The Impact of International Financial Reporting Standards adoption on Accounting Quality: Evidence From Sri Lanka.

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.