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What, if any, are the potential economic consequences or benefits of the Canadian IFRS adoption?

As the activities of preparing and auditing the first set of complete annual reports using international financial reporting standards (IFRS) are in full swing, it is easy to identify some costs of transitioning from Canadian GAAP to IFRS. So it is an appropriate time to ask, why are we going through this transition? Are there benefits that my company, my clients or the country as a whole might expect to realize from IFRS adoption?
Recent academic literature has examined IFRS transitions, mainly the European Union (EU) transition, which occurred in 2005, and provides evidence that some benefits have accrued to some IFRS-adopting firms.

Benefits are summarized below:

 1. IFRS adoption may increase transparency if IFRS-compliant financial statements better reflect a firm’s economic context and contain enhanced disclosures.

2. Increased international comparability may result as about 90 countries have fully conformed with IFRS.

3.  Lower costs of capital, increased liquidity, and enhanced analyst and investor participation, particularly among foreign analysts and investors.

4. There is a general expectation that these capital market benefits will result in macroeconomic benefits such as increased employment.

5. Finally, an emerging literature examines how IFRS affects the usefulness of accounting numbers in settings other than capital markets, particularly in contractual settings such as executive performance appraisal and remuneration.

 Why might we see these capital market effects from IFRS adoption?

It is difficult for researchers to provide direct evidence to answer this question. However, additional studies that examine the effects of IFRS financial statements on capital market participants’ decisions provide some insights. Byard et al. (2011) find that both financial analysts’ earnings forecast errors and the dispersion of earnings forecasts across analysts decline after IFRS adoption.

Foreign analysts are also able to forecast IFRS-based earnings more accurately than they could forecast the prior local GAAP earnings for adopting firms.

IFRS adoption also attracts local analyst following but does not improve local analysts’ forecast accuracy. Since earlier research suggested that local analysts could forecast more accurately than foreign analysts under local GAAP reporting, this suggests that IFRS adoption reduces or eliminates the forecasting advantage that local analysts previously enjoyed.

Conclusions and implications for Canada
The evidence to date appears to suggest that at least some IFRS-adopting firms have experienced lower cost of capital; enhanced equity market liquidity; and increased analyst and institutional investor interest, particularly among foreign analysts and investors. 

Discussion Questions:

1.Will Canadian IFRS adopters, expect to receive similar benefits?

2. Are these benefits easily quantifiable?

3. Is it too early to tell whether IFRS adoption has been beneficial to Canada?

Article written by: David Godsell and Michael Welker

Read the complete article in CA magazine :Inconclusive Evidence

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