Abstract:
This study examines whether the application of International Financial Reporting
Standards (IFRS/SLFRS) is associated with higher accounting quality for Sri Lankan
firms using a sample of 157 firms listed Colombo Stock Exchange (CSE). The companies
listed on CSE were mandated to adopt IFRS/SLFRS in preparation of their financial
statements with effect from 01st of January 2012. Prior to the adoption of IFRS/ SLFRS
Sri Lankan firms reported under Sri Lankan Accounting Standards (SLAS). Thus, this
study compares several measures of accounting quality for Sri Lankan firms under two
reporting regime to identify the improvement of accounting quality in post IFRS/SLFRS
adoption. Following prior studies, this study uses eight individual measures of accounting
quality relating to earnings smoothing, managing towards earnings targets, timely loss
recognition and value relevance. Firms are said to have improved accounting quality if
they display lower levels of earnings smoothing, less management towards earnings
targets, more timely loss recognition and higher levels of value relevance. The results of
this indicate that in general, accounting quality of SL firms improved after mandatory
IFRS/ SLFRS adoption in terms of displaying less management towards earnings targets
and more timeliness of loss recognition. However, there is no evidence that accounting
quality has been improved with regards to reducing earnings smoothing and improving
value relevance. In addition, the results of this study revealed that earning smoothing has
increased significantly following mandatory adoption of IFRS/ SLFRS. Further, the value
relevance of accounting numbers is very low under IFRS/ SLFRS.
