and economics are not entirely global, and have substantial national charac-
teristics that would be foolish to ignore. Perhaps recognizing this, the FASB has aban-
doned the convergence project, and neither the FASB nor the IASB continues to use
the term. The term implies that at some point the two sets of standards will meet on
common ground, which now seems unlikely.20
(8) It is hard to imagine the SEC regulating the application of a purely principles-based set of
accounting standards, without detailed rules. The reasoning underlining this view is out-
lined in Ball (2009, pp. 310 – 12) and includes: administrators operate in a world of rules,
and regulators generally regulate by creating and enforcing rules; regulating the appli-
cation of principles involves assessing judgment, and hence comes with a risk of being
found wrong, which is anathema to career bureaucrats; and detailed rules provide both
financial statement issuers and their auditors with more certainty over regulatory responses
to their actions. Again indulging in quoting myself (Ball 2009, p. 312):
If the U.S. did attempt a move toward principles-based accounting, for example by allowing dom-
estic companies to report under IFRS, a skeptical prediction is that the SEC would pay only lip
service to the change, and this would be fine with the audit firms. Principles-based financial
reporting would require companies and their auditors to be both able and willing to make the
judgments necessary to apply broad principles in specific circumstances. It also would require
SEC staff to be able and willing to evaluate those judgments. A principles-based set of accounting
standards such as those embodied in IFRS soon would be supplemented by a flurry of implemen-
tation guidelines or rules issued by FASB, the SEC or individual audit firms, the net effect being
similar to the current system. Stated differently, the current financial reporting system is an
endogenous result of U.S. market and political/regulatory forces, and hence is unlikely to
change in substance (as distinct from appearance) unless those forces themselves change.
(9) The distinction between rules-based and principles-based accounting standards is not as
simple in practice as is commonly believed. First, rules generally are based on principles.
Second, some system is needed to apply broad principles to more specific circumstances,
whether it is left entirely to the individual preparers and auditors of financial reports acting
separately in each case, or whether a rule emerges for all to follow. Third, rules can be effi-
cient ways of enshrining the experience gained in applying general principles to specific
circumstances that repeat across firms and time, without individual preparers and auditors
needing to reinvent the wheel each time.21
(10) The context in which the IASB prefers principles-based accounting standards differs from
the US context in material ways. In particular, the IASB is responsible to over 100 different
jurisdictions, with their own political and economic agendas, and with different sets of cir-
cumstances in which broad principles are applied. The optimal solution for the IASB then
would seem less detailed than that of the FASB. This is another reason the SEC almost cer-
tainly will need a domestic standard setting body like the FASB to establish detailed rules
as they emerge from experience.
(11) A domestic US accounting standards body seems highly likely to be retained. Its form and
function could follow several scenarios:
(a) Even if the US fully adopts IFRS as issued by the IASB, a US body would be required to
represent US political and economic interests at the IASB, when it is modifying existing
standards or creating new standards.
(b) Under the previous scenario, a US body would be required to provide more-detailed rules
implementing the IASB’s principle-based standards.
(c) If the US adopts its own version of IFRS, a US body would be needed to review new
IFRS standards for political and economic acceptability, recommend whether they be
adopted, make any desirable changes, translate them into US terminology, and ulti-
mately endorse them into the accounting principles that are generally accepted in
the US.
(d) If the US adopts its own version of IFRS, but IASB decisions were to become
substantially inconsistent with US political and economic interests, it could be
important to have maintained an active accounting standards body that could
quickly take over a full standard-setting role (i.e. as an option that could be exercised
if needed).
(e) If the status quo is maintained, with US GAAP and IFRS being developed along co-
operative (if not identical) lines, maintaining a domestic body would be a prerequisite.
This obviously would be the case if for some reason the US ever decided to completely
go it alone and develop US GAAP independently, with minimal interaction with the
IASB.
Under all scenarios, a US standard-setting body seems likely to continue for the indefinite
future.
14. Conclusions
The adoption of IFRS in over 100 countries a decade ago was a once in a lifetime systems inno-
vation, of great promise and magnitude. There was good reason to expect success, based largely
on widespread enthusiasm for international standards and, behind that, recognition of the strong
forces of globalization. Nevertheless, there were risks involved and there was limited a priori evi-
dence to guide the decision-makers. A decade later, this is still the case. Globalization remains a
potent economic and political force, and drives the demand for globalization in accounting.
Nevertheless, most political and commercial activity remains local, so adoption of uniform
rules does not by itself lead to uniform reporting behavior around the world. For many of the
claimed benefits of IFRS adoption to be realized, uniform implementation would have to occur
in a wide range of countries, which seems unlikely and requires more than simply creating regu-
latory enforcement mechanisms.
Some evidence of actual outcomes from IFRS adoption has come to light but, by and large the
evidence to date is not very useful. After a decade of hindsight, IFRS adoption is an innovation of
historical proportions whose worldwide effects remain somewhat uncertain.
568 R. Ball
Acknowledgements
This essay is based on the 2015 PD Leake Lecture delivered at the Institute of Chartered Accountants in
England and Wales in London on 14 October 2015, and revisits my 2005 PD Leake Lecture with the
benefit of a decade of hindsight. I am extremely grateful to the Institute for their continued interest in the
topic and my views on it, and particularly to Robert Hodgkinson, Gillian Knight, Brian Singleton-Green,
and Nigel Sleigh-Johnson. The essay has benefited greatly from several discussions with my colleague
Hans Christensen, and from the comments of Mark Clatworthy and Edward Lee.
Disclosure statement
No potential conflict of interest was reported by the author.
Notes
1. This argument is developed in Ball et al. (2000a), Ball (2001), and Ball et al. (2003). Subsequent devel-
opment includes Biddle et al. (2009), Bushman et al. (2011), and Garcı́a Lara et al. (2016).
2. http://www.ifrs.org/Use-around-the-world/Pages/Analysis-of-the-IFRS-jurisdictional-profiles.aspx,
accessed 10 September 2015.
3. Acceptance From Foreign Private Issuers of Financial Statements Prepared in Accordance With Inter-
national Financial Reporting Standards Without Reconciliation to U.S. GAAP, Securities Act Release
No. 33-8879, Exchange Act Release No. 34-57026, December 21, 2007. Available at http://www.sec.
gov/rules/final/2007/33-8879.pdf.
4. This subsection summarizes the framework first laid out in Ball (1995) and elaborated in Ball (2001,
2006). Subsequent events, both in accounting and more widely in economics and politics generally,
have shown the framework to be quite robust.
5. This also helps in explaining why, relative to the prior standards of many adopting countries, IFRS aim
at greater transparency in public reporting (the former common law model): the prior insider access
model of many countries, with less emphasis on public reporting quality, was inefficient for cross-
border transacting.
6. Nobes (2013, section 4.4) makes a related point, referred to as covert options.
7. Many of these concerns were expressed in the previous lecture (Ball 2006), to which the reader is
referred for more detail.
8. This distinction is discussed in Ball et al. (2000a, 2003).
9. http://www.ifrs.org/Current-Projects/IASB-Projects/Conceptual-Framework/Pages/Conceptual-Fra-
mework-Summary.aspx, visited 10 September 2015.
10. A joint FASB/IASB News Release on 28 September 2010 stated (emphasis added): the objective of the
conceptual framework project is to create a sound foundation for future accounting standards that are
principles-based, internally consistent and internationally converged. See http://www.fasb.org/cs/
ContentServer?pagename=FASB/FASBContent_C/NewsPage&cid=1176157497474.
11. Brüggemann et al. (2013) use the term in much the same context, the relation between IFRS and con-
tracting. The notion of unintended consequences was first described in 1759 by Adam Smith. It
achieved widespread attention in 1936 as a result of the famous sociologist Robert K. Merton
(father of Robert C. Merton, winner of the 1997 Nobel Prize in Economic Sciences).
12. For more details, see Ball et al. (2015).
13. In theory, and assuming no changes in discount rates, shocks to asset prices are completely indepen-
dent across time (Samuelson 1965).
14. Results are from Ball et al. (2015). Similar results are in Brown (2013) and Chen et al. (2015).
15. The role of value relevance studies in evaluating financial reporting generally is debated in Barth et al.
(2001) and Holthausen and Watts (2001).
16. There also is reason to doubt that Lee et al. (2013) did, in fact, demonstrate a post-IFRS increase exists
in the data. The whole-sample results (Table 3) indicate no post-IFRS change in the value relevance
coefficients at the conventional 5% level of statistical significance. Even then, the significance
likely is substantially over-estimated because all company-level observations are assumed to be inde-
pendent of each other, without adjustment for clustering Petersen (2009). Clustering likely is a larger
issue in the individual clusters for which subsequent tables report stronger results.
17. http://www.ifrs.org/Use-around-the-world/Documents/Jurisdiction-profiles/China-IFRS-Profile.pdf.
In fairness, the IASB classifies China as using national standards, not IFRS, but its jurisdictional profile
is headlined by the cited statement that ASBE are substantially converged to IFRS. This might be
correct in terms of a simple count of the number of standards ASBE and IFRS have in common,
but it is a misleading index of the comparability of financial statements across jurisdictions.
18. Hail et al. (2010) provide a comprehensive analysis.
19. https://www.sec.gov/about/commissioner.shtml, accessed 8 April 2016.
20. Despite their differences, the two bodies still share a lot in common and still work closely together, but
now they apparently recognize that there always will be differences.
21. By way of analogy, lower law courts apply the broad-application decisions of higher courts to more
specific circumstances. Their decisions become binding in other specific circumstances that are not
materially different.
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IFRS - 10 Years Later: Accounting and Business Research

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Accounting and Business Research

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IFRS – 10 years later

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IFRS – 10 years later

The University of Chicago Booth School of Business, Chicago, IL, USA

A decade ago, the near-simultaneous adoption of International Financial Reporting Standards

# 2016 Informa UK Limited, trading as Taylor & Francis Group

2. Then and now: summarizing the perspectives in 2005 and 2015

3. IFRS generally are viewed as high-quality standards

4. Potential beneﬁts of IFRS adoption

5. Widespread formal adoption by jurisdictions

Table 1. Status of IFRS adoptiona.

Table 2. The 116/140 countries that require IFRSa.

6. Forces against uniformity in reporting practice

Table 3. The 24 jurisdictions that have not adopted IFRSa.

6.1. Limits to globalization

6.2. Uneven adoption

6.3. Uneven implementation

6.3.1. The role of estimation and discretion

6.3.2. Local politics, economics, and institutions

6.3.3. Evidence on incentives versus standards

6.3.4. Implementation and regulatory enforcement mechanisms

6.3.5. Implementation and transparency

6.4. One policy implication: institutions are complements

7. Other concerns about IFRS adoption

7.1. One global brand name

7.2. Reduced competition in standard setting

7.3. Conceptual framework

7.4. Summary of concerns

8. Unintended consequence: IFRS and the use of accounting information in contracting

9. IFRS introduction and accounting information in debt contracting

10. Conservatism, prudence, and conditional conservatism

This attempt to reconcile neutrality and prudence/conservatism is unconvincing. To me at least,

11. Some comments on research and IFRS standard-setting

11.1. Data limitations

11.2. Flawed or incomplete theory underlying the tests conducted

11.2.1. Value relevance studies

11.2.2. Cost of capital studies

12. The case of China

13. Whither the US?

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