Why do countries adopt IFRS?

The International Accounting Standards Board (IASB) was established in 2001 to develop International Financial Reporting Standards (IFRS). Since then, nearly 70 countries have mandated IFRS for all listed companies. Further, about 23 countries have either mandated IFRS for some listed companies or allow listed companies to voluntarily adopt IFRS. However, as of 2007, at least 40 countries continued to require domestically developed accounting standards over IFRS, and this list included some large economies like Brazil, Canada, China, Japan, India, and the US. In joint work with Ewa Sletten of MIT, I investigate why some countries adopt IFRS while others do not. Understanding countries’ adoption decisions can provide insights into the benefits and costs of IFRS adoption.

We focus our analysis on a sample of 102 non-EU countries and examine IFRS adoption over the period 2002 through 2007. We exclude the EU member states from our analysis because their decision to adopt IFRS was closely tied to the establishment of the IASB itself.

In our sample of 102 countries, there is evidence that more powerful countries are less likely to adopt IFRS, consistent with more powerful countries being less willing to surrender standard-setting authority to an international body. There is also evidence that the likelihood of IFRS adoption at first increases and then decreases in the quality of countries’ domestic governance institutions, consistent with IFRS being adopted when governments are capable of timely decision making and when the opportunity and switching costs of domestic standards are relatively low. We do not find evidence that levels of and expected changes in foreign trade and investment flows in a country affect its adoption decision: thus, we cannot confirm that IFRS lowers information costs in more globalized economies.

Finally, we find evidence of the likelihood of IFRS adoption for a given country increasing with the number of IFRS adopters in its geographical region (network benefits). This result is significant because it suggests that as the network benefits from IFRS get large, countries may adopt the international standards even if the direct economic benefits from such standards are inferior to those from locally developed standards. The full paper is available for download here.