IFRS adoption impacts on financial position and earnings management: evidence from Malaysia
Creators: name: Wong, Karen
Publisher: name: RMIT University
Year: 2024
Subjects: classificationCode: 350103
subject: Financial accounting

description: The adoption of International Financial Reporting Standards (IFRS) has substantially progressed amongst countries around the world, particularly in the ASEAN region, which consists mainly of developing countries. Numerous research studies on IFRS issues have been conducted in western countries, mainly those with developed economies. Few studies have examined the impacts of IFRS adoption on developing economies, but mainly focused on partial convergence. This thesis focused on the impact of full IFRS convergence on one of the developing economies in ASEAN region, Malaysia. Specifically, this thesis focused on two IFRS issues. First, it explored the impact of IFRS on changes in financial statements and financial ratios. This is followed by determining the IFRS impact on the quality of financial reporting, particularly the earnings management. This thesis applied two theories - agency and signalling theories - to determine how the full convergence with IFRS will affect the financial reporting of the companies listed on Bursa Malaysia. Agency theory suggests that full IFRS convergence acts as a bonding mechanism to restrict the listed companies from engaging in the manipulation of financial information. This restriction will reduce the information asymmetry between the managements of the listed companies and the users of financial statements, especially the shareholders and investors. This can be explained by the signalling theory. Therefore, agency and signalling theories predict that the full convergence with IFRS will improve the quality of financial reporting. The changes in the quality of financial reporting are evident when there are changes in financial statements and financial ratios. To determine the impact of full IFRS convergence, this thesis conducted a six-year observation which comprised three years before and three years after full IFRS convergence. The sample used for this study consisted of companies listed on Bursa Malaysia. Data was manually collected from the annual reports of these listed companies. To determine the quality of financial reporting, this study examined the changes in discretionary accruals – one of the earnings management proxies. The discretionary accruals were calculated using the Jones (1991) model and two of the modified Jones (1991) models. The results of this thesis indicate that the IFRS convergence (both before and after full convergence) significantly influenced the financial statements and financial ratios. A comparison of the discretionary accruals indicated that the managements of listed companies exercised less earnings management during the full convergence period than the close alignment period. The findings of this study also suggest that full IFRS convergence may not be effective in reducing earnings management in the long term. The strengthening of monitoring or bonding mechanisms by, for example, using Big 4 auditors, is important to ensure compliance with IFRS. This thesis provides analytical information on the effectiveness of IFRS in improving the quality of financial reporting, which is important to the accounting standards-setting bodies, particularly the IASB and MASB. The findings of this study also signal to the Malaysian accounting regulators the importance of strengthening the enforcement of IFRS compliance to ensure the long-term benefits of IFRS implementation. Finally, this analytical information may also serve as guide for the neighbouring ASEAN countries such as Indonesia, Singapore and Thailand that are currently working towards full convergence.