IFRS VS US GAAP - Research Explorer

IFRS VS US GAAP:

DISPATCHES FROM THE INTERNATIONAL BATTLEFIELD

A thesis submitted to the University of Manchester for the degree of

Doctor of Philosophy

in the Faculty of Humanities

2016

Ersa Tri Wahyuni

Accounting and Finance Division

Alliance Manchester Business School

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Contents

List of Tables ________________________________________________________ 6

List of Figures _______________________________________________________ 7

Copyright __________________________________________________________ 8

Declaration __________________________________________________________ 8

List of Abbreviations and Acronyms ______________________________________ 9

Abstract _________________________________________________________ 12

Acknowledgement ___________________________________________________ 14

Chapter 1. Introduction _______________________________________________ 15

1.1 Background _________________________________________________________ 15

1.2 Research objectives ___________________________________________________ 21

1.3 Research methodology ________________________________________________ 22

1.4 The layout of the thesis ________________________________________________ 23

Chapter 2. The Rise of IFRS ___________________________________________ 26

2.1 Introduction _________________________________________________________ 26

2.2 The world pursuit of global accounting standards __________________________ 28

2.3 International institutions involved in the diffusion of IFRS in its early period. __ 31

2.4 Important milestones in the diffusion of IFRS (1998-2008)___________________ 34

2.5 IFRS v US GAAP and the global financial crisis ___________________________ 42

2.6 Conclusion __________________________________________________________ 45

Chapter 3. Literature Review ___________________________________________ 47

3.1 Introduction _________________________________________________________ 47

3.2 Does IFRS produce better quality accounting information? __________________ 48

3.3 The reasons why countries adopt IFRS ___________________________________ 53

3.4 The study of accounting standard setting: Identifying the research gap ________ 55

3.5 Conclusion __________________________________________________________ 57

Chapter 4. Framing the IFRS Adoption Process: The Value of an Institutional

Perspective _______________________________________________ 59

4.1 Introduction _________________________________________________________ 59

4.2 IFRS diffusion and globalisation from a world society perspective ____________ 61 4.2.1 Understanding the key players involved in the diffusion of IFRS_____________________ 64

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4.3 Understanding the process of IFRS adoption from the perspective of adopting

countries __________________________________________________________ 66 4.3.1 Criticisms of institutional isomorphism in the studies of IFRS _______________________ 67 4.3.2 Looking closer at the process: Institutional work theory ____________________________ 69 4.3.3 Creating institutional work __________________________________________________ 72 4.3.4 Maintaining institutional work _______________________________________________ 73 4.3.5 Disrupting institutional work _________________________________________________ 75

4.4 Conclusion __________________________________________________________ 76

Chapter 5. Studying IFRS Adoption Processes: A Research Methodology _______ 78

5.1 Introduction _________________________________________________________ 78

5.2 Research paradigm ___________________________________________________ 79

5.3 The case studies: Country selection criteria _______________________________ 81

5.4 Research design ______________________________________________________ 83 5.4.1 Research questions ________________________________________________________ 85 5.4.2 Data collection ____________________________________________________________ 86 5.4.3 Selection criteria of respondents and their profile _________________________________ 88 5.4.4 Gaining access and interview procedure ________________________________________ 90 5.4.5 Data analysis _____________________________________________________________ 91

5.5 Writing the thesis _____________________________________________________ 95

5.6 Reliability and validity assessment ______________________________________ 98

5.7 Conclusion _________________________________________________________ 101

Chapter 6: Legalistic Mechanisms as Institutional Work in Processes of IFRS

Adoption in Emerging Economies: Case Studies of the Philippines and

Brazil ___________________________________________________ 102

6.1 Introduction ________________________________________________________ 102

6.2 IFRS adoption in the Philippines _______________________________________ 103 6.2.1 The harmonisation period: 1996-2000 ________________________________________ 104 6.2.2 The decision-making period: 1998/1999 and 2004 _______________________________ 106 6.2.3 The transition period: 2001-2005 ____________________________________________ 109 6.2.4 The implementation period beyond 2005: New option for non-listed companies ________ 112

6.3 IFRS adoption in Brazil ______________________________________________ 114 6.3.1 The harmonisation period: Before 2006 _______________________________________ 118 6.3.2 The decision-making period: 2007 ___________________________________________ 120 6.3.3 The transition period: 2007-2010 ____________________________________________ 123 6.3.4 The implementation period beyond 2010: Onerous application of few standards________ 125

6.4. Discussion: A strong legal mandate has encouraged adoption _______________ 128

6.5 Conclusion _________________________________________________________ 132

Chapter 7. Lobbying Mechanisms in IFRS Adoption: The Case of Canada and

Indonesia _______________________________________________ 133

7.1 Introduction ________________________________________________________ 133

7.2 IFRS adoption in Canada _____________________________________________ 134 7.2.1 The harmonisation period: 1998-2004 ________________________________________ 135 7.2.2 The decision-making period: 2004-2006 _______________________________________ 137 7.2.3 The transition period: 2006-2008 ____________________________________________ 145 7.2.4 The implementation period beyond 2011: The case of rate-regulated entities. __________ 152

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7.3 IFRS convergence in Indonesia ________________________________________ 155 7.3.1 The harmonisation period: 1994-2004 ________________________________________ 156 7.3.2 The decision-making period: 2004 – 2008 _____________________________________ 161 7.3.3 The transition period: 2009 – 2011 ___________________________________________ 166 7.3.4 The implementation period beyond 2012: The case of accounting for land and IAS 41 ___ 171

7.4 Discussion __________________________________________________________ 172 7.4.1 IFRS vs US GAAP adoption decision: Was it ever about quality? ___________________ 175

7.5 Conclusion _________________________________________________________ 176

Chapter 8. Market Mechanisms and IFRS Convergence in Advanced Economies:

The Case of Japan ________________________________________ 178

8.1 Introduction ________________________________________________________ 178

8.2 “Big Bang” and the harmonisation period: 1996-2004. _____________________ 179

8.3 The decision-making period: 2005-2010 _________________________________ 182

8.4 The transition period: 2010-2013 _______________________________________ 189

8.5 Strategic repositioning: IFRS in Japan beyond 2013 _______________________ 194

8.6 Discussion __________________________________________________________ 202 8.6.1 Market competition as institutional work in IFRS convergence processes _____________ 204 8.6.2 Key actors in IFRS convergence process in Japan. _______________________________ 206

8.7 Conclusion _________________________________________________________ 208

Chapter 9. One Set of Global Accounting Standards: Is IFRS Adoption the Only

Way? The Case of the US __________________________________ 211

9.1 Introduction ________________________________________________________ 211

9.2 2000-2005: The warm period __________________________________________ 213

9.3 2005-2008: The golden period _________________________________________ 216

9.4 2009-2012: The disappointment period __________________________________ 222

9.5 Beyond 2012: Will the US eventually adopt IFRS? ________________________ 232

9.6 Discussion: What can we learned from the US case? _______________________ 234

9.7 Conclusion _________________________________________________________ 237

Chapter 10. The Institutional Work of IFRS Adoption: Transforming Accounting

Regulatory Fields _________________________________________ 239

10.1 Introduction _______________________________________________________ 239

10.2 Theorising the IFRS adoption process: the dynamics of institutional work ___ 241

10.3 Disrupting institutional work _________________________________________ 247 10.3.1 Undermining the ‘localism’ logic of the old accounting standard ___________________ 247 10.3.2 Disrupting the full adoption of IFRS ________________________________________ 249 10.3.3 Prohibiting the continued use of old standards. _________________________________ 251

10.4 Creating institutional work __________________________________________ 252 10.4.1 IFRS as a high quality accounting standard: Image-making processes _______________ 253 10.4.2 Reconfiguration of belief systems ___________________________________________ 256 10.4.3 The creation of competition logic ___________________________________________ 259

10.5 Maintaining institutional work _______________________________________ 260 10.5.1 Resisting new (and maintaining old) standard __________________________________ 261

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10.5.2 Maintaining the IFRS adoption decision: Reinventing the old actors ________________ 263 10.5.3 Maintaining full IFRS adoption _____________________________________________ 265

10.6 Beyond implementation: The new battlefields ___________________________ 267 10.6.1 The emergence of regional clubs: The new organisational field? __________________ 268

10.7 Conclusion ________________________________________________________ 269

Chapter 11. Overall Conclusions _______________________________________ 271

11.1 Overview of the study _______________________________________________ 271

11.2 Summary of main findings ___________________________________________ 272

11.3 Implications of the study _____________________________________________ 275

11.4 Research contributions and policy recommendations _____________________ 277

11.5 Agenda for future research ___________________________________________ 281

Reference List ______________________________________________________ 283

Appendix 1. Interview Log ____________________________________________ 296

Appendix 2. Summary of IFRS adoption in sampled countries _______________ 303

Word Count: 90,455

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List of Tables

Table 1. The Financial Stability Forum’s 12 key standards for sound financial systems ......... 36

Table 2. Comparison of realist perspectives and world society perspectives ............................ 64

Table 3. Creating institutions .................................................................................................... 72

Table 4. Maintaining institutions ............................................................................................... 74

Table 5. Disrupting institutions ................................................................................................. 75

Table 6. Data types utilised in the study .................................................................................... 88

Table 7. Respondents’ profile by country and institutions ........................................................ 89

Table 8. Timeline of IFRS adoption in the Philippines ........................................................... 113

Table 9. Accounting standards applied in Brazil prior to IFRS adoption ............................... 117

Table 10. Timeline of IFRS adoption in Brazil ....................................................................... 125

Table 11 Arguments for and against US GAAP in Canada .................................................... 142

Table 12 Arguments for and against IFRS in Canada ............................................................. 143

Table 13. Public engagement activities by AcSB members/staff to stakeholders during 2006-

2008 ........................................................................................................................ 147

Table 14 Timeline of Canadian IFRS adoption and relevant events in the US ....................... 152

Table 15. Timeline of Indonesia’s convergence process ......................................................... 168

Table 16. Comparison between the ROSC draft and the ROSC final report of Indonesia ...... 170

Table 17. Japanese companies to have voluntarily adopted IFRS by June 2013 .................... 193

Table 18. Accounting standards in the Japan before and after June 2013 ............................... 196

Table 19. Japanese IFRS convergence timeline with relevant international events ................ 201

Table 20. Reasons for the US not adopting IFRS based on US field interviews..................... 231

Table 21. Transition relief and ‘carve outs’ undertaken by sampled countries ....................... 251

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List of Figures

Figure 1. Timeline of the global diffusion of IFRS ................................................................... 46

Figure 2. Inductive research approach adopted in the study ..................................................... 84

Figure 3. Data analysis .............................................................................................................. 93

Figure 4. Thematic analysis of interview data ........................................................................... 94

Figure 5. Stages in IFRS adoption ............................................................................................. 98

Figure 6. The Institutionalisation of IFRS ............................................................................... 242

Figure 7. The cycle of IFRS image-making ............................................................................ 254






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Copyright

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Declaration

No portion of the work referred to in the thesis has been submitted in support of an

application for another degree or qualification of this or any other university or other

institute of learning;

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List of Abbreviations and Acronyms

AAA American Accounting Association

AASC Auditing and Accounting Standards Council

ABRASCA Association of Listed Corporations (Brazil)

ACCA The Association of Chartered Certified Accountants

AcSB Accounting Standard Board (Canada)

AICPA American Institute of Certified Public Accountants

AISG Accountants International Study Group

AOSSG Asian-Ocenian Standard-setter Group

APB Accounting Principles Board (The US)

ASAF Accounting Standards Advisory Forum

ASB Accounting Standards Board

ASBJ Accounting Standards Board of Japan

ASC Accounting Standards Council

ASIC Australian Securities and Investments Commission

BCB Banco Central do Brasil (Central Bank of Brazil)

BI Bank Indonesia (Central Bank of Indonesia)

BIS Bank for International Settlement

BOA Board of Accountancy (The Philippines)

BOVESPA São Paulo Stock Exchange

BSP Bangko Sentral ng Pilipinas (Central Bank of the Philippines)

CAPA Confederation of Asian and Pacific Accountants

CbC Country by Country Reporting

CC Commercial Code (Japan)

CFC/CRC Federal / Regional Accounting Council (Brazil)

CICA Canadian Institute of Chartered Accountants

CPA Certified Public Accountant

CPC Accounting Standards Committee (Brazil)

CVM Securities and Exchange Commission of Brazil.

DPN Dewan Pengurus Nasional (IAI National Council) (Indonesia)

DSAK Dewan Standar Akuntansi Keuangan (Indonesian Financial Accounting

Standards Board)

EC European Commission

EFRAG European Financial Reporting Advisory Group

ESMA European Securities and Markets Authorities

EU European Union

FASB Financial Accounting Standard Board (The US)

FATF Financial Action Task Force

FEE The Fédération des Experts Comptables Européens (Federation of

European Accountants)

FIBV Federation Internationale des Bourses de Valeurs (International Federation

of Stock Exchanges)

FINEX Financial Executives Institute of the Philippines

FRC Financial Reporting Council (The Philippines)

FRSC Financial Reporting Standards Council (The Philippines)

FSAP Financial Sector Assessment program

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FSB Financial Stability Board

FSF Financial Stability Forum

G20 Group of Twenty (International forum for the governments and central

bank governors from 20 major economies)

G7 Group of Seven (Group of finance ministers and central bank Governors of

7 countries: Canada, France, Germany, Italy, Japan, United Kingdom and

United States

GLASS Group of Latin America Accounting Standard-setters

GRI Global Reporting Initiative

IAFEI International Association of Financial Executives Institutes

IAI Ikatan Akuntan Indonesia (Indonesian Institute of Accountants)

IAIS International Association of Insurance Supervisors

IAS International Accounting Standards

IASB International Accounting Standards Board

IASC International Accounting Standards Committee

IBRACON Institute of Independent Auditors (Brazil)

ICAEW Institute of Chartered Accountants in England and Wales (ICAEW)

ICANN Internet Corporation for Assigned Names and Numbers

ICCAP International Co-ordination Committee for the Accountancy Profession

IFAC International Federation of Accountants

IFASS International Forum of Accounting Standard-setters

IFRIC International Financial Reporting Interpretations Committee

IFRS International Financial Reporting Standards

ILO International Labour Organisation

IMF International Monetary Fund

INTOSAI The International Organisation of Supreme Audit Institutions

IOSCO International Organisation of Securities Commissions

IPSAS International Public Sector Accounting Standards

ISAR Intergovernmental Working Group of Experts on International Standards of

Accounting and Reporting (United Nations)

ISO International Organisation for Standardisation

JFSA Japanese Financial Service Agency

JICPA Japanese Institute of Certified Public Accountant

JMIS Japan Modified International Standards

MoF Ministry of Finance

MoU Memorandum of Understanding

NSS National Standard-setters

NYSE New York Stock Exchange

OECD Organisation for Economic Co-operation and Development

OEEC Organisation of European Economic Cooperation

OGA Office of the General Accountant

OJK Otoritas Jasa Keuangan (Financial Services Authority) (Indonesia)

PAS Philippine Accounting Standard

PCAOB Public Company Accounting Oversight Board

PFRS Philippine Financial Reporting Standard

PICPA Philippine Institute of Certified Public Accountants

PSAK Penyataan Standar Akuntansi Keuangan (Indonesian Financial Accounting

Standards)

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ROSC Report on the Observance of Standards and Codes

RRA Rate-Regulated Assets

RRL Rate-Regulated Liabilities

SAAJ The Securities Analysts Association of Japan

SAK Standar Akuntansi Keuangan (Accounting standards) (Indonesia)

SEC Securities and Exchange Commission

SME Small and Medium Enterprises

SOE State-Owned Enterprises

SRC Securities Regulation Code (The Philippines)

SUSEP Superintendency of Private Insurance

TFOSS Task Force on Standard Setting (Canada)

UK GAAP United Kingdom Generally Accepted Accounting Principles

US GAAP United States of America Generally Accepted Accounting Principles

WSS World Standard-setter Conference

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Ersa Tri Wahyuni

University of Manchester, Doctor of Philosophy

1st February 2016

IFRS vs US GAAP : Dispatches from the International Battlefield

Abstract The aim of this research is to develop an understanding of the rapid diffusion of IFRS

as a set of global accounting standards by studying in detail the process by which a

selected number of countries formally chose to adopt or converge to IFRS over US

GAAP. This study examines the IFRS adoption or convergence decision-making

processes in six countries, namely Philippine, Brazil, Canada, Indonesia, Japan and the

US. The research explores how the sampled countries made their decision to adopt or

converge with IFRS by analysing the events, the work of key actors and the arguments

that precipitated and bolstered such decision making. In considering countries where the

option was arguably to choose between one of two ‘quality’ sets of accounting standards,

the paper provides a valuable opportunity to consider the extent to which the case for

quality (so often made in support of the value and rise of IFRS) was influential in the

adoption process and the extent to which other factors played a significant role. This study argues that it is the idea of ‘one global accounting standard’ which has

been diffused and not only just IFRS. Countries opposing IFRS adoption face the risk of

being alienated by the IFRS international community, thus several have purported to

support the idea of ‘one global accounting standard’, although that may not necessarily

indicate IFRS adoption. This study finds that technical accounting issues, comparing the

quality of both standards, did not dominate the debate during the decision making process,

but other factors such as maintaining (or advancing) their international influence have

been dominant reasons for choosing IFRS in most sample countries.

This thesis develops a new analytical framework by depicting the adoption process of

IFRS as an ongoing engagement of interested actors who exert different types of

institutional work during the four stages of adoption: harmonisation, decision, transition

and implementation. The framework, serves to develop existing institutional work theory

(Lawrence and Suddaby, 2006), shows that distruptive, creating, and maintaining

institutional work are not wielded autonomously but rather are interconnected with each

other and they are capable of evolving over time. Focusing on the work itself and not the

institutional outcome, the framework reveals a less deterministic causal relationship

between one particular institutional work and its intended outcome. This study is hoped to

encourage the development of such theory in accounting standard-setting contexts.

Empirically, a developing global isomorphism of national standard-setters forms is

identified by this study as an evident implication of IFRS adoption. Upon adoption of

IFRS, national standard-setters are becoming more similar in their governance and due

process, mimicking the IASB model. The need to survive upon surrendering most of their

authorities to the IASB, is also arguably encouraging the emergence of regional groups of

national standard-setters, which in turn may evolve to become a new regulatory field

operating within and between the international and national regulatory fields. Such

developments have a number of important implications in respect of the development of

future research and regulatory policy in the area of international standard settings.

Keywords : IFRS, US GAAP, Institutional Work, Convergence, Adoption

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Dedicated to my mother and my late father

Thank you for your encouragement and constant support

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Acknowledgement

This PhD has been a challenging and rewarding journey. The list of institutions and

people below deserve thanks and appreciation for the completion of this thesis:

1. To the Indonesian Ministry of Education and Padjadjaran University, thank you for the

funding support which without I would not have been able to complete this journey;

2. My two supervisors, Prof. Christopher Humphrey and Prof. Edward Lee, thank you for

the guidance, knowledge and motivations during my PhD. You both pushed me

beyond my comfort zone, shaking my confidence, so I could achieve a higher level of

thinking and understanding;

3. To the Indonesian Institute of Accountants. For the access of your network of

standard-setters and research material for this study;

4. My husband and my two daughters, thank you for all of your patience and the

opportunity to have plenty of moments of solitude for me to finish the thesis;

5. I cannot thank enough Rosita Uli Sinaga, the chairwoman of the Indonesian Financial

Accounting Standard Board for her motivations, insights and moral supports;

6. I received a tremendous amount of support from the Executive Director of PICPA

(Philippine Institute of Certified Public Accountants) during my fieldwork in the

Philippines and the ASBJ (Accounting Standard Board of Japan) during my fieldwork

in Japan;

7. I am humbled by the positive responses I received from all respondents. Many of

whom I have developed a close friendship with after interviewing them;

8. I thank Prof. Roy Suddaby, Prof. James Faulconbridge, Prof. Laura Empson, Prof.

Frank Mueler and Prof. Daniel Muzio for their feedback during the Masterclass

Workshop in Newcastle Business School, June 2014. Also thank you to Prof.

Masayoshi Noguchi and Prof Niamh Brennan for their feedback during the APIRA

Doctoral Colloquium and to the discussant and all participants at the APIRA

Conference in Kobe, June 2013 and to the Indonesian Student International

Convention in London, November 2013;

9. My huge thank to fellow PhD students who gave support and motivations throughout

my PhD journey: Nurul Hidayah, Zubir Azhar, Hiroyuki Suzuki, Fareesa Malik, Lia

Nazlia,Qin Ye, Waziri Sulu-Gambari, Mirta Amalia. Also friends at Hartley Hall who

became my family in Manchester especially Vyta Hanifah;

10. Last, but not least, I thank other professors in the Accounting and Finance Division of

AMBS and Lynne Barlow-Cheetam and her team in the PGR office for the excellent

support during my PhD.

Chapter 1. Introduction

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1.1 Background

The world capital markets have become so interdependent that the instability of one

capital market can frequently affect others. Faster globalisation and the increased mobility

of capital have increased the pressure and demand for the harmonisation of reporting

frameworks and related standards (UNCTAD, 2006). The need for global financial

reporting standards to support the stability of globally connected financial markets is

argued to be critical for the sound functioning of the underpinning international financial

infrastructure (UNCTAD, 2006; Humphrey et al., 2009; Arnold, 2012). The world has

witnessed the diffusion of International Financial Reporting Standards (IFRS) over the last

15 years to a point where they have become a globally accepted accounting standard. The

scale of IFRS adoption is such that is now required or permitted by 126 jurisdictions for

the financial corporate reporting of all or most of their publicly listed companies

(Hoogervorst, 2015).

The need for a global set of high-quality financial reporting standards has long been

discussed by international bodies and the accounting professions. For example in Europe,

the European Commission (EC) started an initiative in the mid-1960s to harmonise

national regulations and improve the comparability of financial statements (Botzem and

Quack, 2006). The process of international convergence towards a global set of standards

was formalised in 1973 when sixteen professional accountancy bodies from nine countries

agreed to form the International Accounting Standards Committee (IASC), reorganised in

2001 to form the International Accounting Standards Board (IASB), in order to develop a

set of global accounting standards and related interpretations (see Camfferman and Zeff,

2007; Botzem, 2012).

Despite the proliferation of IFRS, the mechanisms employed by countries in the

adoption of IFRS are little understood, particularly when the countries have been in a

position where they had the capacity to make a choice between two allegedly high quality


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accounting standards. The broad aim of this thesis is to understand the rapid rise of IFRS

as a set of global accounting standards by studying in detail the processes by which a

selected number of countries chose to adopt IFRS over the alternative. The sampled

countries in this study are those who had a choice -- they had the choice to choose IFRS or

the alternative. Option in some countries could have been to adopt US GAAP and in

others where adopting US GAAP were not practicable, they could have continue to use

their local GAAP which also have been harmonised with US GAAP. Specifically, this

study aims to investigate how the decision to adopt IFRS emerged, who the actors were,

their actions, and the arguments precipitating their decision.

IFRS and the IASB have been the object of analysis for a considerable period of time

in accounting research. Evidence of the market consequences of IFRS adoption has

dominated capital market research in the last decade (see Brüggemann et al., 2013 for an

overview). IASB as a standard-setter has been the subject of institutional research in the

global standard setting literature (Botzem and Quack, 2006; Botzem, 2012; Richardson

and Eberlein, 2011; Zeff, 2012). Case studies on IFRS adopting countries, which are

mostly developing and ex-socialist countries, have provided limited empirical analysis of

IFRS adoption (Tyrrall et al., 2007; Albu et al., 2011). Often the case studies of IFRS

adoption in individual countries have argued that IFRS adoption was inevitable due to the

pressure of international donor bodies (Artikis et al., 2010; Tyrrall et al., 2007; Mir and

Rahaman, 2005; Junaid and Ghani, 2005). The benefits of IFRS adoption have been

promoted by international bodies such as the United Nations and the World Bank, with

claims including reduction in company’s cost of capital, greater mobility of capital and

improvements in the quality of accounting information (World Bank, 2010; UNCTAD,

2006).

There is a growing body of literature examining the quality of accounting information

associated with the adoption of IFRS. The research to date however, provides mixed

evidence as to whether accounting data from the IFRS system exhibits higher quality than

that associated with the application of local Generally Accepted Accounting Principles

(GAAP) or US GAAP. Although some research provides evidence that IFRS produces

better quality accounting information compared to local GAAP (Barth et al., 2008; Horton

et al., 2013; Daske et al., 2008; Lee et al., 2008), the evidence is less clear if it is tested


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against US GAAP. Research findings have tended to suggest that IFRS is not better in

quality when compared with US GAAP. If companies convert from US GAAP to IFRS,

accounting quality dimensions (inter alia value relevance, earnings management,

timeliness) have been found to remain unchanged (Bartov et al., 2005; Leuz, 2003) or

even deteriorate (Van der Meulen et al., 2007; Barth et al., 2012). The existing empirical

literature on the quality of IFRS versus US GAAP delineated above relies on extracted

corporate data from financial reports and capital markets. In essence, studies tend to

analyse the IFRS adoption impact at a firm level and not at the level of the individual

country. Most of the companies in such studies have not had a choice of using IFRS as the

country in which they are domiciled made the decision for IFRS adoption. However it

remains unclear why some countries switched from their national accounting regime to the

international accounting regime and what cost benefit calculations were performed. Indeed

in some cases, jurisdictions have adopted IFRS without even knowing the final form of the

standards to which they were committing, for example the case of the EU’s surprising

decision in June 2000 to require IFRS for all listed companies by 2005 (Zeff, 2012). When

the EU made this decision, the IASC was in the process of restructuring to become IASB

and the success of the new board was unknown. Thus, case studies of IFRS adoption are

potentially important to reveal the reasons behind such switching.

Existing case studies of individual country adoption of IFRS have mainly been

situated in the context of developing countries. Such countries may be more willing to

accommodate pressures for change due to capital dependency and the lack of an

accounting standard setting infrastructure. Countries covered in such literature on IFRS

adoption include Bangladesh, Pakistan, Egypt, Kazakhstan, Romania and Zimbabwe.(Mir

and Rahaman, 2005; Junaid and Ghani, 2005; Tyrrall et al., 2007; Albu et al., 2011;

Hassan, 2008; Hussey and Ong, 2006; Chamisa, 2000). In most of these studies, authors

have argued that coercive force has been the major factor in the IFRS adoption process.

However, the adoption of IFRS by the EU or other developed countries such as Canada or

Australia cannot be conveniently explained by theories of external coercive pressures.

These developed countries are clearly less dependent on the form of international aid that

imposes compliance with IFRS as a condition of the funding agreement.


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A study of the IFRS adoption process in several countries, including some developed

economies, is important in order to make sense of IFRS diffusion as a global accounting

standard. It is pivotal to understand why IFRS can be diffused in an arguably short period

of time while other standards, despite wide spread endorsement from transnational

organisations have been diffused at a much slower rate. An example is the slower adoption

of IPSAS by countries despite the endorsement of various international organisations,

including the EU.1Thus a better understanding of the process of IFRS diffusion may help

to inform similar efforts towards international standardisation in other fields such as

IPSAS, the recently emerged framework for integrated reporting, or Country by Country

(CbC) reporting2.

Currently, there are several prominent explanations in the literature as to why IFRS

has been widely diffused. The first common explanation for IFRS diffusion is the realist

perspective that argue that IFRS have been diffused through capital dependency and as a

new technological tool for developed countries to use to dominate developing countries

(Aras and Crowther, 2008; Nnadi, 2012; Bakre, 2008). The second explanation, is that

IFRS as well as other international standards, are diffused due to the financialisation of the

world, especially after the Asian Crisis in 1998 (Humphrey et al., 2009; Humphrey and

Loft, 2009; Arnold, 2012; Wade, 2007). The third explanation for countries to adopt IFRS

is to seek legitimacy and social acceptability regardless of their usefulness, or a country

‘isomorphing’ with predominant norms (Rodrigues and Craig, 2007). Isomorphism is a

key element in the institutional theory and widely used in IFRS case studies. (Collin et al.,

2009; Hassan, 2008; Mostafa Kamal, 2008; Mir and Rahaman, 2005; Albu et al., 2013;

Albu et al., 2011).

Surprisingly, the various streams of literature rarely make reference to one another.

Those analysing IFRS diffusion at a global level usually accentuate the transnational

organisational interplay, and how international organisations improve the legitimacy of

1 The slow adoption rate of IPSAS has encouraged five transnational organisations: OECD, IMF, World

Bank, FSB, IOSCO, and INTOSAI to review the governance of IPASB and issue the public consultation

paper in February 2014 : http://www.oecd.org/gov/budgeting/IPSASB-Consultation-Paper.pdf

2CbC reporting is Country By Country reporting, initially proposed by UK tax consultant Richard

Murphy, and now under consideration by the OECD and the EU. The EU issued new accounting directive in

June 2013 about CbC and OECD issued consultation paper in January 2014:

http://www.oecd.org/ctp/transfer-pricing/discussion-draft-transfer-pricing-documentation.pdf

http://www.oecd.org/gov/budgeting/IPSASB-Consultation-Paper.pdf


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particular sets of standard and precipitate the diffusion. Often they neglect the processes

inside countries as an important institutional work in promoting IFRS diffusion. In

contrast, IFRS country case studies are caught up in explaining the legitimacy motives of a

country, and rarely perceive the country as a relevant player in the international arena. The

case studies using an isomorphistic explanation have paid little attention to issues of

contestation, and the process and influence in international standard-setting process

(Botzem and Quack, 2006).

It can be argued that globalisation has created the demand for one global accounting

standard and IFRS adoption has been promoted as the way to achieve that goal (Pacter,

2014; Tweedie, 2012; UNCTAD, 2006). Extant research provides evidence that IFRS

produces better accounting information compared to local accounting standards only in

certain circumstances and does not always compare favourable with the US GAAP (see

Brüggemann et al., 2013; Tarca, 2012 for an overview). Such studies tend to be dominated

by cases where the alternative to IFRS adoption was to maintain a vividly inferior national

GAAP. There have been few studies of IFRS adoption where an alternative adoption of a

competing set of quality standards was potentially available.

Drawing from world society theory (Drori et al., 2006b), this study argues that IFRS

diffusion is the part of world’s cultural consolidation in the era of global social change. In

contrast with the realist perspectives3 which see globalization as exploitation, domination,

competition, and manipulation; world society theory offers an alternative image of

globalisation which involves an increasing sense that the world in itself is a society with

its own social system and culture. This thesis argues IFRS has been globally diffused

because the idea of ‘one global accounting standard’ over thirty years has become a part of

world culture. It is not only IFRS as a set of standard per se, but the idea of ‘one set of

global accounting’ standards that has travelled and been embraced by many countries.

IFRS happens to have taken as the reification of that idea. As will be discussed in the

empirical chapters, countries have chosen IFRS, not necessarily due to the pressure from

3 such as world-system theory Chase-Dunn, C. K. (1998) Global Formation: Structures of the World-

Economy. Lanham: Rowman & Littlefield, Wallerstein, I. (1974) The Modern World-System I: Capitalist

Agriculture and the Origins of the European World-Economy in the Sixteenth Century New York: Academic

Press and state-competition theory Tilly, C. (1992) Coercion, Capital, and European States, Ad 990-1992.

Oxford: Blackwell Publishing. Skocpol, T. (1979) States and Social Revolutions: A Comparative Analysis of

France, Russia and China: Cambridge University Press.


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international donor bodies, but to become part of global society. Even countries opposing

IFRS adoption face the risk of being alienated by an emerging IFRS global society thus

they may need to purport their support for the idea of ‘one global accounting standard’

although not necessarily indicate IFRS adoption.

This study argues that IFRS adoption is not a clear-cut sequential process but an

ongoing engagement of different forces and actors amidst continued transformation in

national and international regulatory fields. In analysing the six sample countries, this

study develops an analytical framework of dynamic processual change that is

distinguished from the current existing hierarchical models (Dillard, et. al., 2004)

commonly used in analysing IFRS adoption processes (e.g Guerreiro et al., 2015; Irvine,

2008). Drawing on the notion of institutional work (Lawrence and Suddaby, 2006;

Lawrence et al., 2009), the analytical framework facilitates a richer insight into of the

political tensions across different stages of IFRS adoption and takes the analysis beyond

the ubiquitous institutional isomorphism explanations offered by much existing literature

on IFRS adoption.

In so doing, the study serves to develop the analytical framework introduced by

Lawrence and Suddaby (2006) by finding a less deterministic set of linkage between

certain types of institutional work and the intended effects of the work. Such a framework

allows for the fact that particular institutional work may not necessarily correspond

directly with specified institutional outcomes. As will be discussed in chapter ten, some

forms of what have been termed creating and disrupting work have been successful in

some countries but not in others. For example, the creating work of actors in promoting

the notion of ‘one global accounting standard’, has not necessarily lead to a full IFRS

adoption in Japan and the US. Such use of institutional work to illustrate the dynamics of a

field change contributes to the current discussion of the theory which have tendency to

tightly couple forms of institutional work with their intended outcome. (e.g Hirsch and

Bermiss, 2009; Trank and Washington, 2009; Suddaby and Viale, 2011). The case studies

using institutional work theory have usually started with a certain outcome (e.g the

creation of a new field) then investigated how the institutional work contributed to the

outcome (e.g Zietsma et.al., 2010; Hirsch and Bermiss, 2009;Trank and Washington,

2009; Suddaby and Viale, 2011).


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The analytical framework proposed in this thesis (as will be discussed in chapter ten)

also stresses the importance of recognising the interdependent relationship between

international and national fields. The decision and actions of national actors can be highly

influenced by the logics and dynamics of the international field. Through the movement of

actors across/between the two fields, the logics in the international field are cascaded to

the national field and vice versa – with the national actors are being capable of influencing

IFRS policy-making through their representation. The diffusion of international logics to

the national field has brought other institutional implications besides the adoption of IFRS.

The IFRS diffusion has encouraged the global isomorphism of organisational structures

and processes, transforming the national standard-setters to become more similar in their

forms and due processes. Such institutional developments have been overlooked by the

current IFRS literature and will be discussed toward the end of this thesis when

consideration is given to the emerging significance of regional institutional fields in

accounting standard setting.

1.2 Research objectives

The primary objective of this study is to understand how IFRS has been adopted by

different countries to enhance knowledge of the global diffusion of IFRS. This study aims

to go beyond how countries have made the decision to adopt or converge with IFRS by

analysing the activities, the actors and the arguments precipitating the decision to adopt

IFRS.

In achieving the aims of the research, this study will analyse IFRS adoption in several

countries where the national actors have contemplated to choose IFRS over other allegedly

good quality international standards. Comparative case studies of six countries will

provide a more comprehensive understanding of IFRS diffusion globally, as these six

countries represent both developing and developed economies. All the sample countries,

except for the US and Japan, at some point of time they have made decision to abandon

US GAAP and fully adopt IFRS. The comparative case studies are used to answer three

broad research questions:


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Research Question 1: How did the decision to adopt (or not to adopt) IFRS emerge in

these 6 selected countries, which actors were involved in the process and what factors both

endogenous and exogenous, determined the decision?

Research Question 2: How prominent were arguments about the relative quality of

IFRS vs. US GAAP (or the local GAAP) in debates over IFRS adoption and did other

issues have greater prominence?

Research Question 3: What can be gained from detailed investigation of the process

of IFRS adoption in individual countries in terms of:

a. better explaining the processes through which IFRS has become a global

accounting standard; and

b. improving our understanding of institutional change and the dynamics of

institutional work in the regulatory field?

1.3 Research methodology

The design of this research adopts a qualitative interpretative approach to gain an in-

depth understanding of IFRS adoption processes. The six countries selected in this study

are the Philippines, Brazil, Indonesia, Canada, Japan and the US. The main criterion used

in selecting the sampled countries was their past strong connection with US GAAP prior

to their contemplation of IFRS adoption. Arguably, a country which had a strong faith in

US GAAP (often labelled as a rule-based set of standards) would experience quite an

onerous and challenging decision-making process in adopting IFRS, which is claimed to

be a principles-based set of standards.

The documentary study of this research analyses information from World Bank

reports, press releases, speeches, minutes of meetings of national standard-setters, meeting

podcasts, articles in newspapers and magazines, and other relevant material. These

documents were used to develop a timeline for each country and also to identify the

dominant actors involved in that process. In order to understand the actions and the contest

among actors, semi-structured interviews with the decision makers were conducted. Key

decision-makers from national accounting standard-setters, capital market supervisory

agencies and the accounting profession are the main respondents for this study. The


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interview with 63 respondents across six countries were used for several purposes. Firstly,

interviews were used to confirm the timeline of IFRS adoption. Secondly, interviews were

used to confirm the key individuals (or group of individuals or institutions) involved in

discussions leading up to the decision-making process for IFRS adoption. Thirdly,

interviews with several key individuals were used to gain an understanding of how the

decision was made and its consequences were considered.

All interviews were then coded and analysed based on the emergent categories. The

interviews were triangulated with other data such as reports, news articles and other

respondent’s interview to refine the themes. The theoretical coding was then employed to

categorised data based on the theoretical framework. The researcher interpreted the

meaning of themes/descriptions to develop new understandings and analytical framework

for IFRS adoption process.

1.4 The layout of the thesis

This thesis consists of eleven chapters which are structured as follows:

This current introductory chapter provides the general background of and motivations

for the study.

Chapter two provides a historical delineation of the rise of IFRS as a set of global

accounting standards. This chapter starts in the era of the 1960s when the pursuit of global

accounting standards was discussed by international bodies and the accounting profession

around the world. The chapter also notes important milestones in the global diffusion of

IFRS in the decade from1998 to 2008. It concludes by discussing the position of IFRS as a

set of global accounting standard following the global financial crisis of 2007 – 2008 and

reviews the current position of IFRS.

Chapter three’s specific purpose is to identify key gaps in the current literature of IFRS

research. Its first section delineates the mixed research evidence on the question as to

whether IFRS produces better quality accounting information, especially compared to US

GAAP. Section two explicates various individual country case studies of why countries

adopt IFRS. Most existing case studies argue that pressures from international bodies have

dominated the decision making process, although the institutional change and mechanisms


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of IFRS adoption have been rarely explored. The final section reviews the extant literature

on institutional issues in the politics of accounting standard-setting processes. The current

literature is dominated by the case of IASB and FASB, both are well resourced standard-

setters with significant global influence. However the literature has offered little

explanation on how national regulatory fields institutionalise IFRS which has been pivotal

in supporting the IFRS global diffusion.

Chapter four explains the theoretical framework which will be used in analysing,

presenting and discussing the empirics of the study, concentrating in particular on world

society theory and institutional work theory. World society theory offers different

explanations for globalization – not viewing it as an outcome of exploitation, but as

reflection of an increasing sense that the world itself is a society with its own social

systems and culture. While world society theory is helpful to explain the diffusion of IFRS

globally, the theory of institutional work is helpful to analyse the national regulatory field

level. Institutional work theory offers different analytical framework in looking at

institutional change by focusing on the purposive actions of actors which can be creating,

maintaining and disrupting. These two theories have been useful in sense-making and

understanding the multiple cases in this study.

Chapter five focuses on the study’s research methodology, explaining its ontological

and epistemological stances and justifying its interpretative approach. The chapter then

explains the criteria used for country selection and how respondents were selected from

each country as well as how the resulting empirical data was analysed.

Chapter six to nine are the main empirical chapters of the study. Chapter six examines

how the IFRS adoption processes in Brazil and the Philippines were shaped by

international forces, albeit in different ways and in ways that are not consistent with a

classic coercive isomorphism explanation. Chapter seven analyses IFRS adoption

processes in Indonesia and Canada which, in contrast to Brazil and the Philippines, relied

more on the lobbying of national actors, resulting in longer process of decision making.

Chapter eight focused on the strategic re-positioning of Japan’s IFRS adoption decision,

while chapter nine analyses the case of the US, a country which arguably has had the

strongest debate on the respective quality of IFRS and US GAAP. This case also explores


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the emotive aspects of the international response to the US indecisiveness toward IFRS

adoption. The six cases collectively demonstrate that the power struggles between

different actors are an ongoing engagement capable of transforming national regulatory

fields.

Chapter ten brings together the discussion on how IFRS is diffused globally, using this

to develop theoretical understandings of the way which IFRS adoption transformed

national regulatory fields. This chapter uses the cases to develop an analytical framework

of IFRS adoption processes that refines existing theoretical framings of institutional work

categories by showing the evolution of institutional work over different stages and its

coterminous relationship across categories. The framework highlights the distinction

between institutional work and their intended institutional outcome by depicting a less

deterministic link between them.

Chapter eleven draws together the overall conclusions of the thesis and ennunciates

how the multiple case studies improves our understanding of IFRS diffusion. This chapter

also summarises the principal research findings of the study, focused particularly on

exploring emerging significance of regional fields in international accounting standard

setting. Lastly, the chapter proposes an agenda for future research.

Chapter 2. The Rise of IFRS

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Chapter 2. The Rise of IFRS4

‘The best is still to come and that will be when the

Americans say: ‘Yes’” – Sir David Tweedie, answering

the question as to what the best times was in his ten years

as chairman of the IASB in an interview with Deloitte’s

IASPlus, 24th June 2011.

2.1 Introduction

Globalisation creates the demand for worldwide standards. In modern life, especially

after the second world war, standards have flourished (Brunsson and Jacobsson, 2000). In

several areas, private bodies have emerged as transnational rule-makers to provide global

standards as common goods to support the global economy. Private non-governmental

standard-setters, which often consist of self-appointed experts, are becoming increasingly

important actors creating and enforcing global ‘order’. Examples include the International

Organisation for Standardisation (ISO), the Internet Corporation for Assigned Names and

Numbers (ICANN) and the Global Reporting Initiative (GRI). These bodies establish rules

and make decisions that are recognised as authoritative, even if they are technically

voluntary and not legally binding (Richardson and Eberlein, 2011).

The rise of IFRS is often linked to globalised capital markets. The rapid diffusion of

IFRS over the last 15 years, resulting in it becoming a global standard, owes its success to

global marketisation logic (Djelic, 2006; Botzem and Quack, 2006). IFRS has been

marketed by intergovernmental organisations such as the World Bank and IOSCO as the

high quality global accounting standard which will enhance efficiency across capital

markets and deliver the decreased of cost of capital (UNCTAD, 2006). Besides IFRS,

standards serving the global business world include quality standards (ISO 9000),

International Standards on Auditing (ISA) and standards for sustainability reporting

(GRI).

4 When the IASB was formed in 2001, it co-opted all standards issued by IASC (IAS) into IFRS.


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The fast diffusion of IFRS is unique compared to other global standards such as ISO

9000, and ISA. IFRS has been produced by few full time Board members hired by IFRS

Foundation which is not an association of national accounting standard-setters. Unlike

ISO (International Organisation for Standardisation) which is the organisation of national

standards organisations or IFAC (International Federation of Accountants) which is the

organisation for national accounting professional associations, the IASB lacks formal

representation in its rule-setting activities. The ISO and IFAC produced their standards

based on the output of their part-time technical standard setting board/committees whose

members maintain their employment in their industry. In contrast, IFRS since 2001 has

been developed by a group of experts working full-time as standard-setters, supported by

full-time technical staff. One may argue that the IASB lacks legitimacy compared to other

meta-organisations or meta-government standard-setters, but the fast rate of IFRS

diffusion over the last 15 years to become a global standard demonstrates otherwise.

Standards have been described as voluntary agreements initiated and developed by

industry (Hallström, 2004). However, any standards which have reached a certain level of

‘global authority’, are difficult for other jurisdictions not to adopt (Richardson and

Eberlein, 2011).

The road to dominance in the international accounting standard-setting arena has not

been an easy one for IFRS, and not without its challenges. This chapter provides a brief

historical background on how IFRS has developed from a set of standards (that most

countries were reluctant to adopt), to now being adopted by more than 122 countries. This

chapter first looks at the reasons behind the pursuit of global accounting standards in the

1950s. The earliest period of IFRS (or IAS as they were known as back then) development

is discussed subsequently in the next section, highlighting the international institutions

involved in its development and diffusion. Section three explores the key milestones of

IFRS global rise over ten years (1998-2008) and the chapter concludes by considering

impact of the financial crisis in 2008 on the global diffusion of IFRS.


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2.2 The world pursuit of global accounting standards

Before the development of international trade and the integration of the world

economy, accounting standards were the product of a particular country which was

influences by its business and legal environment. However, the world witnessed rapid

growth in international trade and investment after the Second World War. By the late

1960s, a large majority of multinationals were American or British; comprising four-fifths

of the stock of foreign investors (Camfferman and Zeff, 2007 p.21). Barriers to trade and

investment were minimised by the formation of international trading blocs such as the

European Economic Community (EEC) in 1957.

As the international movement of investment increased, so did the need for accounting

harmonisation. Accounting professional bodies started to look beyond their national

borders and held conferences with other accounting bodies in the wider region. Meetings

of regional accounting bodies were held in Europe, America and Asia between the 1950s

and 1960s. At the Far East Conference of Accountants in Manila in 1957, several

accounting bodies formed the CAPA (Confederation of Asian and Pacific Accountants)

and at that conference, Washington SyCip (a leader of the Philippines accountancy

profession) called for more uniform standards. Similar call was also repeated in many

international accounting conferences after that, for example, at the seventh and eighth

International Congress of Accountants in 1957 and in 1962 (Camfferman and Zeff, 2007

p.23 and p.24). The president of the congress, Jacob Kraayenhof, highlighted the

divergence on auditing standards in various countries as a problem during the seventh

congress in 1952 and called for a uniformity of accounting principles during the annual

meeting of American Institute of Certified Public Accountants (AICPA) in 1959

(Camfferman and Zeff, 2007 p.23).

Prior to the call from the accounting profession, harmonisation of national accounting

standards found their way on to the agenda of international organisations. The OEEC

(Organisation of European Economic Cooperation) developed a standardised system for

national income accounts and began to publish data using those standards in 1953. At the

same time, the UN proposed a standardised system of its own, in order to produce


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comparable national income accounts. The standards of the OEEC and the UN were then

merged in 1956 (Botzem and Quack, 2006 p.271).

In Europe, the European Commission (EC) started an initiative in the mid-1960s to

harmonise national regulations and improve the comparability of financial statements. The

Elmendorf Report was produced which then shaped the first draft of the EC’s Fourth

Company Law Directive submitted in 1971 (Botzem and Quack, 2006 p.272). Initially, the

drafts of the directive were highly influenced by German company law, but when the UK

and Ireland joined the European Union (EU) in 1973, they insisted that the essence of

Anglo Saxon accounting philosophy should be better reflected with Dutch, Danish and

UK delegations insisting on the inclusion of the principle of the true and fair view. The

EC’s Fourth Directive was approved in 1978, laying down requirements for companies

across the EEC to prepare annual accounts that provided a true and fair view. In 1983, the

Seventh Council Directive on consolidated accounts was adopted in the EEC (Botzem and

Quack, 2006 p.272)

In the 1970s, the UN became a more active player in the international accounting

standard-setting arena. In December 1971, during the International Labour Organisation

(ILO) conference in Turin (on universal standards and conventions in accounting), the UN

was said to consider a ‘summit of leading accountants’ for 1972 to discuss “the chaos of

international accounting methods” (Camfferman and Zeff, 2007 p.188). In 1972, a Group

of Eminent Persons was appointed by the UN secretary-general to study the impact of

multinational corporations on development and international relations. The UN

Commission on Transnational Corporations decided to form its own Group of Experts in

1975 which became a working group in 1979 and was called the “Ad Hoc Inter-

governmental Working Group on International Standards of Accounting and Reporting”

(Camfferman and Zeff, 2007 p.192).

While inter-governmental organisations were working towards the harmonisation of

accounting standards, professional accounting associations were working with a similar

goal in mind. In 1966, the President of Institute of Chartered Accountants of England and

Wales (ICAEW), Sir Henry Benson proposed the establishment of the Accountants


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International Study Group (AISG) which comprised of representatives of the accounting

professional bodies of the UK, Canada and the US. The aim of the AISG was to

strengthen private standard-setting as an alternative to supranational regulation such as the

EC (Botzem and Quack, 2006 p.274). Its work reflected the influence of Anglo Saxon

professionals with a liberal tradition of self-regulation and their efforts to open new

markets in continental Europe.

Sir Henry Benson and Sir Douglas Morpheth played a pivotal role in the establishment

of the IASC, the predecessor of the current IASB (Bocqueraz and Walton, 2006). At the

Tenth International Congress of Accountants in Sydney 1972, Sir Benson invited

professional bodies from six nations to establish the IASC. The Congress also became the

birthplace of the International Co-ordination Committee for the Accountancy Profession

(ICCAP), which subsequently became IFAC in 1977 (Humphrey and Loft, 2007) .

On 28th June 1973, the IASC was created by representatives of national professional

accounting bodies from nine countries: Australia, Canada, France, West Germany, Great

Britain (with Ireland), Japan, Mexico, the Netherlands and the US. Sir Henry Benson

became chairman of the IASC (Camfferman and Zeff, 2007 p.6). The emergence of the

IASC, marked a significant shift in the previously burgeoning development of

international regulation in the field of accounting. The IASC aimed to develop

international accounting standards instead of regional ones. Most importantly, the

accounting standard-setting arena was in the hands of private actors who previously

advised in a subordinate position to governmental decision-making bodies such as the EC

and the UN (Botzem and Quack, 2006 p.274) .

The IASC was transformed into the IASB when its member bodies unanimously

approved its restructuring on 24th May 2000 in Edinburgh (Camfferman and Zeff, 2007

p.496). By this vote, the IASC finally was separated from IFAC and became an

independent body (Camfferman and Zeff, 2007 p.496). The IASC which consisted of

representatives from IFAC member bodies was a similar quasi-legislative model to other

global standard-setters such as the ISO technical committees (Hallström, 2004), however,


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the evolution of the IASB in to a private body created a new quasi-judicial model in global

standard-setting.

2.3 International institutions involved in the diffusion of IFRS in its early period.

The early years following the establishment of the IASC represented the formative

stage of international accounting standard-setting. For a transnational standard to be

diffused, it needs input and output legitimacy. Output legitimacy is not solely sufficient as

it takes time to see if a standard works well especially in a global wide scale. Without

input legitimacy from a wide pool of stakeholders, a set of accounting standards may be

perceived as biased, self-serving and not international. Input legitimacy is argued to be

derived from stakeholder involvement in the process of standard formation (Botzem and

Dobusch, 2012 p.741). International standard-setters, especially those newly established

like the IASC, needed to generate input legitimacy by strategically engaging third parties.

Some international organisations, with a stronger political legitimacy such as the UN and

the EU, were also developing international accounting standards in the 1970s and

competing with IASC in creating cross-border regulation (Botzem, 2012). During 1970s

and 1980s, UN and OECD questioned the IASC’s primacy in setting international

accounting standards (Zeff, 2012 p.840). Both bodies viewed IASC lacked of legitimacy

as it was a creature of the accounting profession with its own perceived narrow self-

interest (Zeff, 2012 p.841).

At the time of its establishment, IASB decided to cooperate with other international

organisations which were also trying to create internationally recognised accounting

standard. The IASC, for example, was represented at all meetings of the UN working

group ISAR (Intergovernmental Working Group of Experts on International Standards of

Accounting and Reporting) throughout the 1980s (Camfferman and Zeff, 2007 p.192).

The IASC also maintained regular contact with the OECD and its working group on

accounting standards throughout the 1980s and into the early 1990s (Camfferman and

Zeff, 2007 p.194).


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In the early years of their establishment from the mid-1970s to the early 1980s, the

IASC cooperated with many other international bodies such as the ‘Group of Ten’ Bank of

Governors at the Bank for International Settlements (BIS) in developing financial

reporting rules for their internationally active banks. Besides the UN, OECD and BIS, the

IASC also sought to improve its relations with other national standard-setters by launching

joint projects with standard-setters from the Netherlands, the UK and the US (Botzem and

Quack, 2006 p.276).

The IASC also tried to improve its input legitimacy by inviting other stakeholders to

become voting members and observers. Constitutional amendments in 1977 and 1982

expanded IASC membership to a total of seventeen members from only nine in 1973.

Organisations with an interest in financial accounting like the Association of Financial

Analysts (AFA) and the Association of Financial Executives (AFE) had reserved seats in

the IASC starting in 1986 and 1996 respectively (Botzem and Quack, 2006 p.277). The

pursuit of inclusiveness in standards formation by the IASC was also illustrated by the

establishment in 1981 of its Consultative Group which included various international

organisations to advise the IASC on strategic projects and priorities.

The IASC’s Consultative Group was a major step towards expanding its reach to

international non-accounting bodies. While the UN and the OECD both declined formal

membership, but the first consultative group contained representatives of the following

international bodies (Camfferman and Zeff, 2007 p.86):

- Federation Internationale des Bourses de Valeurs (FIBV)

- International Chamber of Commerce (ICC)

- International Confederation of Free Trade Unions

- International Co-ordinating committee of Financial Analysts’ Associations

- The World Bank

The Consultative Group notably proved its worth in improving the legitimacy of the

IASC during the OECD Forum on Harmonisation of Accounting Standards in 1985. A

number of individuals who expressed their support for the IASC during that conference

were also members of the Consultative Group. These members made a significant


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contribution to the enhancement of the IASC and increased its legitimacy in the eyes of

the OECD (Camfferman and Zeff, 2007 p.87).

As the input legitimacy of IAS improved, the output legitimacy became equally

important in expediting diffusion of the standard. Output legitimacy, has been argued,

results from the effectiveness and coordinative capacity of a standard (Botzem and

Dobusch, 2012), something that IAS was lacking at that time. As a group of accounting

professionals, the IASC could only persuade their members to use the standard and were

unable to enforce it. For example the AICPA was one of the founders of the IASC, but the

Financial Accounting Standards Board (FASB) remained the accounting standard-setter in

the US. Similarly in Japan, where the JICPA (Japanese Institute of Certified Public

Accountant), was a founding founder of the IASC, but had a relatively weak level of

influence on the standard-setting process in Japan (Camfferman and Zeff, 2007 p.172).

The IASC reported in 1988 that none of the founding members of the IASC had adopted

any of the IASC’s standards as their national requirements--suggesting as they had little to

learn from the IASC (Camfferman and Zeff, 2007 p.181). Thus, it was important for a

third party with a strong enforcing power to endorse the standards. Third parties play a

pivotal role in standard diffusion by endorsing and requiring or even insisting upon

adoption of IAS by its members (Botzem and Dobusch, 2012).

During the second half of the 1980s, the IASC targeted national regulators of

securities markets and approached IOSCO with the aim of establishing financial

statements prepared according to international accounting standards as a requirement for a

company’s access to the national/global stock market. IOSCO, created as an inter-

American organisation in 1974, which developed into a powerful global player by the

mid-1980s (Botzem and Quack, 2006 p.278) . Thus, seeking IOSCO recognition was

important for IAS legitimacy. Taking a similar stand to the FASB and the US SEC,

IOSCO was critical of IAS on the grounds that the language was incoherent, according to

them and lacked transparency (Botzem and Quack, 2006 p.278). Thus, it was important

for the IASC to improve the quality of their standards in order to gain IOSCO approval.


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The first project between the IOSCO and the IASC which started in 1987 aimed at

reducing or eliminating alternatives within standards and making them more detailed and

prescriptive. As part of this project, 10 out of 31 IAS standards published before 1987,

went through revision and the IOSCO played a tough vetoing role throughout the project

period (Botzem and Quack, 2006 p.279). The revised version of IAS published in 1993

produced 14 acceptable standards which received endorsement by European members of

IOSCO but the US Securities Exchange Commission (SEC) wanted to recognise and

endorse IAS only when a complete set of core standards was ready. Thus, in 1993 the

IASC and IOSCO started another revision project to create acceptable core standards by

1998. Finally in 2000, IOSCO recommended its members to allow the use of IAS in cross-

border offerings and listings. IOSCO endorsements provided significant support to the

IAS output legitimacy in that early period.

By the end of 1999, IASC agreed to restructure itself as demanded by the US SEC

(Zeff, 2012). Instead of a council of 60-70 people representative from various countries,

international accounting standards were developed by a small number of people hired by a

IFRS foundation incorporated in the US and headquartered in London. By the end of

2000, the standards produced by the IASC had become one of the standards being

reviewed for compliance by the IMF-World Bank assessment programme to the banking

sector. The growing acceptance by countries across the globe of IFRS is being used by

some to suggest that IASB is a model for transnational standard-setting (Richardson and

Eberlein, 2011).

2.4 Important milestones in the diffusion of IFRS (1998-2008)

There were many factors contributing to IFRS diffusion over the past 15 years. Major

milestones include the Asian financial crisis in the mid-1990s, the adoption of IFRS by the

EU in 2005 and the SEC decision in 2007 to accept IFRS-based financial reporting for

foreign companies listed in the US. Those three milestones made significant contributions

to the rise of IFRS.


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The idea of global accounting standards developed since the inception of the IASC in

1973, but it was not until the Asian financial crisis that the international agencies such as

World Bank really made global accounting standards a matter of priority. The importance

of the Asian financial crisis in the mid-1990s as the catalyst for the creation of a new

financial infrastructural regime, resulting in the demand for better global accounting

standards, has been highlighted in various studies (Humphrey and Loft, 2009; Arnold,

2012; Wade, 2007)

The Asian financial crisis began in Thailand in 1997 with the devaluation of the Thai

Baht due to speculation by short term investors. The crisis spread very quickly to

neighbouring countries with weak currencies such as the Philippines, Indonesia and

Korea. The Asian financial crisis soon became a global crisis as it also had an impact on

US hedge funds, the Russian debt crisis in 1998 and the Brazilian currency crisis in 1999

(Wade, 2007). Several countries like South Korea, Brazil, Thailand, Indonesia did not

have a choice but to accept IMF rescue programmes (Wade, 2007; Arnold, 2012).

The seriousness and the scale of the crisis led to widespread consensus among western

economies, world policy analysts, politicians and finance ministers regarding the need to

reform the international financial system, thus the G7 was established in October 19985.

The G-7 or Group of 7 was a group of finance ministers and central bank governors of

seven developed countries: Canada, France, Germany, Italy, Japan, the UK and the US.

Four months after the October meeting, G7 finance ministers and central bank governors

agreed to create another forum, the Financial Stability Forum (FSF), to promote

information exchange and coordination among national authorities, international

institutions, and international regulatory experts. The FSF had more representatives than

the seven nations which formed the first G7, it included Australia, Hong Kong, Singapore,

and Netherlands.

G7 countries, in a declaration dated 30 October 19986, proposed numerous measures

including the call on the IASC to finalise by early 1999, a proposal for a full range of

5 G7 Statement on the world economy, Declaration of G7 Finance Ministers and Central Bank Governors, London, 30 October 1998. Available at: http://www.g8.utoronto.ca/finance/fm103098.htm (Accessed 30th December 2014) 6 Ibid.

http://www.g8.utoronto.ca/finance/fm103098.htm


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internationally agreed upon accounting standards. They also requested that IOSCO, IAIS

(International Association of Insurance Supervisors), and the Basel Committee should

complete a timely review of the standards. Although the IASC had established contacts

with the Basel Committee and the World Bank for many years, this declaration,

nevertheless, was an important enhancement of the IASC’s position in the international

financial arena (Camfferman and Zeff, 2007 p.442)

The FSF duly conducted several meetings to discuss the setting of standards for the

new financial infrastructure. By September 1999, The G7 had expanded into

representatives from 20 countries which then became known as the G20. In March 2000,

the G20 agreed to focus attention on twelve key international standards: IFRS set by the

IASC and auditing standards set by the IFAC were among the 12 key international

financial standards (Table 1 lists these standards and their respective issuing bodies).

Area Standard Issuing Body

Macroeconomic Policy and Data Transparency

Monetary and financial policy

transparency

Code of Good Practices on transparency

and financial policies

IMF

Fiscal Policy and

Transparency

Code of good practices on fiscal

transparency

IMF

Data Dissemination Special Data dissemination standards and

General data dissemination standards

IMF

Institutional and Market Infrastructure

Insolvency Insolvency and Creditor Rights World Banks

Corporate Governance Principles of Governance OECD

Accounting International Accounting Standards IASB

Auditing International Auditing Standards IFAC

Payment and Settlement Principles for financial market

infrastructures

CPSS/IOSCO

Market Integrity FATF Recommendations on Combating

Money Laundering and the Financing of

Terrorism & Proliferation

FATF

Financial Regulation and Supervision

Banking supervision Core Principles for Effective Banking

Supervision

BCBS

Securities regulation Objectives and Principles of Securities

Regulation

IOSCO

Insurance supervision Insurance Core Principles IAIS

Table 1. The Financial Stability Forum’s 12 key standards for sound financial

systems

Source: http://www.financialstabilityboard.org/cos/key_standards.htm Accessed on 4th November

2013

http://www.financialstabilityboard.org/cos/cos_061030a.htm

http://www.financialstabilityboard.org/cos/cos_061030a.htm

http://www.financialstabilityboard.org/cos/cos_100601.htm



http://www.financialstabilityboard.org/cos/key_standards.htm


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These 12 standards were important as they were to become the basis for the IMF and

the World Bank in their joint country-by-country assessment. By this inclusion, it was a

clear signal that the IASC was now taken seriously at governmental level in the developed

world (Camfferman and Zeff, 2007 p.443). As part of the IMF-World Bank Financial

Sector Assessment Program (FSAP), these international bodies were charged with the

responsibility of monitoring countries’ implementation and compliance with the FSF’s 12

standards and codes. The IMF and World Bank upon conducting a detailed assessment of

progress developed their programme of Reports on the Observance of Standards and

Codes (ROSC). The international support for IFRS was also strengthened by IOSCO

endorsement in May 2000 for IASC’s core standards and Basel Committee in April 2000

for 15 IASC’s standards that had a significant effect on banks.

External pressures from international agencies such as the World Bank or the Asian

Development Bank (ADB) have been discussed in many case studies as one of the

dominant factors leading to IFRS diffusion in developing countries. (Hassan, 2008; Mir

and Rahaman, 2005). By 2013, as many as 98 countries had been assessed by the World

Bank and most of the resulting ROSC Accounting and Auditing Reports are available

from the World Bank website7. Over the last 12 years since 2001, 14 countries have been

assessed twice. The majority of the assessments have been conducted in developing

countries while the major advanced economies such as Germany, the UK, Japan and the

US are not assessed (or if they do, the reports are not available in the World Bank website)

which is ironic as the developed countries are the initiators of the assessment.

G20 recommendations have also been an influential factor for its members considering

the adoption of IFRS, and also for the IASB to revise its standards. For example, the G20

successfully pressured the IASB to revise its financial instrument standards after the

global financial crisis in 2008 (Bengtsson, 2011). During its second summit in London

April 2009, the G20 issued a leader’s statement with 29 recommendations to its members.

One of the recommendations was to strengthen financial supervision and the adoption of

IFRS.

7 ROSC Accounting and Auditing can be accessed at http://www.worldbank.org/ifa/rosc_aa.html

(Accessed 13 November 2014)


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“To call on the accounting standard-setters to work urgently with supervisors and

regulators to improve standards on valuation and provisioning and achieve a single

set of high-quality global accounting standards.” (G20 Leader’s statement para 15).

Beside the creation of a new financial infrastructure globally (Wade, 2007), the Asian

financial crisis also encouraged the emergence of new international actors, e.g FSF

became FSB and G7 became G20, who remain influential in the making of IFRS to the

present day. The rise of the G7 which then evolved into the G20, the creation of 12 key

standards and the FSAP/ROSC programme by the IMF and the World Bank fostered IFRS

diffusion, especially in Asian jurisdictions. Research by Alon and Dwyer (2014)

highlights that the majority of early adopters moved to IFRS after 1998 when a number of

countries received aid from the World Bank and IMF as a consequence of the Asian

financial crisis.

Following soon after, The EU boldly chose to endorse IFRS as an accounting standard

which united the continent’s capital markets. The adoption of IFRS by the EU in 2005

became a major milestone marking an increase in the rate of IFRS diffusion. The IASB

had the support of the EU from the beginning of its establishment in 2001. Since the mid-

1990s, discussions started in the EU about the need to develop its internal capital market,

and to address investor needs (Zeff, 2012). Thus the need for comparable accounting

practices arose as a major issue (Zeff, 2012). There was considerable diversity across the

EU (15 GAAPs in the 1990s, increasing with subsequent expansion) despite member

states incorporating the fourth and seventh directives into their national legislations and

those national traditions mainly were not “investor-oriented financial reporting systems”8.

The idea of a European Body to develop European accounting standards did receive some

limited discussions before 1990s but by the middle of 1995 it was clear to the EC that the

member state would not support it (Camfferman and Zeff, 2007, p.420-424). The two

alternatives available for the EC were US GAAP and IAS. US GAAP was not supported,

not only was it too verbose and detailed, but it was also an American import, developed by

the FASB which would have little or no interest in the views of Europeans when

developing future standards as excerpted below (EC, 2000).

8 EU Financial Reporting Strategy: The Way Forward 2000, para 14).


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IAS also has the distinct advantage of being drawn up with an international

perspective, rather than being tailored to the US environment. US GAAP, on the other

hand, is voluminous and is based on very detailed rules and interpretations.

Considerable education and training is necessary in order to use its standards. In the

US its effective application stems largely from the strong regulatory and enforcement

powers exercised by the US Securities and Exchange Commission. The European

Union does not, of course, have influence on the elaboration of US GAAP.

(EuropeanCommission, 2000, EU Financial Reporting Strategy: The Way Forward,

para.15).

In 2000, the EC designated the as-yet-unborn IASB as its de facto standard-setter. In

2002, the European Parliament required all EU-listed companies to report under IFRS by

2005. After the adoption, the EC which was pursuing a single set of accounting standards

across its diverse capital market, wanted to play a significant role in the international

accounting standard-setting arena and avoid US dominance in this process (Camfferman

and Zeff, 2007 p.422-423). The EC stated that the central objective of its revised strategy

in adopting IFRS “is that the policy should ensure that securities can be traded on EU and

international financial markets on the basis of a single set of financial reporting

standards”9

The decision to adopt IFRS by the EU in 2002, proved to be a major drive for IFRS

diffusion to other parts of the world. Technically, the EU maintains an independent

process of having each individual IFRS evaluated by its advisory group, the European

Financial Reporting Advisory Group (EFRAG), which was established in 2001. Due to

modifications that can emerge in the process, the EU-version of IFRS is not identical to

IFRS issued by the IASB. Nevertheless, the ‘European effect’ pushed other countries to

consider a similar strategic move of adopting IFRS. In July 2003, Australia announced the

adoption of IFRS by 1st January 2005, which triggered shock and anger by Australian

stakeholders (Picker, 2007). In media releases from the Australian Financial Reporting

Council on 3rd July 2002, the chairman explicitly stated that Europe’s IFRS adoption was

a major motivation.

9 EU Financial Reporting Strategy: The Way Forward 2000, para 7.


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Mr. Lucy said he understood that the 1stJanuary 2005 timing is somewhat later

than the Government would have liked. However, it is determined by the decision

of the European Union to require EU listed companies to prepare their

consolidated accounts in accordance with IASB standards from that date, in

support of the EU single market objective. ‘Australia certainly cannot afford to lag

[behind] Europe in this regard’, Mr. Lucy said. (Australian FRC media release, 3rd

July 2012).

Besides Australia, Japan's decision to harmonise their standards with IFRS was also

highly influenced by the EU’s decision. The Committee of European Securities Regulators

(CESR) advice to Japan’s FSA in July 2005 was a major contributing factor in leading the

BAC (Business Advisory Council) and the Accounting Standards Board of Japan

(ASBJ)10 to sign the Tokyo Agreement with the IASB in 2007. When the EU adopted

IFRS in 2005, CESR made an assessment of Japanese GAAP and concluded that there

were 26 areas of differences between Japanese GAAP and IFRS. CESR considered

Japanese GAAP as not equivalent to IFRS and this elicited concern from Japanese

companies listed in European markets (Kaneko and Tarca, 2008). IFRS harmonisation

attempts in Japan emerged from the pressure to convince the EU that Japanese GAAP was

equivalent to IFRS since Japanese companies relied heavily on European capital markets

for external financing (Skinner, 2008).

Recent empirical evidence also corroborates historical evidence concerning how this

‘European effect’ has been an influential factor in IFRS diffusion throughout the world.

Research by Ramanna and Sletten (2009) tested for the presence of network effects in the

decision of over 90 non-EU countries to adopt IFRS between 2003 and 2008. Using 552

country-year observations, they found that the network benefits expected to accrue from

the economic relations with the EU were a dominant source of influence. This conclusion

was especially true for larger countries rather than countries with smaller GDPs.

Across Atlantic, US SEC also solicited views from its stakeholders for lifting the

reconciliation requirements for private issuers which used IAS. US SEC ‘Concept

10 BAC is Business Advisory Council – an advisory council of Japanese FSA. ASBJ is Accounting

Standards Board of Japan.


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Release’ was issued in February 2000 and the basic issue raised was whether there exists a

supporting infrastructure to assure IASC standards would be rigorously interpreted and

applied11. The key question was ‘Are the IASC standards of sufficiently high quality to be

used without reconciliation to US GAAP in cross-border filings in the United States?’ and

SEC deputy chief of accountant reported the summary of the response of this question as

‘most of Europeans say ‘yes, definitely’ while most US respondents say ‘not yet’.”12

Europeans viewed this concept release as evidence the SEC would never be satisfied and

might imposing even more conditions (Camfferman and Zeff, 2007 p.347)

Apart from the Asian financial crisis and European adoption, another important

milestone in the global diffusion of IFRS was the decision of the US SEC in November

2007 to exempt foreign-listed companies from reconciling their financial statements to US

GAAP if they used IFRS (as issued by the IASB) as the basis of their financial reporting.

When the SEC issued a “Roadmap to Convergence” in 2005 in collaboration with the EU,

the elimination of the SEC’s 20-F reconciliation for foreign issuers using IFRS was aimed

to be effective by 2009 (Street, 2007). After the 2007 decision, the prospect of the world

achieving one global accounting standard increased. In August 2008, the SEC

unanimously, and with enthusiastic support from all of the participating staff offices and

divisions, approved a rule proposal containing a roadmap towards required adoption of

IFRS by US issuers. (Zeff, 2012). With this positive development, even the US pro-

competition scholars like Syam Sunder and Kothari, could not deny the possibility of one

global accounting standard becoming achievable.

“If the current trends continue, the US, the EU and many other parts of the world

may claim to have reached this long-sought goal of uniformity in the foreseeable

future.” (Sunder, 2010).

“The ongoing collaboration between the FASB and IASB could lead to a single

global standard-setter within the next decade.” (Kothari et al., 2010).

11 US SEC Concept Release was issued in 16 February 2000. The document is available at:

https://www.sec.gov/rules/concept/34-42430.htm (Accessed 4th September 2015) 12 John M.Morrisey remarks at 28th National Conference on Current SEC Developments (5December

2000). The speech is available at https://www.sec.gov/news/speech/spch443.htm (Accessed 4th September

2015)

https://www.sec.gov/rules/concept/34-42430.htm

https://www.sec.gov/news/speech/spch443.htm


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2.5 IFRS v US GAAP and the global financial crisis

There was international optimism that the US would adopt IFRS after the SEC

published its proposed roadmap in 2008, outlining key activities that needed to be

completed before a decision could be made to allow US filers to adopt IFRS. The SEC

aimed to evaluate progress in 2011 and at that time would decide whether to require

mandatory use of IFRS as issued by the IASB, beginning in 2014. The roadmap also

sought feedback on whether or not the SEC should enforce mandatory adoption based on

market capitalisation, with large accelerated filers required to file using IFRS in 2014,

accelerated filers in 2015 and non-accelerated filers in 2016.

However, the global financial crisis which started in Europe hit the US badly around

2007-2008. Political bodies were intrigued as to whether accounting standards were a

contributing factor in the failure of banks, financial markets and the overall economy

(Bengtsson, 2011). Fair value was seen as the culprit of the crisis and the EU successfully

put pressure on the IASB to change its accounting standards for financial instruments (see

Bengtsson 2011 for more details). Thus, the IASB's response to the EU’s political pressure

placed the issue of IASB independence under scrutiny, especially by the US stakeholders13

and the SEC14.

When Mary Schapiro was appointed as the new SEC chairman in February 2009, she

received a lot of pressure from the senate to regulate the market 15 . Accounting

standardisation ceased to be a main priority for the SEC, and their attitude towards IFRS

adoption started to change. The quality of IFRS and the independence of the standard-

setter became the major issues in Schapiro’s reluctance to continue the proposed 2008

roadmap as was expressed at her answers during US senate confirmation hearings:

13 For example the study of Council of Institutional Investors :

http://www.cii.org/files/publications/white_papers/06_06_11_criteria_for_an_independent_accounting_stan

dard_setter.pdf (Accessed 4th September 2015) 14 See SEC staff June 2011 report page. 68 :

https://www.sec.gov/spotlight/globalaccountingstandards/IFRS-work-plan-final-report.pdf (Accessed 4th

September 2015 15 Stepehen Labaton, S.E.C. Nominee Offers Plan for Tighter Regulation” The New York Times, 15 January

2009 http://www.nytimes.com/2009/01/16/business/economy/16sec.html?_r=0, (Accessed 4th September

2015)

http://www.nytimes.com/2009/01/16/business/economy/16sec.html?_r=0


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On other issues, she plans to back off on some of Cox’s plans, namely the proposed

roadmap for converting companies to international financial reporting standards.

She has concerns about the pace of the timeline, the independence of the overseas

standard-setter, and the quality of the rules themselves. Considered more

principles-based than U.S. GAAP, IFRS standards are not as detailed, and allow

more room for interpretation, she said. She is also worried about what the

conversation might cost companies, noting that the SEC estimates that the price

tag could run as high as $32 million for the largest firms adopting IFRS. “I will

not be bound by the existing roadmap that’s out for public comment,” she said.16

(CFO.com, 15th January 2009).

Schapiro dismissed the SEC’s 2008 roadmap (Camfferman and Zeff, 2015 p.507) and

directed SEC’s staff to come up with another work plan for incorporating IFRS into the

financial reporting system for US issuers. SEC staff then issued a work plan in February

2010. The SEC staff have published various reports ever since, including a May 2011 staff

paper which focused on exploring a possible method of IFRS incorporation and the

“IFRS Application paper” in November 2011 which analysed IFRS in practice. On 5th

December 2011, SEC chief accountant, Jim Kroeker announced a delay in a decision on

the IFRS work plan for US markets.

When SEC staff issued their final staff report on July 2012, many parties expected that

they would give a clear recommendation to the commissioners on when and how IFRS

would be incorporated into the US financial reporting system. The long expected final

report was an anti-climax for some as it failed to provide any recommendations to the

commissioners on how the US could proceed to adopt IFRS. Basically the staff report

considered the standards produced by the IASB to be of a high quality despite several

areas that needed further development. But the staff report questioned the independence of

the IASB due to its funding sources. The report also expressed concerns about the

timeliness of responses to widespread accounting issues by the IFRS Interpretations

16 Sarah Johnson, “Mary Schapiro Vows to Be Tough Enforcer”, 15th January 2009.

http://ww2.cfo.com/risk-compliance/2009/01/mary-schapiro-vows-to-be-tough-enforcer/ (Accessed 4th

September 2015)


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Committee, and lastly it argued that IFRS adoption would be costly for US public

companies17.

The US indecision on IFRS adoption made the future of one global accounting

standard very uncertain. Although the convergence project between the IASB and the

FASB was to be completed by 2012, many standard differences remained unsolved

between the two standard-setters18, for example, the standard for financial instruments.

The IASB chairman recently conceded:

“We did not just make progress; there was also disappointment. We did not

succeed in one central recommendation of the FCAG and G20, and that is in the

area of convergence in the IASB’s and the FASB’s Standard for financial

instruments […] With regard to Offsetting and most likely with Classification and

Measurement the FASB in the end reverted to existing practice in the United

States.”(Hans Hoogervorst’s Speech in Asia-Oceania IFRS Regional Policy Forum

in New Delhi, India, 8th March 201419).

In November 2012, the G20 revised its target for IFRS-US GAAP convergence for the

fourth time asking the IASB and the FASB to report no later than June 2013 on all

outstanding items with a specific timetable of completion (Reuters, 2012). However, at the

G20 meeting of February 2014 ended without a call for international standard-setters to

continue their ongoing efforts. The IASB also seemed to close the door on the future

opportunity of another convergence project with FASB. Thus, the only way for the world

to achieve a single global standard is for the US to adopt IFRS, as implied by IASB

chairman Hans Hoogervorst:

“This inability to deliver compatible outcomes with the FASB clearly demonstrates

the inherent instability of convergence as a mean to achieve a single set of global

accounting standards. For this reason, our Trustees wisely concluded that

convergence can never be a substitute for adoption of IFRS.” (Hans Hoogervorst’s

17 US SEC Final Staff Report is available at:

https://www.sec.gov/spotlight/globalaccountingstandards/IFRS-work-plan-final-report.pdf (Accessed 4th

September 2015) 18 Ibid, pp.13-14 19 Speech is available : http://www.IFRS.org/Alerts/Conference/Documents/2014/Speech-Hans-

Hoogervorst-March-2014.pdf, accessed on 12th March, 2014

https://www.sec.gov/spotlight/globalaccountingstandards/ifrs-work-plan-final-report.pdf


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Speech in Asia-Oceania IFRS Regional Policy Forum in New Delhi, India, 8th

March 2014).

Some studies argue that US GAAP and IFRS should co-exist together (De Lange and

Howieson, 2006) and the idea of having a few international accounting standards instead

of one has been discussed by many scholars over the last ten years (Hail et al., 2010;

Kothari et al., 2010; Saito, 2008; Sunder, 2002; Sunder, 2011; Walker, 2010). US GAAP

and IFRS competition also received formal support by the American Accounting

Association (AAA). The Financial Accounting Standard Committee of AAA issued their

position to support competition among IFRS and US GAAP as there is no clear difference

in quality between the two standards (Jamal et al., 2008).

2.6 Conclusion

This chapter has provided a brief history of the rise of IFRS becoming a global

standard and the milestones for its diffusion (Figure 1 provides the timeline of IFRS

diffusion). IFRS has developed from a set of standards which countries were reluctant to

adopt to become a globally endorsed by many international organisations. However the

rise of IFRS as the global accounting standard faced challenges when US SEC receded

from its IFRS adoption roadmap plan. Such setback has also raised questions about the

validity and significance of IFRS claims as a high quality set of accounting standards.

Revisiting the IFRS adoption processes in some countries becomes relevant to investigate

if the diffusion of IFRS has been driven by the quality argument or shaped by other

feature such as political motives. The case studies discussed in this thesis would help to

cast light on what has not been discussed in the literature and may provide new

explanations for the diffusion of IFRS.

The diffusion of IFRS over the last decade has encouraged many research proofing the

claim of IFRS, however the research looking how IFRS was adopted and institutionalise at

the national field only can offers limited explanation to the mechanism of the diffusion. As

will be discussed in the next chapter, IFRS claims have been widely tested in the capital

market type of research (such as the claim of reducing the cost of capital).


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* e.g Australia, Philippines, Hongkong, South Africa

** e.g Indonesia, Malaysia, Singapore, Rusia, Mexico

1973, IASC established

1987, first IOSCO-IASC

project

1993 IOSCO-IASC revision

project

1997-1998 Asian crisis

2000, IOSCO endorsement

2002 EU decided to adopt IFRS by

2005. Convergence project starts between IASB

and FASB

2005, IFRS adoption by EU,

and some countries*

2007 US SEC allowed IFRS for foreign issuers

2008 Global Financial crisis

2012,

Some countries adopt IFRS for

the first time**

IASB-FASB convergence

ended.

Figure 1. Timeline of the global diffusion of IFRS

Chapter 3. Literature Review

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3.1 Introduction

As a global accounting standard, IFRS is often described as a high quality accounting

standard which generates huge economic benefits to the countries that have adopted it.

The scale of IFRS diffusion over the last 10 to 15 years has generated extensive research

on its impact (see Baker and Barbu, 2007; Tarca, 2012). However, while research has

provided evidence that firms switching to IFRS exhibit higher accounting quality than

those using local GAAP (see Brüggemann et al., 2013 for an overview), the result is not

very conclusive when compared with US GAAP (Leuz, 2003; Barth et al., 2012; Lin et al.,

2012). More recent research has also argued that the benefits of IFRS adoption are only

significant in countries with strong legal and reporting enforcement regimes (Landsman et

al., 2012; Christensen et al., 2013; Li, 2010), implying the role of IFRS in improving the

accounting quality may not be as significant as claimed by IFRS supporters. Thus

investigating how national actors in countries which have adopted (or converged to) IFRS

assess its quality relative to US GAAP is potentially pivotal to revealing if the issue of

quality is imperative in IFRS diffusion.

Arguably, the ‘high quality’ claim of IFRS is influential for countries who perceive

their local accounting standards as low-quality. Accounting standard setting can be an

expensive exercise and many countries may not have resources, or appetite, to develop

good quality local accounting standards. Adopting IFRS can be an efficient choice to

provide good quality accounting standards as the research and due process expenses would

be borne by IASB. However it is not clear how the ‘quality’ of IFRS has been considered

when countries have choices between IFRS and other good quality accounting standards.

The literature review chapter begins with the analysis of the existing research in

answering whether IFRS produces better quality accounting information. Using

quantitative research in the most part, this section tests the claim that IFRS is a high


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quality accounting standard, especially when compared to US GAAP. The second section

discusses the available research pertaining to reasons for countries adopting IFRS. Some

case studies of developing countries which have adopted IFRS are also discussed in this

section. The chapter concludes by considering research on accounting standard setting,

highlighting the lack of research on the strategic decision-making processes among

national standard-setters when the decision to adopt IFRS was made.

3.2 Does IFRS produce better quality accounting information?

IFRS is often claimed to be a high quality standard. The term high quality has been

used extensively by the IASB in many speeches and even in their mission statement.

However to define what contributes to the quality of an accounting standard is not easy.

What makes IFRS a good quality set of standards remains unclear, e.g. is it because of its

due process, or because it is principles based, has fewer accounting choices, or because it

produces better quality accounting data or a combination of all of the above?

Alternatively, the purpose of a financial reporting standard is said to be to create relevant

and reliable financial report for the users, thus it could be argued that a quality accounting

standard is the one that can satisfy the demands of financial statement users (Ball, 2006).

Other scholars, Barth et al. (2008) reflected on the way the IASB improved IFRS to

become a high quality set of standards when compared with the earlier standards produced

by the IASC which involved making IFRS principles-based, removing allowable

accounting alternatives, and requiring accounting measurements that ‘better’ reflected a

firm’s economic position and performance. The IASB was also perceived to have created

a set of standards which provided earnings information, and balance sheets more relevant

to specific users, compared to the standard ones issued by its predecessor (Ball, 2006).

Chronologically, it has been claimed that the first time the term ‘high quality’ was

used in the international accounting standard-setting discussion was by the US SEC,

referring to it as an attribute that IASC standards must possess (Zeff, 2012). It was

mentioned by US SEC chief accountant, Michael Sutton, before the AAA anual meeting

in 1997. The SEC identified the essential elements of high quality accounting standards:


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“The standards must be of ‘high quality’ -- they must result in comparability and

transparency, and they must provide for full disclosure. Investors must be able to

meaningfully analyze performance across time periods and among companies.”

(Michael Sutton, US SEC Chief of Accountants, AAA Annual meeting 1997).

As the roles of the US SEC and the FASB were undeniably significant in the

establishment of the IASB in 2001 (Camfferman and Zeff, 2007 p.469 and p.487; Street,

2007), the notion of high quality from a US perspective arguably influenced the IASB’s

definition. The FASB in 1999 produced a report entitled International Accounting

Standard Setting: A Vision for the Future which discussed the quality of accounting

standards in significant detail. The report emphasised the importance of a sound

conceptual framework as a prerequisite for high quality international accounting

standards. With an underlying assumption that the objective of an accounting standard is

to provide financial reporting for external investors and creditors, the FASB report

stipulated that to be a good quality accounting standard, it should (FASB, 1999):

be consistent with the guidance provided by an underlying conceptual framework;

avoid or minimise alternative accounting procedures, explicit or implicit, because

comparability and consistency enhance the usefulness of information;

be unambiguous and comprehensible so that the standard is understandable by

preparers and auditors who must apply the standard, by authorities who must

enforce the standard, and by the users who must deal with the information

produced by the standard;

be capable of rigorous interpretation and application so that similar events and

transactions are accounted for similarly across time periods and among companies.

The IASB set the development of ‘high quality’ accounting standards as their mission

and attracted accounting scholars to find evidence of this quality in the application of

IFRS standards, especially after Europe adopted IFRS in 2005 when capital market data

became available for analysis. The claims made by the IASB that IFRS reduced the cost of

capital and increased financial reporting comparability were widely tested, especially in

Europe. One of the most highly cited papers to verify this claim was Barth et al. (2008)

who found that IFRS improved accounting quality across 21 countries (less earnings

management, greater timely loss recognition and more value relevance of accounting


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figures). However, as acknowledged by the authors, these positive findings did not

distinguish as to whether accounting quality improved because of IFRS or due to the

incentives under which corporate management was funded. And their study excluded

firms that had used US GAAP before switching to IFRS. Indeed, other research suggests

that firms using IFRS generally exhibit higher accounting quality than firms using local

GAAP (Barth et al., 2008; Horton et al., 2013).

Numerous capital market benefits of IFRS adoption have been identified, including a

reduced cost of capital and improved liquidity (Daske et al., 2008; Lee et al., 2008; Li,

2010). Other positive impacts of IFRS revealed by existing research included higher

foreign investment (Amiram, 2012; Covrig et al., 2007; Landsman et al., 2012; Yu, 2010),

and greater analyst following and reduced analyst forecast dispersion (Byard et al., 2011;

Horton et al., 2013; Tan et al., 2011). Collectively, these studies tend to suggest that firms

applying IFRS should have higher financial reporting quality and greater comparability

than those applying domestic accounting standards. It is important to note that in most of

this research what is meant by domestic accounting standards are non-US GAAP standard.

However various studies to verify the claim of IFRS quality using capital market

variables do not provide clear evidence of whether the positive results were due to IFRS

quality or due to other market incentives. Those who believe the latter, argue that

incentives are more influential in the improvement of financial reporting quality than

accounting standards. In countries where incentives are low for managers to produce good

quality financial reporting, the adoption of IFRS has been said to be futile (Ball et al.,

2003).

A study in a European setting by Lee et al. (2008) argued that mandatory adoption of

IFRS in Europe reduced the cost of capital, but not necessarily because it was a better

quality standard. The strength of financial reporting incentives and enforcement played an

important role for a significant reduction of cost of capital. The UK surprisingly enjoyed

the biggest reduction in the cost of capital compared to other European countries where

there was a wider gap between their accounting standards and IFRS (e.g Greece). This

finding was unexpected as logically, if the adoption of IFRS was really impactful,

countries with wider gaps between their local GAAP and IFRS should have benefited the


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most. Their study found limited and mixed evidence of such IFRS claimed benefit of cost

of capital reduction in European countries with weak institutional environment

characteristics.

In fact the study of German listed companies found that the adoption of IFRS did not

necessarily lead to higher quality accounting when preparers have no incentives to become

more transparent in their reporting (Christensen et al., 2013). The study found that

companies more resistant to of IFRS adoption (companies that adopted IFRS after it was

mandated instead of being voluntary adopters) have closer connections with banks and

inside shareholders, consistent with lower incentives for the claimed adoption of ‘more

comprehensive’ accounting standards. Similar evidence was also found in East Asian

jurisdictions (such as Hong Kong, Malaysia, Singapore and Thailand). Ball et al. (2003)

argued that in order to pursue better financial reporting quality, East Asian countries

needed to change manager and auditor incentives and other institutional factors (political,

legal and economic institutions) rather than just adopting an alleged high quality standard

in isolation.

Political and legal institutional structures of a country also shape the way accounting

numbers are reported. Research by Bushman and Piotroski (2006) revealed that firms in

countries with high quality judicial systems reflect bad news in reported earnings faster

than firms in countries with low quality judicial systems. Bushman and Piotroski (2006)

drew their conclusions from studying the financial statements of 38 countries over ten

years. Strong public enforcement aspects of securities law also forces the firms to be less

conservative by reporting good news more slowly. The importance of legal enforcement is

also echoed by Landsman et al. (2012) affirming that the effects of IFRS after mandatory

adoption in sixteen countries depended on the strength of legal enforcement.

The Landsman et al. (2012) study investigated more than 20,000 earnings

announcement samples in sixteen countries over the period 2002-2007. They found

evidence of three mechanisms through which IFRS adoption increases information

content: a reduced reporting lag, increased analyst following, and increased foreign

investment. However, the effect of mandatory IFRS adoption depended significantly on

the strength of legal enforcement in the adopting country. It is important to note that in


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this study, Landsman et al. (2012) compared IFRS with local GAAP, and not with US

GAAP.

Contrasting IFRS against US GAAP, research demonstrates that there is no significant

difference between these two standards in term of producing good accounting numbers.

A number of papers examined differences in accounting quality between US GAAP and

IFRS in environments where firms were free to choose between multiple sets of standards

such as in Germany. Bartov et al. (2005) found no significant difference in earnings

quality, measured by the price-earnings relationship, for their sample of German ‘new

market’ firms that were allowed to choose between IFRS and US GAAP. Leuz (2003) also

argued that market liquidity and information asymmetry were similar across IFRS and US

GAAP firms. Such evidence tend to suggest that investors do not perceive accounting

numbers reported under US GAAP or IFRS as being significantly different.

Other research has even argued that US GAAP is better than IFRS. Van der Meulen et

al. (2007) argued that German companies using US GAAP had more predictable earnings

than those using IFRS. Lin et al. (2012) asserted that a mandatory switch from US GAAP

to IFRS in Germany could reduce the accounting quality of the firm. Using a sample of

German high-tech firms, Lin et al. (2012) found that accounting numbers under IFRS

generally exhibited more earnings management, less timely loss recognition, and less

value relevance compared to those under US GAAP.

Similarly, Barth et al. (2012) also provided evidence that the application of US GAAP

resulted in higher value relevance of accounting information compared to foreign firms

using IFRS. Although comparability to US firms increased when foreign firms used IFRS

over their local GAAP, the accounting quality of IFRS firms was not better than that of

their US counterpart. Barth et al. (2012) compared US firms which used US GAAP with

non-US firms applying IFRS. The study found that US firms were better in all three

dimensions of accounting quality: earning smoothing, accrual quality and timeliness. The

earnings information quality of US GAAP-reconciled amounts also was of a higher

quality than earnings based on IFRS according to Gordon et al. (2008).

Based on the discussion in this first section, we can conclude that IFRS may bring

economic benefit to firms in adopting countries although research suggests IFRS does not


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work in isolation. Whether IFRS as an accounting standard produces better quality

accounting information remains inconclusive, especially when it is compared to the

quality of reporting generated by companies in compliance with US GAAP. Thus, it is

interesting to investigate whether the differences in quality between IFRS and US GAAP

become an important issue for national actors when they contemplate IFRS adoption.

Especially for countries which have had a close relationship with US GAAP prior to IFRS

adoption, and could, in theory, have chosen US GAAP instead of IFRS yet adopted IFRS

despite the limited evidence of its superior quality.

3.3 The reasons why countries adopt IFRS

The capital market benefits of IFRS adoption have been the major selling rhetoric for

the promoters of IFRS. Developed countries with small domestic capital markets such as

Australia and New Zealand considered that the future growth of their markets required

international investment which would be promoted by the adoption of IFRS (Picker, 2007;

Tarca, 2012). Similar reasons were also put forward by Canadians, based on their

perception that the small size of their capital market could not afford to retain ‘made in

Canada’ reporting standards, and should therefore adopt IFRS (CICA, 2012).

The presence and size of a capital market as reasons for a country adopting IFRS is

also prevalent in the developing world. For example the study by Zeghal and Mhedhbi

(2006) investigated the factors for developing countries to adopt IFRS. Their multivariate

analysis of 64 developing countries proposed the following factors as possible

explanations of IFRS adoption: economic growth, education level, degree of economic

transparency, cultural aspects and the existence of a capital market. Their study claimed

that developing countries with the highest literacy rate, having a capital market and

belonging to the Anglo-American culture were the most motivated to adopt IAS.

According to their study, capital-market variables had a strong effect, signalling that

developing countries decided to adopt IFRS for economic reasons, i.e. to improve

investment in their capital market.

However for developing countries, various case studies also demonstrate that there are

many other non-economic factors influencing the decision for a country to adopt IFRS.


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Pressure from international donor organisations such as the World Bank, the Asian

Development Bank, the IMF and the EU had been a major cause for developing countries

to adopt IFRS, such as in the case of Bangladesh, Pakistan, Egypt, Kazakhstan, Romania

and Zimbabwe (Albu et al., 2011; Chamisa, 2000; Hassan, 2008; Hussey and Ong, 2006;

Junaid and Ghani, 2005; Mir and Rahaman, 2005; Tyrrall et al., 2007)

According to Tyrrall et al. (2007), although Kazakhstan, a former Soviet republic

which only became an independent country in late 1991, could not make a strong case for

IFRS adoption, it had little choice but to proceed with IFRS as the financial aid received

by international donor bodies was conditional upon that country’s acceptance of IFRS-

based accounting standards. Based on their survey of various stakeholders in the country,

Tyrrall et al. (2007) concluded that there was less support for the claimed relevance and

importance of IFRS to the range of firms and investors in the country. Despite this, in

1992, Kazakhstan's government decided in favour of IFRS adoption rather than a

nationally specific accounting system (Tyrrall et al., 2007).

Romania, one of the ex-communist countries had to adopt IFRS when it became an EU

member in 2007. However, the decision to adopt IAS/IFRS was taken in 1997-1998 as

imposed by the World Bank as one of four conditions for granting it financial assistance

(Albu et al., 2011). The decision to adopt IFRS was reinforced in the subsequent reforms

in 1999 and 2001, despite the fact that the benefits of harmonisation with IFRS were not

perceived as significant by finance directors of listed companies in Romania (Ionas¸ cu et

al., 2007).

The adoption of IFRS is also associated with changes in a country’s political

philosophy, for example changes from a socialist towards a market based economy. This

is illustrated by the case of China which has been gradually converged with IFRS,

incorporating it into their local standards over a period of 15 years (Peng and van der Laan

Smith, 2010). The case of Egypt (illustrated in (Hassan) also concluded that the adoption

of IAS was due to the change from a socialist regime to a market economy with an ‘open

door’ policy.

This study will focus on the decision-making process of IFRS adoption includes three

emerging economies and three developed economies. Indonesia, Brazil and the Philippines


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were emerging economies which adopted IFRS in 2012, 2010 and 2005 respectively.

Canada, Japan and the USA represent more developed countries and also have significant

influence in the IFRS policy-making and standard-setting arena due to their

representations in various committees of the IFRS Foundation. Canada adopted IFRS in

2011, while Japan has made IFRS available for its listed companies since 2010 and

recently in 2013 extended the IFRS option for non-listed companies. Although the USA

has not adopted IFRS for their domestic companies, nevertheless IFRS is used by almost

500 foreign companies listed in the US20 which is more than the total number of listed

companies in many IFRS adopting countries.

The selection criteria for sampled countries will be discussed in more detail in chapter

five, however the commonality between the six sampled countries is their close

attachment to US GAAP before they adopted IFRS. The accounting standards at the

sample countries were developed using US GAAP as their main references. Thus we

expect these countries to have had a more difficult decision-making process in choosing

IFRS, compared to ‘new’ countries such as Kazakhstan or countries with a strong

dependence on international donor bodies which may have been coerced to adopt IFRS

such as Egypt and Bangladesh.

3.4 The study of accounting standard setting: Identifying the research gap

Standardisation as being defined by (Botzem and Dobusch, 2012) as the activities of

the setting, diffusing, and implementing of rules, mostly discussed how a standard was

formed and diffused in to a global norm. However, the emergence ‘private standard-

setter’, beyond nation-states and meta-governmental organisations, in producing global

rules and standards are also receiving increasing attention (Büthe, 2010; Boli and Thomas,

1997; Brunsson and Jacobsson, 2000; Botzem and Dobusch, 2012; Humphrey and Loft,

2009; Fransen and Kolk, 2007). The current literature on standard making process

accentuates the issue of stakeholder participation (Hallström, 2004) (Perry and Nölke,

20 According to speech of Michel Prada, Chairman of trustee of IFRS Foundation, 11 March 2014 in

Riyadh. The speech can be accessed: http://www.IFRS.org/Alerts/Conference/Documents/2014/Speech-

Michel-Prada-Riyadh-March-2014.pdf, accessed 15 March 2014.

http://www.ifrs.org/Alerts/Conference/Documents/2014/Speech-Michel-Prada-Riyadh-March-2014.pdf

http://www.ifrs.org/Alerts/Conference/Documents/2014/Speech-Michel-Prada-Riyadh-March-2014.pdf


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2005; Durocher et al., 2007; Young, 2006) and the important role of negotiation in

standard making processes (Nölke and Perry, 2007; Botzem and Hofmann, 2010).

The IASB as a private standard-setter has attracted a lot of attention in the literature of

standardisation. The institutional transformation of IASB over the last 25 years has been

discussed (Camfferman and Zeff, 2007; Camfferman and Zeff, 2015; Richardson and

Eberlein, 2011; Botzem, 2012), as well as the political pressures it received (Nölke and

Perry, 2007; Bengtsson, 2011; Georgiou, 2010). For example the pressure from EU has

been claimed to increase after the 2008 financial crisis (Bengtsson, 2011). The political

pressure has been a challenge faced by the IASB on many occasions during the

development of standards in the past (Zeff, 2002).

Accounting standard in the literature of standardisation has been classified as non-

technical standards (Brunsson et al., 2012; Botzem and Dobusch, 2012). In contrast with

the technological standards such as Microsoft Windows for computer operating systems

which usually became dominant via market competition, IFRS became dominant due to

public endorsement (Botzem and Dobusch, 2012; Martinez-Diaz, 2005). As was discussed

in chapter two, the endorsement from the international bodies such as World Bank and

IOSCO has been pivotal for the diffusion of IFRS. The endorsement from national

standard-setters and capital market regulators also plays an important role in the diffusion

of IFRS by imposing it to the local firms. Standard’s diffusion and binding quality of a

standard are interrelated (Botzem and Dobusch, 2012) and arguably the decision of

countries to adopt IFRS has improved the legitimacy of IFRS which has been claimed as a

set of high quality global accounting standards. The study of the IFRS adoption process by

national actors such this thesis will improve our understanding of the global standard

diffusion and looking at the countries where they could have been endorsing US GAAP

instead of IFRS arguably will provide a richer explanation for the diffusion of IFRS.

The process of standard setting at the national level is also a very much political

process and not just a purely economic one (Ramanna and Sletten, 2009). The national

accounting standards are produced from a deliberation process, predominantly by

members of a standard board representing various parties with heterogeneous interests.

Accounting standards traditionally were a product of national actors, bounded to the local


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legal and culture (Radebaugh et al., 2006; Nobes, 1983), and some studies argued that

despite the effort of harmonization of reporting standards, the convergence of reporting

practices is unlikely to achieve due to different institutional and enforcement regimes

(Leuz, 2010; Nobes, 2013). Despite the claim that IFRS is a set of global accounting

standard, Nobes (2013) asserted that language issues as well as monitoring and

enforcement of the standard have become a factor in IFRS differences among its adopting

countries. For example ‘IFRS as adopted by the EU’ are not the same as IFRS issued by

the IASB and the emergence of Chinese and Venezuelan versions of IFRS would

probably not comply with the IASB’s IFRS (Nobes, 2013).

Understanding the mechanism of IFRS adoption by countries is critical to understand

the wide continuum on how IFRS is adopted in each jurisdiction. For example, a recent

survey by the IASB revealed that the endorsement process in each jurisdiction varied from

no endorsement procedures at all (more than 40 per cent of respondents from a total of 66

jurisdictions) to the multi-level endorsement, sometimes up to parliamentary level as in

the case of Australia, New Zealand and the European Union21. The level of scrutiny in the

endorsement process also varies from being a very rigorous process, standard by standard,

involving technically competent standard-setters to those which are automatically adopted

as they are issued by the IASB. While some endorsement processes are open to the public

with all discussions and meeting papers available on the publicly available websites of the

endorsers e.g. EFRAG (for the European Union), the ASBJ (for Japan) and the AASB (for

Australia), others are carried out by small groups of standard-setters working in closed

door meeting rooms, where even the notes of the meeting are not accessible to the public,

e.g. Indonesia and Philippines.

3.5 Conclusion

High quality has been an alleged defining characteristic of IFRS as a set of global

accounting standards, and it has been associated with the enhanced relevance and

reliability of accounting information generated through compliance with such standards.

21 IASB has been collecting survey from IFRS adopting countries as of 13 March 2014, there is 129

jurisdictions voluntarily submit the survey. The survey can be accessed at: http://www.IFRS.org/Use-

around-the-world/Pages/Jurisdiction-profiles.aspx


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Although some research provides evidence that IFRS produces better quality accounting

information compared to local GAAP, the evidence is less clear if it is tested against US

GAAP. Section one of this chapter presented pro-market-incentive research which has

argued that IFRS only corresponds to the reduction in the cost of capital in environments

with strong capital market incentives such as strong legal enforcement and investor

protection. Thus the question of whether IFRS is high quality, especially if they are better

quality that US GAAP remains inconclusive. If IFRS is not better than US GAAP, then it

is intriguing to understand why countries decided to accept IFRS, especially if they had a

close relationship with US GAAP before the switch.

Existing research on standard-setting processes exhibited is mostly focused at the

international level. Research exploring the standard setting process at the level of national

standard-setters is still relatively rare, especially in countries that arguably had a choice

between adopting IFRS or adopting/continuing with a set of standards of arguably

competing quality. Thus the mechanism of IFRS institutionalisation remains rather

unexplored. The process of how a decision to switch from US GAAP to IFRS emerged in

IFRS adopting countries has not been discussed in previous literature and will therefore be

the main contribution of this study.

The next chapter will discuss theoretical frameworks in the IFRS adoption process,

drawing on the recent development of institutional theory. This study utilises a

combination the institutional work theory (Lawrence and Suddaby, 2006) to frame the

mechanism of IFRS institutionalisation in the adopting country and world society theory

(Meyer, 2010) to propose a new paradigm of why countries adopt IFRS and how it has

been diffused and become a global accounting standard.

Chapter 4. Framing the IFRS Adoption Process: The Value of an Institutional Perspective

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Chapter 4. Framing the IFRS Adoption Process: The Value of an

Institutional Perspective

4.1 Introduction

Our modern world is marked by more rule-making activities at the transnational level.

For example with education, health or financial reporting, those spheres are increasingly

subject to international activities and initiatives (Djelic and Sahlin-Andersson, 2006).

Globalisation is not only about the flow of goods, people and capital, but a re-ordering of

the world where institutional rules are in major transition (Djelic and Sahlin-Andersson,

2006). A modern state is subject to standards, designed by various international bodies,

which set principles about the need to have democracy, a constitution, an educational

system and reporting standards for their companies. For some, the ‘global world’ is more

than a series of networks or systems of economic and political interaction; it has become a

single international society (Meyer 1987;Watson 1992, Boli and Thomas 1997)

The distinctive feature of globalization is a powerful trend towards marketisation in

many regions of the world (Djelic, 2006). Since the early 1980s, market ideology and

market-oriented policies have spread far and wide around the globe (Djelic, 2006).

Another distinctive feature of globalisation is the rise of international NGOs, meta-

organisations or even private organisations as global standard-setters (Boli and Thomas,

1997; Brunsson and Jacobsson, 2000). The rise of IFRS as a set of global accounting

standards has been driven by the spread or marketisation logic (Botzem and Quack, 2006),

and together with other key standards (such as ISA), IFRS has been used as a key

international financial framework standard. IFRS and other global standards in the

international financial infrastructure aim to maintain financial stability by standardising

the capital markets (Humphrey et al., 2009).

As globalisation accelerated in the 1980s, so did the internationalisation of the

accounting profession through the network of accounting service firms. Large accounting

firms in the US and UK which were traditionally bounded by national borders, quickly

became international firms. Through a series of mergers and the closure of Arthur


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Andersen, the Big Eight accounting firms in 1989 had evolved in to the Big Four by 2001

(Cypert and Association, 1991; Sullivan, 2002; Wootton and Wolk, 1992) and currently

dominate the accounting services around the globe. Accounting professional associations

which traditionally offered national examinations also became global associations by

exporting their examinations and extending their membership outside their home

countries. For example by 1995, two UK-based accounting professional bodies ACCA

and CIMA, had overseas memberships of 38.6 per cent and 22.6 per cent respectively

(Briston and Kedslie, 1997).

Research on international standardisation has mostly discussed the contested interplay

between actors and the institutional forces influencing the dynamics of international

regulation (see Humphrey et al., 2009; Djelic and Sahlin-Andersson, 2006; Hallström,

2004; Drori et al., 2006b; Brunsson and Jacobsson, 2000). The discussion about

globalisation and the world regulatory framework mostly presents the case of IASB as

the‘re-invented’ actor in a transnational regulatory space (Botzem and Quack, 2006; Jang,

2006; Hallström, 2004). Research has also delineated how the IASB evolved and how

IFRS has been diffused in the international arena (see Camfferman and Zeff, 2007;

Camfferman and Zeff, 2015; Arnold, 2012). However, case studies on the process of IFRS

adoption by individual countries often take a macro-realist perspective representing the

adopting country as the creature of worldwide systems of economic or political power,

exchange and competition.

Macro-realist arguments such as world-system theory (Wallerstein, 1974; Chase-

Dunn, 1998) view global capitalist expansion as a compulsion of profit-seeking forces

and portray the national actors as quite passive. Often the conclusions from the IFRS case

studies in developing countries demonstrate that IFRS adoption has been recommended by

an international donor. Authors of case studies of Greece (Artikis et al., 2010), Kazakhstan

(Tyrrall et al., 2007), Bangladesh (Mir and Rahaman, 2005) and Pakistan (Junaid and

Ghani, 2005) have argued that IFRS was not appropriate standard for such countries, yet

national actors seemingly feel that they do not have a choice but to adopt IFRS due to the

pressure of the role of transnational bodies such as the EU, IMF, ADB, and World Bank.


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This thesis aims to investigate the decision-making process of countries which have

adopted IFRS but utilising a different perspective than the macro-realists. In contrast to the

existing case studies on countries which have adopted IFRS, countries featured in this

study are not passive actors in the international arena, but are instead influential players,

and IFRS adoption in these countries emerged from institutional works of actors. The

sampled countries in this study are those who had a potential choice between IFRS and an

alternative (a previous national standard highly influenced by US GAAP). Using the world

society perspective, this study argues that the national actors are embedded in the world

culture of globalisation and the process of adoption at the national level did not take place

in a vacuum but was highly influenced by the international dynamics of the IFRS arena.

This chapter starts with a discussion on how institutional perspectives theorise about

globalisation compared to realist perspectives and their reflection on IFRS diffusion. The

world society theory will be discussed as the perspective to frame IFRS diffusion and the

importance of adopting countries as international players. Then it will discuss in more

detail the players according to world society theory which consists of actors and

‘rationalised others’ and review it in light of IFRS diffusion. The next section of the

chapter discusses the theoretical framework used for the empirical chapters. The analysis

of the country which will be the main empirical discussion of the later chapters will apply

the perspective of world society theory and institutional work.

4.2 IFRS diffusion and globalisation from a world society perspective

Macro-realists arguments such as world-system theory (Wallerstein, 1974; Chase-

Dunn, 1998) and state-competition theory (Tilly, 1992; Skocpol, 1979) see the nature of

the international relationship in globalization through notions of exploitation, domination,

competition, and manipulation (see Drori, 2008). The realist perspective on the nature of

social actors views nation states and international organisations as rational but often

passive constituents. These actors, from a realist perspective, are subunits of the global

capitalist structural system, wherein the nation state is the mere occupant of a role defined

by world economic and political/military competition (Meyer, 2010).


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IFRS as part of global order has been perceived by some as the new colonisation of the

advanced economy in less developed countries. Aras and Crowther (2008), have argued

that IFRS is the vehicle of colonial exploitation, and they continue to argue that its

promotion of IFRS is an attempt to foster an environment conducive to the appropriation

of the socio-economic resources of less powerful countries by IFRS standard-setting

countries. Aras and Crowther (2008) as well as other scholars (Nnadi, 2012; Bakre, 2008;

Arnold and Sikka, 2001) have argued that IFRS is diffused by powerful countries to their

own advantage to exploit less developed countries.

A similar perspective is shared to structure/frame the influence of British power in

African countries (Nnadi, 2012) and Jamaica (Bakre, 2008). IFRS in its present form is

more in line with western standards and practices to fit the requirements of international

mobility of capital rather than developing countries. As a neo-colonial tool, accounting has

been applied to accumulate and allocate economic surpluses and to safeguard the

‘colonial’ interests as well as other international capital. Strong western countries remain

important players in the international standard-setting arena and the nation state’s capacity

to regulate MNCs is compromised by history, domestic concerns and relationships with

class and capitalist interests (Arnold and Sikka, 2001).

This thesis offers a different perspective on IFRS diffusion processes. Although it does

not deny that pressure from international organisations exists, especially towards less

powerful countries, it is argued that IFRS is also diffused because global accounting

standards are increasingly becoming a part of world culture. Framed by world society

theory (Drori et al., 2006b), this study argues that IFRS diffusion is part of a world

cultural consolidation in an era of global social change.

World society theory offers an alternative image of global social change. Modern

globalisation involves an increasing sense that the world is itself a society with its own

social systems and culture. World society theory perceives globalisation as a dual process:

the global institutionalisation of world society and the diffusion of world societal models

to social units increasingly embedded in the global environment (Drori, 2003; Drori et al.,

2006a). It also involves enhancing internationality and transnationality by the diffusion of


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models worldwide while also consolidating the global (Drori, 2003). Globalisation is

therefore not only an adaptation and change of national institutions to global conditions

and pressures, but also about institutional building in the transnational arena (Drori, 2008).

Globalisation as a dual process is clearly distinct from a realist’s definition of

globalisation. Realists perceive that globalisation emerged from intense worldwide

transactions as well as inter-dependency. World society theory sees globalisation as more

than that but also includes an additional conceptual shift towards the universal, and is thus

a cultural process in addition to being an economic and political process (Drori, 2008). In

this way, the globalisation era is not only characterised by a remarkable intensification of

global exchanges or transnational relations, but also a change in organising logic from the

particularistic to the universal. The nationalistic view of nation states is fast fading, and

instead, nation states are now perceived to be part of a global world or world society. The

culture of world society serves as a ‘sacred canopy’ for the contemporary world (Berger,

1967).

Framed by world society theory, this study perceives nation states which have adopted

IFRS, as culturally constructed and embedded to world culture. In this study, countries

which have adopted IFRS are perceived as rationalised actors actively involved in shaping

IFRS. Using world society theory IFRS should not be perceived as a technological

exploitation tool used in the post-colonial era, but as a reification of one set of global

standards as world culture. The practice of making a unique national accounting standard,

which has been common until recently, has slowly been replaced by harmonising with

international standards.

Table 2 illustrates the difference between a realist’s perspective and an institutional

perspective as applied to the subject of IFRS diffusion.


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Table 2. Comparison of realist perspectives and world society perspectives

4.2.1 Understanding the key players involved in the diffusion of IFRS

In contemporary world society, the dominant global actors are not only nation states,

but also transnational corporations and international/inter-governmental organisations

(Boli and Thomas, 1997; Drori, 2008). International organisations are pivotal in shaping

world culture and forming a global structure of world polity. In particular, international

NGOs have proliferated from about 200 active organisations in 1900 to nearly 4000 in the

1980s (Boli and Thomas, 1997). In the globalisation of standards, the important role of

international organisations has been highlighted by many scholars, (Arnold,2012;

Humphrey at.al., 2009; Timmermans and Epstein, 2010; Meyer et.al., 2006) and has been

discussed in Chapter Two.

IFRS diffusion from a realist

perspective

IFRS diffusion from the world

society perspective

The perception of IFRS As technological tools which serve

the interest of colonialists, in less

powerful nation states.

IFRS serves as reification of

world culture: one set of global

accounting standard.

Nation states which have

adopted IFRS

Subunit of the global capitalist

structural system.

Perceived as rational, yet passive.

Rationalised actors.

Perceived as highly relevant

players.

The reasons why nation

states have adopted

IFRS

Capital dependency on an

international donor or coerced by

more powerful countries.

A rationalised option as nation

states want to be accepted in

world society.

The key players Emphasis on international

organisations and the international

regulatory system as the main

mechanism for diffusion.

International organisations are

important in developing world

culture but nation states are also

identity suppliers for world

culture. Players include

‘rationalised others’ who advise

national actors.


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World cultural principles license the nation state not only as a managing central

authority but also as an identity-supplying nation Meyer et al. (1997). Thus, in the IFRS

arena, it is argued that nation states contribute towards the identity of IFRS and are

intimately involved in the development of the individual standards. Contrary to common

belief that IFRS is made by a group of experts sitting in ivory towers writing standards to

be used by the whole world, there are some examples where new IFRS or amendments

were issued based on the requests of less powerful countries such as Malaysia which

recently successfully pushed for the revision of the agricultural standard. The realist would

see Malaysian lobbying efforts were designed to protect the Malaysian palm oil industry

from the volatility of the fair value of palm oil. However there is another argument that

Malaysia may have felt a responsibility to improve IFRS in an area in which it had

expertise. Malaysia provided evidence of a need to more accurately measure plants based

on real life experience and the enormous challenges to measure plants using fair value. A

better global standard in turn would benefit other agricultural producing countries, and as

a part of world society, these countries could definitely have had a genuine desire to

improve the quality of the standard by demonstrating its flaws and sharing the

implementation challenges faced in their jurisdictions.

World society is also made up of social elements such as sciences and professions

which have been labelled by Meyer (1994) as ‘rationalised others’ as he argued that the

term ‘actor’ hardly seems appropriate. These ‘others’ give advice to nation states and other

actors about their true accountable natures, purposes, technologies and so on in a

consortium of international associations. Scientists and professionals have become central

and prestigious participants in world society. Their authority derives not from their

strength as actors but from their authority to assimilate and develop the rationalised and

universalistic knowledge that makes ‘action’ and ‘actor-hood’ possible. In analysing the

actors as the national levels, this study would also investigate if such actors exist.

The accounting profession was heavily involved in the establishment of the

international standard-setter, the International Accounting Standards Committee (IASC).

When the IASC became IASB the funding support of the Big Four Firms become its


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major contributor, comprising around 25% of total contributions22. For IFRS diffusion, the

role of the accounting profession (as a whole) and the accounting firm is profound (Nolke,

2005; Perry and Nölke, 2005). As will be discussed further in empirical chapters, the

accounting profession has been a major supporter of IFRS in some countries and was

instrumental in advising previously reluctant national actors to adopt IFRS. In the US, for

example, the association of accountants, AICPA, allowed IFRS to be used by US private

companies and NGOs in 2008 23 despite the US SEC prohibiting IFRS for US-listed

companies.

4.3 Understanding the process of IFRS adoption from the perspective of adopting

countries

Whilst world society theory has been useful to understand how IFRS diffuses at world

level, the main contribution of this study would be the analysis of the adoption process

inside countries which have adopted IFRS, especially those who had a close relationship

with US GAAP prior to adoption. Using institutional perspectives, this thesis will

scrutinise how national actors made the decision and arguments they brought to silence

their opponents. IFRS carries a different logic to US GAAP, it is claimed to be more

principles-based while US GAAP is said to be more detailed and rules-based. Thus

replacing the old logic with a new one may bring a significant transformation to the

accounting practices. During the transition period following the adoption of a new

accounting standard, a country may endure significant institutional change. A study

looking at the institutional change of the national regulatory field, such as this thesis,

potentially would improve our understanding of the global diffusion of IFRS.

Country-specific case studies evaluating IFRS adoption generally, to date, have used

institutional isomorphism in their analysis to explain why countries homogenously adopt

the same accounting standard despite variances in the legal environment (code law vs

common law), business culture and the economic development (developing, emerging or

22 IFRS Foundation Annual Report 2007 p.15, available at http://www.IFRS.org/About-us/IFRS-

Foundation/Oversight/Annual-reports/Documents/IASCF_annual_report_2007.pdf (accessed 23 March

2014) 23 From AICPA website “IFRS FAQs”, available at http://www.IFRS.com/IFRS_faqs.html#q14,

(accessed 22 March 2014).

http://www.ifrs.org/About-us/IFRS-Foundation/Oversight/Annual-reports/Documents/IASCF_annual_report_2007.pdf

http://www.ifrs.org/About-us/IFRS-Foundation/Oversight/Annual-reports/Documents/IASCF_annual_report_2007.pdf

http://www.ifrs.com/ifrs_faqs.html#q14


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advanced economies). However in the sphere on institutional theory studies, institutional

isomorphism has not been a dominant explanatory force for a good number of years with a

greater emphasis on actorhood in institutional theory (Boxenbaum and Jonsson, 2008),

supported by the development of institutional work and institutional entrepreneurship as

new theoretical frameworks to analyse institutional change.

This study examines the IFRS adoption process across multiple national regulatory

fields. DiMaggio and Powell (1983) defined a field as “organizations that, in the

aggregate, constitute an area of institutional life, key suppliers, resource and product

customers, regulatory agencies and other organization that produce similar services or

products.” (p.148) Central to this definition is the focus on a ‘set’ of organisations that

directly interact with one another in a meaningful way (Greenwood et al., 2002). National

regulatory fields consist of several organisations such as the accounting standard-setter,

the capital market regulator, the accounting profession, and the users of the standard. The

adoption of IFRS came to be seen as the result of the political process across these

organisations, but most importantly the adoption of IFRS, to some degree, transformed the

field by changing its institutional logic.

4.3.1 Criticisms of institutional isomorphism in the studies of IFRS

Institutional isomorphism was proposed by DiMaggio and Powell (1983) to explain

why organisations are so strikingly similar. DiMaggio and Powell (1983) highlighted

three mechanisms through which institutional isomorphic change occurs, each with its

own antecedents: (1) coercive isomorphism that stems from political influence and

problems of legitimacy, (2) mimetic isomorphism resulting from standard responses to

uncertainty; and (3) normative isomorphism, associated with ‘professionalisation’. As

more and more countries with different legal and cultural environments adopted IFRS over

the last 10 years, institutional isomorphism has been a common theoretical framework to

explain why countries became more homogenous in their accounting standards.

The use of institutional isomorphism as the framework to explain IFRS adoption more

broadly was suggested by Rodrigues and Craig (2007) and has been utilised in qualitative


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case studies for countries as well as companies adopting IFRS (Collin et al., 2009; Hassan,

2008; Mostafa Kamal, 2008; Mir and Rahaman, 2005; Albu et al., 2013; Albu et al.,

2011). In these particular case studies all authors argued that coercive force has been the

major factor in the IFRS convergence process -- either in the form of coercive pressure

from the international donor organisation such as the IMF to a country or a coercive

pressure by the national government’s on companies.

Although institutional isomorphism has been widely used by researchers to explain the

global diffusion of IFRS; careful attention should be applied before linking isomorphism

with diffusion as there has been much criticism in relation to this. Although there is

natural empirical affinity between isomorphism and diffusion, however, this can be

theoretically treacherous (Boxenbaum and Jonsson, 2008). Whilst institutional

isomorphism presupposes that legitimacy is the driving force behind diffusion, it may also

occur without any legitimately seeking behaviour and not everything that diffuses

enhances organisational legitimacy (Boxenbaum and Jonsson, 2008). In many cases

diffusion is a prerequisite for isomorphism, but diffusion need not always lead to

isomorphism; conversely all that looks similar need not be the result of diffusion

(Boxenbaum and Jonsson, 2008). Boxenbaum and Jonsson (2008) further illustrated that a

company may replace an existing structure with another one if they receive a substantial

state subsidy to do so. They are neither forced, uncertain, or under any moral obligation to

adopt the new structure, but simply see an opportunity to control costs. Similarly in the

IFRS adoption by the European Union (EU), the main reason for the adoption was not to

seek legitimacy but to find a similar platform for financial reporting across European

capital markets (EC, 2000 para.4). The adoption of IFRS by the EU is an example of the

natural demand and difficult to be explained by institutional isomorphism as the EU is

amongst the first full adopter(s). Before IFRS adoption, there was no existing single set of

accounting standards within the EU: rather there were a variety of national standards of

varying degrees of completeness, sophistication and authority, reflecting different national

traditions and institutional arrangements (Whittington, 2005).

As for the case of IFRS diffusion, a closer look at countries which have adopted IFRS

has revealed that different ‘flavours’ exist as countries amended the standards in the

process of adoption (Nobes,2013). Isomorphism assumes that the adopting countries are


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passive in absorbing the standard and IFRS is static, whereas what could, alternatively, be

viewed as evolving set of standards capable of being modified due to the difficulties faced

by the countries in the process of adoption.

Nevertheless, institutional isomorphism contributes an important role in organisational

theory as an alternative explanation for organisational change. Isomorphism concepts have

helped us to understand why organisations move closer to one another (Scott, 2008;

Boxenbaum and Jonsson, 2008), or in IFRS studies why many countries adopt the

standard despite different legal and cultural backgrounds. The isomorphism explanation

may have prevented researchers from looking closer to the core of the matter and

investigating how varying, competing institutions and multiple institutional elements often

interact in the key decision-making process which leads to IFRS adoption. By examining

the countries which had options between IFRS and US GAAP, this study expects to reveal

more contested interplay between interested actors.

Institutional isomorphism often neglects the importance of actors in the process of

IFRS decision-making. The empirics collected by these ‘isomorphic IFRS’ case studies

often focus on finding evidence of coercive pressure from international donor bodies on

the adopting countries. Thus, the contracts from the World Bank, IMF, IDB or the ROSC

have become the major documents analysed in these case studies (Chamisa,2000;

Uassan,2008; Hussey and Ong, 2006; Junaid and Ghani,2005; Mir and Rahaman, 2005).

That evidence may partly explain the reason for inexorable IFRS adoption, but the process

as to how decisions were made and the arguments for or against IFRS adoption amongst

institutional actors of the country remain relatively unexplored.

4.3.2 Looking closer at the process: Institutional work theory

The initial concern of neo-institutionalism was to explain organisational isomorphism

that could not be explained by competitive pressures or efficiency motives (DiMaggio and

Powell, 1983; Boxenbaum and Jonsson, 2008). From this perspective, agency was a

secondary consideration, understood as either a reaction to institutional pressures, or not

seriously considered at all (Lawrence et al., 2009). Institutional theory traditionally

perceives actors as being embedded in an institutionalised world view--making it difficult


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to explain how some actors are able to resist institutional pressures and initiate change

(Battilana, 2006). One explanatory stream attributes such change to institutional

entrepreneurs (DiMaggio, 1988) or actors who, because of their structural position within

a field or because of their unique social skill or power, are able to resist pressures of

institutionalisation or mobilise resources to initiate change (Greenwood and Suddaby,

2006; Battilana et al., 2009).

Institutional entrepreneurship has been used to frame the establishment of new

organisational forms in the accounting profession. Greenwood and Suddaby (2006), for

example, presented a Canadian case study on how the matured accounting service industry

changed from traditional audit service to multi-disciplinary practices. The role of

institutional entrepreneurs in the adopting country and their action in the diffusion of IFRS

has been neglected in existing IFRS literature as many case studies focused on exogenous

factors for IFRS adoption (Chamisa,2000; Hassan,2008; Hussey and Ong, 2006; Junaid

and Ghani,2005; Mir and Rahaman, 2005).

The notion of institutional entrepreneurs, however, has drawn substantial criticism.

Theorists object to the simplistic use of agency as an explanatory variable, in large part

because explanations are inconsistent with the logic of institutional theory. A central

assumption of organisational institutionalism is that actors are so embedded in their

institutional environments that existing arrangements are taken for granted and actors

cannot cognitively conceive any alternate arrangements (Suddaby and Viale, 2011).

Institutional work represents a new idea connecting, bridging and extending the work

of institutional entrepreneurship, institutional change and innovation and

deinstitutionalisations (Lawrence et al., 2009). Institutional works have been described by

Lawrence and Suddaby (2006) as “the purposive action of individuals and organisations

aimed at creating, maintaining and disrupting institutions”. It has been argued that the

creation of new institutions requires institutional work on the part of a wide range of

actors, both those with the resources and skills to act as entrepreneurs and those whose

role is supportive or facilitative of the entrepreneur's endeavours (Lawrence and

Suddaby,2006). Institutional work highlights three main aspects: it depicts institutional

actors as reflexive, goal-oriented and capable; it focuses on actors’ actions as the centre of


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institutional dynamics; and it strives to capture, agency and their interrelations (Battilana

et al., 2009).

The study of institutional work shifts the focus of traditional institutional theory from

how institutions govern action to how action affects and reshape institutions. In many

IFRS case studies (e.g Tyrall et al.,2007; Albu et.al.,2011), often the decisions of adopting

IFRS are perceived as something that is being decided by institutions (government,

standard-setters, the accounting profession). Those case studies often neglects to look

closer to the action made by individual actors to help the decision to materialise. The

current literature also rarely investigates if the action of adopting IFRS was made through

institutional works, for example, by creating a new institution or disrupting the status quo

at an existing institution.

Lawrence et al. (2009) argued that the critical issue for the study of institutional work

is the distinction between ‘creating, maintaining and disrupting institutions’ and the

‘creation, maintenance and disruption of institutions.’ The former describes a set of

activities in progress where the latter describes a set accomplishment. Although both could

be the focus of institutional work studies, Lawrence and Suddaby (2006) argued that the

former set is at the core of the study of institutional work. Thus, in this study we are

interested in the actors’ activities towards creating, maintaining and disrupting institutions

involved in the IFRS decision-making process.

The next three sections will discuss in more detail the three broad categories of

institutional work. The three broad categories: creating, maintaining and disrupting

institutions aim to connect disparate studies of institutional work such as the literature of

institutional entrepreneurship and deinstitutionalisation (Lawrence and Suddaby, 2006)


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4.3.3 Creating institutional work

‘Creating institutions’ has received the most attentions by scholars in the

organisational research area. As suggested by Table 3 below, Lawrence and Suddaby

(2006) summarised the forms of institutional work used in creating institutions.

Groups of

Institutional

Work

Forms of

Institutional

work

Definition Key references

for empirical

examples

Political work in

reconstruction of

rules, property

rights and

boundaries

Advocacy The mobilization of political and

regulatory support through direct

and deliberate techniques of social

suasion.

Elsbach and

Sutton (1992)

Galvin (2002)

Defining The construction of rule systems

that confer status or identify, define

boundaries of membership or create

status hierarchies within a field.

Fox-Wolfgramm

et al. (1998)

Vesting The creation of rule structures that

confer property rights.

Russo (2001)

Reconfiguration

of belief systems

Constructing

Identities

Defining the relationship between

sets of practices and the moral and

cultural foundations for those

practices.

Lounsbury (2001)

Oakes et al.

(1998)

Changing

normative

associations

Re-making the connections between

sets of practices and the moral and

cultural foundations for those

practices.

Townley (1997)

Zilber (2002)

Constructing

normative

networks

Constructing of interorganisational

connections through which practices

become normatively sanctioned and

which form the relevant peer group

with respect to compliance,

monitoring and evaluation.

Lawrence et al.

(2002)

Orssatto et al.

(2002)

Altering abstract

categorisations in

which the

boundaries of

meaning systems

are altered

Mimicry Associating new practices with

existing sets of taken-for-granted

practices, technologies and rules in

order to ease adoption.

Hargadon and

Douglas (2001)

Jones (2001)

Theorizing The development and specification

of abstract categories and the

elaboration of chains of cause and

effect.

Kitchener (2002)

Orssatto et al.

(2002)

Educating The educating of actors in skills and

knowledge necessary to support the

new institution.

Lounsbury (2001)

Woywode (2002)

Table 3. Creating institutions

Source: Lawrence and Suddaby (2006)


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Lawrence and Suddaby further grouped these types of institutional work in to three

groups. The first group consists of three types of institutional work, ‘advocacy’, ‘defining’

and ‘vesting’ are functions that reflect overtly the political work in which actors

reconstruct rules, property rights and boundaries that define access to material resources.

Advocacy by international organisations, arguably, has been a major form institutional

work in supporting the IFRS diffusion. As will be discussed further in the empirical

chapters, pro-IFRS actors also advocate other actors in the national arena to choose IFRS

over the alternatives.

The second group of practices on creating institutions emphasise actions in which

actor’s belief systems are reconfigured (Lawrence and Suddaby, 2006). The three

examples are: ‘constructing identities’, ‘changing normative associations’ and

‘constructing normative networks’. IFRS as a new accounting standard can be seen has

different logics and terminologies compared to old standards. Institutionalising IFRS to

the country with a prior belief system rooted in US GAAP accordingly may require actors

to reconfigure the logics of national regulatory arena from rules-based to principles-based.

In constructing identities or changing normative associations, professionals have been

argued as an important actor in changing the organisational field (Suddaby and Viale,

2011; Greenwood et al., 2002). In the IFRS adoption process, accounting firms and

formal associations of accounting professionals may also have a pivotal role in the

reconfiguration of national regulatory fields. Lastly, the third set of form, ‘mimicry’,

‘theorizing’ and ‘educating’ involve actions designed to alter abstract categorizations in

which the boundaries of meaning systems are altered (Lawrence and Suddaby, 2006).

4.3.4 Maintaining institutional work

The aim of institutional work in maintaining institutions involves supporting,

repairing or recreating the social mechanisms that ensure compliance (Lawrence and

Suddaby, 2006).

Table 4 below provides the list of examples of how the institutions are maintained

through various forms of institutional work.


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Groups of

Institutional

Work

Forms of

institutional

work

Definition Key reference for

empirical

examples

Ensuring

adherence to

rule systems

Enabling work The creation of rules that facilitate,

supplement and support institutions,

such as the creation of authorising

agents or diverting resources.

Leblebici et al.

(1991)

Policing Ensuring compliance through

enforcement, auditing and monitoring.

Fox-Wolfgramm et

al. (1998) Schuler

(1996)

Deterring Establishing coercive barriers to

institutional change.

Holm (1995)

Townley (2002)

Reproducing

existing

norms and

belief systems

Valourizing

and

demonising

Providing for public consumption

positive and negative examples that

illustrates the normative foundations of

an institution.

Angus (1993)

Mythologizing Preserving the normative

underpinnings of an institution by

creating and sustaining myths regarding

its history.

Angus (1993)

Embedding

and routinizing

Actively infusing the normative

foundations of an institution into the

participants’ day to day routines and

organisational practices.

Townley (1997)

Zilber (2002)

Table 4. Maintaining institutions


The first three forms of institutional work, ‘enabling’, ‘policing’ and ‘deterring’

address the maintenance of institutions through ensuring adherence to rules systems

(Lawrence and Suddaby, 2006). This is important in term of IFRS adopting process as

research has shown that legal enforcement is pivotal to gain the benefit of IFRS adoption

(Landsman et al., 2012). The second group of maintaining institutional work,

‘valourizing/demonising’, ‘mythologizing’ and ‘embedding and routinizing’, focus on

reproducing existing norms and belief system (Lawrence and Suddaby, 2006).

Maintaining institutions by routinizing the reproduction of shared frameworks by

members can also be pursued through recruitment practices (see Zilber, 2002 for an

example). In the IFRS arena for example, IASB new members sometime come from

‘IFRS champions’ of the adopting countries, a key person who have been assisting the

countries in adopting IFRS. At the national level, this study will also observe if the sample


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countries experience changes of key individuals during the IFRS adoption process. The

placement of pro-IFRS individuals in the strategic position such as the chairman of

national accounting standard-setter may be pivotal to ensure the IFRS adoption decision

can be executed.

4.3.5 Disrupting institutional work

In the study of institutional change, the emphasis is primarily on the creation and

emergence of new institutions, rather than the work that is done to disrupt existing one

(Lawrence and Suddaby, 2006). However Oliver (1992) and Lawrence and Suddaby

(2006) argued that deinstitutionalization is a distinct process involving different

institutional work from that associated with the creation of new institutions.

Disrupting institutions represents institutional work aimed at attacking or undermining

existing mechanisms (Lawrence and Suddaby, 2006). Bringing in IFRS in to the countries

may require some disrupting work to disconnect the actors with the existing accounting

standard and mechanism of old standard setting. Table 5 below provides some examples

of institutional work in disrupting institutions.

Forms of

Institutional Work

Definition Key Reference for

empirical examples

Disconnecting

sanctions

Working through state apparatus to

disconnect rewards and sanctions from

some set of practices, technologies or

rules.

Jones (2001)

Leblebici et al. (1991)

Disassociating

moral foundations

Disassociating the practice, rule or

technology from its moral foundation as

appropriate within a specific cultural

context.

Ahmadjian and

Robinson (2001)

Undermining

assumptions and

beliefs

Decreasing the perceived risks of

innovation and differentiation by

undermining core assumptions and

belief.

Leblebici et al. (1991)

Wicks (2001)

Table 5. Disrupting institutions



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In terms of the IFRS adoption process, it can be argued that the activities of actors in

disrupting the existing belief system could be pivotal in ensuring the new set of

accounting standards are accepted. Prior to the IFRS adoption, the adopting countries had

their own belief system in developing their own standards, for example the adopting

countries may have prioritised the need of local stakeholders in creating the standards and

looked upon US GAAP specifically for key reference points. This tradition can be

expected to have changed after the IFRS adoption, as national standard-setters

relinquished their authority to the IASB in creating the accounting standards for their

jurisdictions.

4.4 Conclusion

This thesis emphasises the interplay of actors and their institutional work in the IFRS

adoption process. Departing from institutional isomorphism, which is sometimes taken for

granted as the reason behind the decision to adopt IFRS, this study offers a closer

examination of the overall adoption process and the institutional work that contributes

towards the process of change. This is an important shift of study in IFRS adoption as

previous case studies often perceive the adoption process as a snapshot in the historical

time-line of the country’s accounting standards development, whilst this study sees the

adoption process as a movie with many actors playing out their roles. New actors may

have emerged during the movie - which may alter the complexity of the movie’s story

(e.g. the amendment with regard to IFRS adoption by Japan and the US).

This chapter has outlined the theoretical framework that will be used to understand the

diffusion of IFRS in the elected countries, and noted the key institutional perspectives to

be considered on. In contrast to a realist perspective, this study offers a different

ontological perspective by looking at IFRS as a world culture and that its diffusion is a

result of countries becoming part of world society. By using the theory of institutional

work, this study will focus on the work of actors in institutionalising IFRS at the national

regulatory field and perceive national actors as rational and active players in the process.

Chapter five will discuss the research methodology of the study. The emphasis of

chapter five will be on the selection methodology for the six countries chosen as samples


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in this study. Indonesia, Brazil, Philippines, Japan, Canada and the US were intentionally

selected based on their past relationship with the US GAAP. The adoption processes in

these selected countries were expected to provide debate on the relative quality of IFRS

and how the debate influenced the decision making. Chapter Five will also discuss the

detailed research methods applied in the study such as the respondent selection process

and the data analysis.

Chapter 5. Studying IFRS Adoption Processes: A Research Methodology

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“Understanding in any area of human inquiry has to be constructed

through a process of debate, be it explicit or otherwise, between

different conceptual systems, reasonings and analytical and

methodological approaches.” (Hopwood, 1978, p.1).

5.1 Introduction

Anthony Hopwood argued more than 30 years ago that accounting research should pay

more attention to the organisational and social context in which accounting operates

(Hopwood, 1978). More recently, he alerted scholars that accounting research is still too

conscious and conservative, too rigid and traditional, and insufficiently attuned to embrace

novel insights and bodies of knowledge (Hopwood, 2007, p.6). As was discussed in the

previous chapters, studies on IFRS have proliferated over the last 15 years, however our

understanding of the process of IFRS adoption across countries remains rudimentary, as

highlighted by Hopwood below:

“We know very little about the processes and consequences of standardisation and

the accountings for new phenomena… Our international understandings are still

poorly developed, to put it positively.” (Hopwood, 2007 p.6).

This study aims to improve our international understanding of IFRS diffusion by

investigating how IFRS was adopted (or not adopted) by a selected number of countries,

and this chapter addresses the research methodology employed in this study to carry out

the investigation. It starts with the research paradigm, discussing the ontological

perspective and the epistemological approach of the research. The chapter then discusses

how the country case studies were selected. The chapter concludes with an explanation of

the writing-up strategy and a discussion about the reliability and validity of the research.


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5.2 Research paradigm

The positivists often see IFRS as having specific characteristics, such as it being

principles-based, international in scope, and possessing high quality standards. In the area

of international financial reporting, the positivist approach has been widely applied to

study the economic impact of the adoption of IFRS (Daske et al., 2008; Barth et al., 2008;

Christensen et al., 2007). In confirming the quality of IFRS, quantitative research usually

tests the standard against the reduction in the cost of capital or the increase in analyst

forecasts. In these quantitative studies, the capital market mechanism is assumed to be

efficient and the market return acts as one of the key criteria to evaluate IFRS quality.

However, the process of IFRS adoption involves a complex transition involving

international and national actors (Tyrrall et al., 2007; Hassan, 2008). Thus, to understand

the process of how IFRS is adopted, a positivist approach would not be suitable. Arguably,

to enable better understanding of the processes and mechanisms, a qualitative research

approach is required (Maxwell, 2005; Creswell, 1994). Applying the constructionist view

(Crotty, 2003), the characteristics of IFRS are not inherent in the object but are socially

constructed by institutional and cultural contexts and such contexts in related process of

change have to be studies qualitatively.

Ordelheide (2004) proposed that “accounting, like other societal institutions, only

exists because we think it or conceive it”. The research design in this thesis assumes that

accounting standards are a reflection of the society in which they are situated and that this,

in turn, influences the development of institutions. International accounting standards such

as IFRS, as a societal institution, is linked to a number of other societal institutions in a

multitude of ways - the IASB as the rule maker, other standard-setters as adopters, the

regulators as enforcers, the companies as rule takers. They are all interconnected and play

a part in creating each IFRS.

Specifically, in contrast to the positivist approach, this research employs an

interpretative approach utilising qualitative methodology as an appropriate paradigm to

study the process of IFRS adoption. The constructivism paradigm allows the researcher to


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look for complexity of views rather than a narrowing of meanings into a few categories

and ideas. Meanings can be varied and multiple; for example, this research has

documented various explanations from the respondents as to what constitutes a high

quality accounting standard.

The study’s approach views the world as being socially constructed where in

individuals develop subjective meanings from their experiences – meanings directed

towards certain objects and things (Creswell, 2009). Using this paradigm, the researcher

is no longer objective and neutral but rather allowed to assign meaning to actions and

interpret the evidence based on past experience and cultural background. The process of

interpretation puts the researcher at the centre of the research and allows her to impute a

subjective perspective to the research. For example, relevant to this research is the past

experience of the researcher living in Indonesia and having been involved in the IFRS

convergence process.

The epistemological question concerns the relationship of the researcher with those

being researched (Creswell, 1994). In qualitative research, researchers interact with those

they study and try to minimise the distance between themselves and those being

researched (Creswell, 1994). Qualitative research is interpretative in nature and thus the

researchers play an important role as they play a vital role in interpreting the data. Biases,

values and judgements of the researcher should be stated explicitly in the research report

and such openness is considered to be useful and positive (Locke, Spirduso, & Silverman,

1987 as cited in Creswell, 1994).

The researcher worked as the technical director of the Indonesian Financial

Accounting Standards Board (DSAK) from 2009-2011 and her prior knowledge and

experience has inevitably influenced how she interpreted the data collected through the

fieldwork which has been used in this study. Traditionally, what researchers bring to the

research from their past experience has been treated as ‘bias’, something whose influence

needs to be eliminated from the design, rather than serving as a valuable component of it

(Maxwell, 2005). However, separating the research from other aspects of the researcher’s

life and experience can bring major disadvantages as it will cut off the researcher from a


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major source of insights, hypotheses and validity checks. Ignoring what researchers know

from their past experience about the settings or issues they propose to study can seriously

damage the research’s credibility (Maxwell, 2005).

Instead of treating past experience and knowledge as ‘bias’ that should be ignored, the

researcher has tried to incorporate her experience in a productive way. The researcher was

intimately involved in the process of IFRS convergence in Indonesia and her position as

the technical advisor of the board during this study period provided the access to

numerous respondents in this study. Her continuing involvement as part of the Indonesian

delegates in international standard-setter’s conferences also helped to create trust between

herself and the respondents.

However, this does not give the researcher license to uncritically impose her

assumptions and values on the research. As also argued by Reason 1988 as cited

inMaxwell (2005), the researcher should not be allowed to be swept away and

overwhelmed by her values and knowledge; rather, she should be conscious of such values

and knowledge and use this awareness as part of the inquiry process. During the interview

process for this study, the researcher disclosed her identity as a PhD scholar as well as her

role as the technical advisor for DSAK. However, she did not voluntarily explain her own

experience about Indonesia’s IFRS convergence unless the respondents inquired about it,

which a few did at the end of the interviews.

5.3 The case studies: Country selection criteria

This study aims to examine the experience of the IFRS adoption process in the

countries where the choice was evident between two sets of standards with comparable

claims to quality – i.e. IFRS vs US GAAP. It does not investigate how companies make

decisions when they are faced with more than one option; rather, it investigates how

national actors make such decisions in deciding on the national adoption of a particular set

of standard.

As argued by Yin (2009) , the case study method is pertinent for answering

explanatory questions such as ‘how or why did something happen?’ Since the aim of this


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research is to answer questions about the process of IFRS adoption, a case study research

design has been chosen as the main research methodology. A case study is defined by

(Yin, 2009) as “an empirical inquiry about a contemporary phenomenon (e.g., a ‘case’),

set within its real world context - especially when the boundaries between phenomenon

and context are not clearly evident.” (p.18)

Considering more than 122 jurisdictions have adopted IFRS (Pacter, 2014), the

selection criteria for case studies was critical. Candidates for case studies were chosen

from countries where, in the past, they had to make decisions about whether to choose US

GAAP or IFRS. A strong past connection with US GAAP was an important criteria for the

researcher in the selection of sample countries in expectation of revealing more debate on

the quality of standard.

At the moment, US GAAP is still allowed as one of the options in some capital

markets such as Switzerland, Japan and Canada. Although in the past US GAAP and IFRS

were competing in some European capital markets, for example in Germany before the

IFRS adoption period, EU countries are excluded in this study as the decision to adopt

IFRS was in order to comply with EU directives and not because IFRS is a better set of

standards than US GAAP (Albu et al., 2011; Tyrrall et al., 2007).

Japan and Canada are included in this study and Switzerland was also considered for

inclusion in the study. However, upon preliminary document analysis, it was noted that

Switzerland had never made a public commitment to adopt IFRS. Switzerland is the only

country among 66 countries which submitted the jurisdiction survey to the IASB and

admitted it had never made a public announcement to commit to IFRS (IASB, 2012).

Moreover, Switzerland may maintain its neutrality over any international standard in the

foreseeable future24. In fact, Swiss GAAP is gaining more support as a popular choice as

24 listed Swiss companies switched to Swiss GAAP after using IFRS for a few years

(Fiechter et al., 2012).

The final six countries selected for the study therefore are Canada, Brazil, Japan,

Indonesia, Philippines and the US. Canada and Brazil, who adopted IFRS in 2011 and

24 Implied by IASB chairman during IFRS Advisory Council Meeting, October 2013, in response to

Paul Pacter’s presentation “Jurisdiction’s profile of IFRS application”.


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2010 respectively, were chosen for their strong connection with the US economy as well

as US accounting standards. Representing developing countries, the Philippines, which

adopted IFRS fully in 2005, was chosen as it has a strong cultural and legal connection

with the US as a former US colony for more than 50 years between 1898 and 1946. In

these three countries, IFRS has been fully adopted word for word and is mandatory for

public companies.

Indonesia and Japan represent two countries which are still converging their local

standards with IFRS. The decision to close the gap between IFRS and local GAAP was

made in Japan and Indonesia in 2005 and 2008, respectively. However, as of 1st January

2013, differences still remained and both countries had not made any firm decisions as to

when they would mandatorily require IFRS for public listed companies. Japan should have

made that decision in 2011 but in June 2011 the Japanese FSA delayed the decision for the

foreseeable future following US indecision (FSA, 2011). Indonesia should have made that

decision in 2012 but up until April 2013 such a decision had not been made by the

Indonesian FSA or DSAK. Appendix 2 provides a comparison of IFRS adoption history

and the institutional arrangement of the sample countries.

These six countries also represent two blocks of countries: developing and developed

economies. The developed countries, Japan, Canada and the US, have stronger standard-

setting institutions and capital markets than the developing countries: Indonesia,

Philippines and Brazil. It is important to include these two blocks of countries as research

evidence has suggested that more powerful countries are likely to adopt IFRS (Ramanna

and Sletten, 2009)

5.4 Research design

This research is designed as an inductive interpretative study. In a qualitative study, a

researcher does not begin with a theory to test or to verify. Instead, consistent with the

inductive model of thinking, a theory may emerge during the data collection and analysis

phase of the research or be used relatively late in the research process as a basis for

comparison with other theory (Creswell, 1994).


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The theories used in this study (discussed in Chapter Four) were selected during the

data analysis and ‘writing’ phases of the study and not plotted at inception. The inductive

research process of this research study is illustrated in Figure 2 below:

Some single country case studies of IFRS adoption have utilised the notion of

isomorphism of institutional theory (DiMaggio and Powell, 1983) to frame their research

(Collin et al., 2009; Hassan, 2008; Mostafa Kamal, 2008; Mir and Rahaman, 2005; Albu

et al., 2013; Albu et al., 2011). Although the researcher was fully informed of such work,

she attempted not to make the isomorphism of institutional theory a coat closet theory

(Maxwell, 2005), that is, a coat hook in the closet where the researcher can ‘hang’ the

data. Instead, the researcher used the data to refine a quite broad generic theory of

institutional work.

Source: Adapted from Creswell (1994)

Researcher gathers information:

Previous research papers, reports and

other documents

Researcher asks questions

Researcher forms categories based on the

common themes from data analysis

Researcher compares patterns with other theories

Researcher looks for patterns between

country case studies

Iterative

process

Figure 2. Inductive research approach adopted in the study


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5.4.1 Research questions

Research questions specify what a researcher wants to understand by doing the study

and in qualitative inductive research, they are very important and directly link to other

components of the research design (Maxwell, 2005). Qualitative researchers often do not

develop very specific research questions until a significant amount of data collection and

analysis have been conducted (Maxwell, 2005). This does not mean the researchers begin

their fieldwork with no questions at all. Qualitative research usually starts with a central

question or a broad question that demands for an exploration of the central phenomenon or

concept in a study (Creswell, 2009).

For this study, the researcher started the study with the following broad question:

‘Does quality dominate standard setting adoption processes’. After data was collected

through document analysis and preliminary interviews, more focused questions were

developed along the way. As argued by Maxwell (2005), well-constructed research

questions are generally the result of an interactive design process, rather than being the

starting point for developing a design. Below are the three research questions of the

thesis:

Research Question 1: How did the decision to adopt (or not to adopt) IFRS emerge in

these 6 selected countries, which actors were involved in the process and what factors both

endogenous and exogenous, determined the decision?

Research Question 2: How prominent were arguments about the relative quality of

IFRS vs. US GAAP (or the local GAAP) in debates over IFRS adoption and did other

issues have greater prominence?

Research Question 3: What can be gained from detailed investigation of the process

of IFRS adoption in individual countries in terms of:

c. better explaining the processes through which IFRS has become a global

accounting standard; and

d. improving our understanding of institutional change and the dynamics of

institutional work in the regulatory field?


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These three research questions were then used as a guideline in developing interview

questions for the respondents.

5.4.2 Data collection

Data collection in case study research is typically extensive, drawing on multiple

sources of information within a bounded system. The data collection steps include setting

the boundaries for the study and collecting information through unstructured or semi-

structured observations, interviews, and analysis of documents, and visual materials

(Creswell, 2009). In this study, the boundary was set on particular settings in selected

countries, which is the period prior to IFRS adoption. The preliminary data collected

sought to reveal the process in each country which took place with respect to the IFRS

adoption year. The IFRS adoption year (for example, for Canada it was 2011) became the

starting point for when data was collected and stretched back to a point in the past when

IFRS adoption was first formally debated (for example, for Canada it was first debated

formally in 2004).

The main analytical approach of the study involved analysis of archival and

documentary data, where the main data source for the study comes from the documents

produced by standard-setters, documents (reports, speeches, minutes of meetings ) issued

by international organisations such as the World Bank and IASB, newspapers and

magazines, and other relevant materials (see Table 6). Findings from such analysis are

complemented by in-depth semi-structured interviews with decision-makers in all sample

countries, especially where only limited information was provided by publicly available

documents. This research also utilised some audio materials, such as podcasts of meetings.

Some documents were collected during the fieldwork phase in Indonesia, the

Philippines and Japan. Other documents were collected from the organisation’s website,

for example the US SEC website. Sometimes the respondents provided information by

emailing certain documents which had been referred to during the interview.


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Data types Examples How the information from the data

was used in the study

Observation

of meetings

DSAK meetings To understand the nature of how the

board make decisions in the adopting

process.

IFRS Advisory Council

meeting

To understand the international

response to the Japanese FSA

presentation on their market

competition mechanism.

World Standard-setters

meeting

To understand the relationship

between the IASB and other national

standard-setters.

To learn how national standard-setters

use the platform to lobby IASB on key

issues

International Forum of

Accounting Standard-setters

Asian-Oceanian Accounting

Standard-setters Group

IFRIC meeting To understand how DSAK fought for

their implementation issue

‘Accounting for Land’.

Interview Face-to-face at the

respondent’s place of work

To gather historical information on the

adoption process and the issues

debated in the process.

To validate information from the

documents related to actors involved

in the process.

To validate the analysis of the story.

Face-to-face outside

respondent’s country (in

London/Europe during

standard-setter’s conference)

Phone interviews

Documents Published speeches by actors Major source of information to set up

the IFRS adoption timeline, identify

the actors, the issues debated, and

discuss actors’ points of view on key

important adoption issues

Discussion papers/ invitation

for comments/reports issued by

standard-setters or regulators

Comment letters to the

standard-setters or regulators

Minutes of the meetings

Report issues by international

organisations such as World

Bank ROSC

Magazine articles

Memoirs of the actors

Books/articles/research

published by the actor

Articles from the web-based

newspapers and the websites

of professional associations

Audio Recording (podcast) of IFRS To understand the reaction of the


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Materials Advisory Council Meeting international community towards the

decision of Japan in 2011 to abandon

their IFRS adoption plan.

Recording (podcast) of IASB

meeting

To understand how the IASB deals

with implementation issues from new

adopted countries.

Table 6. Data types utilised in the study

Each country has a different level of richness for the information provided in the

documents. Canada and the US, for example, have extensive documents available on the

standard-setters’ website in terms of reports and press releases which informed the IFRS

adoption process. For other countries like Indonesia and the Philippines, the IFRS

adoption processes were not well documented or if such documents available, they were

not available as public document, thus the interview played a more important role as the

tool for collecting data.

5.4.3 Selection criteria of respondents and their profile

As the objective of this research is to understand the IFRS adoption process,

interviews with involved actors become a pivotal data source, in some countries more than

others. Various documents, reports and speeches were used to identify individuals who

were involved in the process. These individuals were past and current members of national

accounting standard boards and senior market regulator officials, such as chief

accountants. Then, the initial invitations were sent, mostly through email, explaining to

them the nature of the research and asking people if they were willing to be interviewed.

This study employed a snowballing interview method which is widely used in

qualitative sociological research (Biernacki and Waldorf, 1981). The snowballing method

yields a study sample through referrals among people who share the same knowledge, or

in this study, among those who were involved in the same process. This method is suitable

when the focus of the study involves a sensitive issue (Biernacki and Waldorf, 1981). In

this study, respondents were sometimes reluctant to admit that they were once in

opposition to the adoption of IFRS. Interviews with past IFRS opponents had to be

sensitive to the fact that they are now connected to what is represented as the ‘losing’


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team. In contrast, IFRS supporters were usually eager to be interviewed and usually

recommended other IFRS supporters to be contacted.

During the interview, other names usually came up or the researcher asked participants

at the end of the interview for further recommendations and if the respondents were

willing to introduce the researcher to other potential respondents. Many respondents

voluntarily provided the contact details of their colleagues for potential interview. Often

the names recommended by respondents were already on the interview list, which then

served as a confirmation of the preliminary research work. The interviews generally

stopped when the incremental knowledge was diminishing and the researcher was satisfied

with the information gathered in terms of answering the research questions. Table 7

provides information about the respondents based on their nationality and affiliated

institutions.

Respondents

Affiliated

Institutions

Nationality of Respondents

PH BR INA CA JP US Others

Respondents

based on

Affiliations

IFRS

Foundations*) 0 2 0 0 3 0 1 6

National

Standard-setters 3 1 14 4 4 2 28

Regulators 3 2 2 1 2 2 12

Academics 1 0 1 0 2 1 5

Auditors 5 0 1 0 0 0 6

Accounting

Association**) 1 0 4 0 0 0 5

Others 0 0 0 0 0 0 1 1

Total number of

respondent 13 5 22 5 11 5 2 63

Note: PH is the Philippines, BR is Brazil, INA is Indonesia, CA is Canada, JP is Japan and US is the

United States America

*) Including member of IASB, Advisory Committee, Interpretation Committee and staff of

IFRS Foundation.

**) Including the elected council member and staff

Table 7. Respondents’ profile by country and institutions

Sixty-nine interviews were conducted with 63 respondents, with some respondents

interviewed more than once in follow-up interviews. Most of the interviews (78%) were

conducted face-to-face and the others (22%) by phone. The face-to-face interviews were


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conducted in the respondent’s country (at their office or home) and few interviews were

conducted in Europe (London and Brussels) when the respondents had travelled for

business purposes. The phone interviews were conducted by the researcher in Manchester.

The interviews ranged in time from 30 to 120 minutes. All interviews were recorded with

the respondent’s prior approval. Appendix 1 provides details about the interviews with all

respondents in a chronological order.

5.4.4 Gaining access and interview procedure

Gaining access to respondents was the main challenge of this research, especially as

the individuals involved were senior officials in the government or the standard-setter

bodies. Access to respondents was obtained from the personal network of the researcher as

well as through other respondents. The research also received helpful direct support from

the professional accounting associations in Indonesia and the Philippines in terms during

the field work.

Attending standard-setters meetings and conferences was important for gaining access

to respondents as well as for becoming attuned to key international debating issues on

IFRS adoption. During the fieldwork phase in Indonesia, the researcher observed some

meetings of DSAK. Unfortunately, during the shorter fieldwork phase that took place in

the Philippines and Japan, there were no accounting standard-setter meetings held at that

time. Most of the standard-setter conferences, such as one the organised by Asian-

Oceanian Accounting Standard-setters Group (AOSSG), would only allow members of

standard-setter bodies to attend and participate. However, the Indonesian Institute of

Accountants supported this research study by nominating the researcher as the

representative of the DSAK at these conferences.

Creswell (2009) argued that in gaining entry it is important for qualitative researchers

to disclose their past experiences to the respondents. In the initial emails to the

respondents, the nature and the purpose of the research was explained as well as the

researcher’s current role as a technical advisor for DSAK. Upon receiving their

confirmation that they were willing to be interviewed, the interview questions were sent to


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each interviewee together with the information sheet and the consent form a few days

prior to the interview.

Before the interview commenced, the researcher always made sure to ask if the

respondents were comfortable with the interview being recorded. All respondents agreed

to be recorded. A few respondents asked for the recorder to be turned off whenever they

mentioned something confidential. Most of the respondents were comfortable for their

names to be mentioned in the thesis with only a few requesting that their name remain

anonymous. A few respondents specified what statements in the transcripts could or could

not be directly quoted in the thesis; such direction was strictly adhered to by the researcher

during the thesis-writing up process.

5.4.5 Data analysis

In a qualitative research, data analysis can be conducted simultaneously with data

collection, data interpretation and narrative report writing (Creswell, 1994; Creswell,

2009). As previously delineated in Table 6, the data for this research is various and

voluminous, covering six countries. Voluminous data is common for qualitative research,

making it important for the researcher to be able to reduce the data to certain patterns,

categories, or key themes and then interpret these together.

For each country, the researcher analysed the timeline of their IFRS adoption history

and identified which organisations and individuals were involved in the process. A

document analysis approach was mainly used at the preliminary research stage before the

interviews took place in order to map respondents to the country’s historical IFRS events

and their role in the adoption process. The documents used in this preliminary step came

from various reports, for example the World Bank ROSC, a jurisdiction profile report by

the IASB, and various reports issued by the standard-setters.

During the interview, the researcher took notes and made a memo after the interview

based on a single interview (or several interviews in one day) to identify the overall issues

and common themes emerging from the interviews. The collection of memos during

fieldwork served as pivotal instrument in analysing the data early in the research process.


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The interviews were then transcribed and studied based on period, themes and countries.

The interview transcripts and the fieldwork notes subsequently became documents which

were consulted from time to time during the writing process.

The initial coding of the interview transcripts highlighted common themes raised by

the respondents. The goal of initial coding was to rearrange the data into categories that

facilitated comparison across cases and in the development of theoretical concepts

(Maxwell, 2004). Through this initial coding, some categories emerged such as ‘the key

actors involved in the debate’, ‘the main argument for IFRS adoption’, or ‘the pressure

from international bodies’, etc. After the analysis of initial coding, broad thematic stages

were identified based on the similar period which: harmonisation, decision, transition and

implementation. Figure 3 illustrates the framework for data analysis in this study.


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All the interview transcripts and notes were analysed using thematic analysis (Rapley,

2011) and five steps were followed at this analytical stage: gaining familiarity with the

data set, generating initial codes, searching for themes, reviewing themes and refining

themes. In analysing the interview transcripts, the researcher distinguished the parts in

which respondents explained about the actors (both individual and institutions) involved

in the IFRS adoption process, the decision-making process of IFRS adoption, and the

arguments debated during the process.

Raw data (transcripts, field notes, etc.)

Reading through all data

Organising and preparing data for analysis

Validating the

accuracy of

information

Description

Hand coding the data

Themes

Interrelating themes / description

Interpreting the meaning of themes/descriptions

Figure 3. Data analysis

Source: Adapted from Creswell, 2009


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Source: Adapted from Rapley (2011)

As illustrated in Figure 4 above, the initial codes were applied to all interview

transcripts and they were developed in to a more refined code of substantive categories.

All respondents in general provided information about the process of decision making,

which institutions were involved in the process and what had been the key arguments

regarding the process. The substantive categories emerged during the cross-country

analysis and when the data was triangulated with other reports or documents. These data

were then re-grouped based on the four stages of adoption for each country, for example:

which actors were involved during transition period and what issues were being

discussed? This analysis increased the researcher’s understanding of what have happened

within countries and across countries at the same stages in the adoption process although

they might not necessarily occur at the same years.

The next step was to define the coded data in to a more general or abstract framework.

This study uses the notion of institutional work (Lawrence and Suddaby, 2006) which

categorises intended action of actors influencing the institutions in to three categories:

disrupting, maintaining and creating. The data (both from interviews and documents) were

analysed using this theoretical categories. While the initial coding allocated the data in

accordance with their countries, in this theoretical coding the data were not restricted to a

Gaining familiarity with the data set

•classified transcript for each country and skim read them

Generating initial codes

•marked the transcript when respondents discuss the institution, the past process, and the arguments

Searching for themes

•themes emerged during the cross-country analysis

Reviewing themes

•During the writing process, some themes emerged in other countries when they were triangulated with other documents

Refining themes

•Go back to the transcript

•additional interview

Figure 4. Thematic analysis of interview data


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particular country case. For example, the same forms of institutional work across countries

were grouped as ‘creating work’.

Although institutional work provided three broad categories of creating, maintaining

and disrupting, the theoretical coding also something of an emergent process. While using

Lawrence and Suddaby (2006) definition of institutional work, some of significant events

influencing the adoption process did not match their definitions. On the other hand some

of forms of institutional work cannot be easily grouped in to one single category as

initially defined by Lawrence and Suddaby (2006). At the later stage of analysis, the

theoretically coded group of data based on their institutional work categories were

analysed by the stage of adoption. For example creating work during the ‘decision’ stage

might took a different form in the ‘transition stage’.

After such codification, the next step was to create a visual image of the emerging

theoretical findings. Diagrams can offer concreate images of ideas and provide a visual

representation of categories and relationship (Charmaz, 2014). The diagram was refined

few times in consultation to the interview transcript and other coded data. The final

diagram, presented in as Figure 6 in chapter ten, serves to illuminate some new

understanding of the process and stages through which IFRS was institutionalised across

different national regulatory fields.

5.5 Writing the thesis

The qualitative research writing process usually see the researcher constantly bouncing

back and forth between phases of analysis and interpretation and it is difficult to

demarcate where one process begins and the other ends (Hesse-Biber and Leavy, 2004).

However, writing up qualitative research with rich data can also serve as a method of

inquiry and discovery (Richardson, 2004). There is no standard format for qualitative

research writing, with Denzin (2004) using the term ‘interpretive realism’ to denote where

authors insert their personal interpretations.

In the present study, the six case studies have been written as four empirical chapters.

The researcher grouped countries based on similarities in the nature of their IFRS adoption


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processes, the institutional arrangements of standard-setters, as well as the amount of

debate between the proponents of IFRS and US GAAP during the process of adoption.

Brazil and the Philippines were grouped together as their adoption process was fast and

ambitious and they shared a similar legalistic mechanism of adoption. Indonesia and

Canada were grouped together as the two countries shared similar standard-setting

arrangements. Japan and the US were each presented in separate chapter because both

offers different explanations on the mechanisms of achieving one set of global accounting

standards.

Within each case study, the story has been presented in chronological order based on

the timeline and historical milestones of IFRS adoption in each country. In each case

study, the actors involved were discussed as well as the arguments proposed by

respondents as to why IFRS was (or was not) adopted. Each of the empirical chapters

includes a discussion section which provides some form of cross country analysis within

them (e.g. between Indonesia and Canada) or between the Canada-Indonesia group

compared to the Brazil-Philippines group). In the case of Japan and the US, the

international responses to their decisions are also specially discussed. The discussion

chapter (chapter ten) duly synthesises the six country case studies and links them to the

emerging theorising and highlights primary contributions of the study.

The empirical chapters discuss the adoption process in each country based on the four

identified stages of adoption: Harmonisation, Decision, Transition and Implementation.

The four stage framework enables a closer empirical analysis in every country. The

framework is also used in the discussion chapter to locate and analyse the institutional

work across sample countries.

The harmonisation period represents the time when countries developed their own

accounting standards albeit with some influence from the international generally accepted

accounting standard or practices. All the sample countries in this study, except for the US,

experienced the harmonisation period before they made the decision to adopt IFRS --

having been harmonising their accounting standards to international generally accepted

accounting standards for quite some time before formally switching to IFRS. US GAAP in

the 1990s was the ubiquitous international standard and was the main reference for these


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countries in developing their national GAAP. The harmonisation usually emerged from

US textbooks which were distributed through the countries accounting education systems

as well as through the economic and trading relationships with the US (Diga, 1997;

Tuanakotta, 2007; Rodrigues et al., 2012).

After various years of harmonisation, the sample countries (with the exception of the

US) made a decision to abandon US GAAP and fully adopt IFRS or converge their

standards to IFRS. Some countries needed several years before IFRS adoption was firmly

decided. Countries with larger financial markets such as the US and Japan seemed to be

more reluctant to adopt IFRS. During this decision period, the IFRS proponents and

opponents involved in the debate why the country need to adopt IFRS and not continue the

status quo of harmonisation.

Following the decision to adopt IFRS, all countries entered the transition period. Some

countries can have short and chaotic transition periods as in the case of Brazil, or a long

five-year transition period as in the case of Canada. The transition period started from the

time when the IFRS adoption decision was announced to the public, or the law was

ratified, until the IFRS target year. For example Canada made a firm decision in 2006 that

full IFRS would be adopted by 2011, thus Canada had a five-year transition period.

During the transition period, new developments could emerge from the internal or

international arena which force a country to refine or revise its previous decision. For

example Japan in 2009 made a roadmap suggesting how IFRS would be mandatory in the

future and that US GAAP would be prohibited. However during the transition period new

developments emerged, forcing Japan, in 2011, to rescind its previous decision and to take

a market competition pathway later on. Another example is Canada, where during the

transition period the authorities decided that some industries should be exempted from the

IFRS mandatory adoption. Indonesia during the transition period refined its definition of

‘convergence’.


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As the transition stage may create surprises and alter the decision, thus the two-way

arrows between the decision period and the transition period were added. The four stages

are illustrated in Figure 5 below:

Figure 5. Stages in IFRS adoption

The period after the IFRS target year is the implementation period. That would be the

period after 2011 for Canada, 2012 for Indonesia, 2010 for Brazil and 2005 for

Philippines. Japan and the US situations are more complicated. Japan and the US at some

point of time have issued a roadmap to adopt IFRS in 2009 and 2008 respectively.

However Japan and the US have not yet fully adopted IFRS at the moment, thus they are

still in what is now a lengthy transition period.

5.6 Reliability and validity assessment

Qualitative validity means that the researcher checks for the accuracy of the findings

by employing certain procedures, while qualitative reliability indicates that the

researcher’s approach is consistent across different researchers and different projects

(Gibbs, 2007 in Creswell, 2009). In this study, the validation of findings occurs

simultaneously throughout the research steps, as illustrated by Figure 5.1. Nevertheless,

this section discussed the efforts made by the researcher to ensure the reliability and the

validity of the research.

This research study’s reliability depends on the access to the right respondents. The

study investigated the process of IFRS adoption, which often took place a few years in the

past. Some of the key decision-makers have retired from their position; one IFRS

opponent in Indonesia, for example, passed away a few years ago. Thus, it is very

Harmonisation Period

Decision Period Transition PeriodImplementation

Period


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important to be able to identify the key people who were involved in the decision-making

process and be able to interview them. The researcher had interviewed these decision-

makers in each country including, for example, the former and current chairmen of

accounting standard-setters as well as the chief of accountants of capital market regulators.

Yin (2009) suggested that qualitative researchers should document the procedures of

their case studies to ensure reliability across case studies. The researcher in this study kept

a research diary to document major ideas which developed throughout the research

journey. The case study protocol in this study was quite straightforward. First, the

researcher identified the key people involved in the process from documentary analysis or

other respondents’ recommendations. Second, the researcher interviewed these people

until the incremental knowledge diminished and she had gained a suitable quantity

information to address core the research questions. Validity threats in qualitative research

are the particular events or processes that could lead to invalid conclusions (Maxwell,

2005). Some strategies to diminish validity threats employed in this research were as

follows:

1. Triangulation of data. Collecting data from different sources of information has

been highlighted as a validity strategy in qualitative research (Maxwell, 2005;

Creswell, 2009). This research used several data resources to gather evidence

throughout the empirical research phase, especially in terms of identifying key

respondents and building the historical timeline of each case study. For example,

for the case study of Indonesia, various reports and media articles identified the

chairman of the Indonesian Institute of Accountants as the mastermind of the IFRS

adoption plan in Indonesia. This was confirmed by various respondents when they

answered the open question ‘which person in Indonesia is most responsible for the

IFRS adoption decision?’ Likewise in the Philippines, respondents could pinpoint

the name of one person, where in Canada, respondents indicated that the decision

was a more collegial decision after a long and extensive public consultation

exercise.

2. Member checking. Respondent validation is an effort to systematically solicit

feedback about the data and the conclusions of the research from respondents

(Creswell, 2009; Maxwell, 2005). Member checking is an important step employed


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in this study. At the end of each interview, the researcher usually provided her

conclusions about the interview and asked respondents if they agreed with her

conclusions. In many cases the researcher also sent a follow-up email to confirm

the conclusions and ask for further clarification. The researcher also cross-checked

the general conclusions she had generated after interviewing respondents from one

group (standard-setters) with respondents in another group (regulators). For

example, after interviewing some members of the AcSB, and the respondent from

Canadian regulator as well as reading various reports, it was possible to conclude

that the standard-setter was the one who initiated the IFRS adoption.

3. Long-term involvement. Long term participant observation provides more complete

data about specific situations and events (Maxwell, 2005). Long-term involvement

also built more trust between the researcher and respondents. Many of the

respondents in this study have known the researcher since 2009, sometimes longer.

The researcher’s participation in several international standard-setters meetings

began in 2009 and the researcher’s participation continued during her doctoral

period. The researcher’s activity in such international standard-setter conferences

allowed her to gain insights which are rarely obtained from official reports or

media coverage of the events.

4. Peer review. This research uses peer review as an external check on the research

process and findings. Throughout the research process, the researcher worked

closely with her supervisors, especially during the data collection phase supervisor

feedback on fieldwork notes was used to refine the interview questions. The

researcher also promptly discussed with her supervisors the general conclusions

derived from the interviews with key respondents, which then generated follow-up

questions. Besides supervisory feedback, the researcher received constructive

feedback from participants at two doctoral events and two academic conferences25.

All this helped to strengthen the developed theoretical frameworks, and the

framing of key research findings.

25 Researcher presented the research at MBS Doctoral Conference 2012, APIRA Doctoral Colloquium

2013, APIRA conference 2013, Indonesian Scholar International Convention (ISIC 2013), Masterclass

Workshop at University of Newcastle 2014, and Aston Business School 2015.


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5.7 Conclusion

This chapter has delineated the research methodology employed in the study and its

emphasis on an in interpretivist epistemology and constructionist ontology. The chapter

discussed how the research paradigm influenced the methods and procedures employed in

the fieldwork, and the strategies used to analyse the empirical data.

Qualitative, multiple case studies of six countries were conducted to allow for a deep

understanding of the process of IFRS adoption across different contexts. The chapter has

provided a detailed explanation of the data sources used in the study and how the data was

analysed. During this process, emergent theories ware tested against obtained data finding

and the existing literature to build core themes. In this way, the process engaged in both

structural and subjective approaches to construe realities. By assessing the methods used

in this research study in terms of the rigour of the data sources, the interpretation process

and the strategies to validate the conclusions, this chapter aimed to raise confidence in the

research findings.

Chapter 6. Legalistic Mechanism as Institutional Work

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Chapter 6: Legalistic Mechanisms as Institutional Work in Processes of

IFRS Adoption in Emerging Economies: Case Studies of the Philippines

and Brazil

6.1 Introduction

IFRS adoption processes in the Philippines and Brazil were amongst the fastest and

most ambitious adoption processes in international accounting history. After adoption, the

Philippines and Brazil mandated IFRS for the financial statements of all listed and non-

listed companies (with certain requirements), as well as consolidated and individual

companies. Consequently, local GAAP ceased to exist. This was ambitious compared to

some jurisdictions such in Europe, where IFRS is required only for consolidated financial

statements. Some countries also decided to retain their local GAAP as an option for non-

listed companies, but in the Philippines and in Brazil, only IFRS was made available to

companies. IFRS for SME’s became an option a few years after adopting IFRS in these

two countries.

This chapter is the first of four empirical chapters, and will discuss the IFRS adoption

process through legal mechanisms in the Philippines and Brazil. The IFRS adoption

processes in these two countries have similarities in many respects. For example, the

decisions to adopt IFRS were supported by the enactment of a law stipulating that the

standard-setter should adopt a set of international accounting standards. This chapter will

analyse how IFRS adoption was decided upon in the Philippines and Brazil. The study has

found that the decision to adopt IFRS in Brazil and the Philippines drew little debate or

resistance from supporters of US GAAP. The decisions to adopt IFRS were heavily

influenced by the recommendations of international bodies such as the World Bank ROSC

for the Philippines and the World Economic Forum for Brazil. The wide support for IFRS

adoption and the lack of a contra-argument for non-adoption may have arisen from the

strong legal support in favour of adoption. A strong legal mandate is not a significant


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factor in other sampled countries included in this study such as Indonesia and Canada,

which will be discussed in the next chapter.

Another finding of the study is that both Brazil and the Philippines established a new

standard-setting body following the adoption of IFRS. The fact that the decision to adopt

IFRS precipitated the creation of a new institution is not unique to Brazil and the

Philippines. Similar institutional developments are evident in other countries such as

Japan, and Korea. IFRS adoption of the standards in some cases also involved the

adoption of the standard-setting model and governance of the IASB. An earlier example of

this tendency was the establishment of the Korean Accounting Standard Board (KASB) in

1999, following pressure from international donors to adopt IFRS as part of the bailout

package (See Rodrigues et al., 2012). The case of Indonesia provides another example: the

standard-setter created an interpretations committee mimicking the IFRS Interpretations

Committee (IFRIC) in 2009 after the country made a decision in 2008 to adopt IFRS.

This chapter begins with some background information on both accounting standard-

setting arrangements in Brazil and the Philippines before the adoption of IFRS. The

second section discusses the IFRS adoption process, how the decision was executed and

which actors were centrally involved in the decision-making process. The chapter

concludes with a discussion comparing and contrasting the process in Brazil and the

Philippines and how the case studies will improve our current understanding of IFRS

diffusion as a global accounting standard.

6.2 IFRS adoption in the Philippines

The Philippines was colonised by Spain for almost 400 years (1595-1898), followed

by the US for about 50 years (1898-1946). The US designated the Philippines as a major

non-NATO ally, and there still exists close security ties between the two nations (U.S.,

2014). The US is amongst the Philippines’ top trading partners and has been its largest

foreign investor. The Philippines has been among the largest beneficiaries of US

programmes which support developing countries specifically by providing preferential

duty-free access to the US market. Key Philippine exports to the US include

semiconductor devices and computer peripherals, automobile parts, electrical machinery,


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textiles and garments, wheat and animal feeds, coconut oil, as well as information

technology and business process outsourcing services (US, 2014).

The economic, historical and political ties between the Philippines and the US had a

profound and pervasive impact not only on the development of accounting in the

Philippines, but more importantly on the institutional and cultural character of the country.

The Philippines legal and political structure, for example, shares certain commonalities

with the US (Valcarcel and Manabat, 2005). Its education system was also developed from

the system established by the Americans during the colonial period (Diga, 1997). In the

case of accounting education, US accounting textbooks and US-trained academics

facilitated the dissemination and acceptance of American accounting concepts and

practices (Diga, 1997). Previous research which classified the country into clusters

according to similarities between their accounting standards and practices usually places

the Philippines in the same cluster as the US (Nair and Frank, 1980; Nobes, 1983). Nair

and Frank (1980) clustered the Philippines in the US model, together with Canada,

Mexico, Japan, and Panama. Another example of the close relationship with the American

accounting system was the establishment of the PICPA (Philippines Institute of Certified

Public Accountants) in 1929, which was patterned after the AICPA. Even the first

president of the PICPA was an American who worked in the Philippines, W.W.Larkin, the

senior partner in the US accounting firm of Clark & Larkin (Diga, 1997).

6.2.1 The harmonisation period: 1996-2000

Prior to 1996, financial accounting standards and practices in the Philippines were

modelled largely on US GAAP. The accounting standard-setting council, the ASC in

Philippines decided to harmonise their standards with IAS in 1996. This decision was an

unexpected one at the time as the accounting education was very much based on the US

GAAP. Even ten years later, in 2006, the Philippines still had a dearth of textbooks on

international accounting, as observed by a World Bank report (World Bank, 2006).

Under its IAS project, the ASC was to replace US-based standards and it started to

adopt IAS on a standard per standard basis, in accordance with the specific needs of the

country concerned. The first IAS adapted and incorporated into Philippine accounting


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standards was IAS 19, Employee Benefits in 1996 which was adopted as SFAS 24 in the

Philippine accounting standard (ASC, 1999). Since then, the Philippines had gradually (in

stages) been harmonising their local standards with IFRS. They have, however, not

adopted the standard verbatim--adjustments were made to them:

“Our local standards were called SFAS, (similar to) US GAAP. So SFAS 1 to 23 if I

am not mistaken, those are still under US GAAP, most of them. Then starting, I think,

with (SFAS) 24 onward, those are IAS influenced standards, so basically (it was)

patterned after IAS. So even [in] 1996 I think those (SFAS) 24 , 25, 26 were issued….

Then in 1997 we came to the commitment. Then between that time until [the] year

2000 if, I am not mistaken. [In] 2001, we started adopting IAS standards by batch. In

2001, we had six (standards). So we have batches of standards that we adopted in to

Philippine GAAP.” (Interview with partner of SGV (member firm of EY) on 12th

February 2012).

Since IAS 19 adoption in 1996, the Philippines had made the IAS their main reference

and they only look in to US GAAP whenever the IAS were silent on a particular issue.

The shift from US GAAP to the IAS as the main reference was a critical point in the

Philippines accounting history. As was discussed in chapter two, the IASC was starting to

emerge at that time offering a claimed set of principled based standard. For a country at an

early stage of its standard-setting with limited resources, the ‘internationality’ of IAS was

more attractive compared to US GAAP. The decision was heavily influenced by the

chairman of the ASC at that time, Charlie Alindada. As he explained during the interview

he recommended the council to adopt IAS:

“There were discussions everywhere that there was standard overload (US GAAP)

already at that time. The second reason (was because) US. GAAP is for US

companies, they never took into account other companies. US GAAP is for [the]

US. So, why do you rely on to something when [the] IASC is emerging already…

why should we stick to the US only?...that there are so many things that we do not

understand, we’ll copy but we don’t understand and then it is not made for us, it is

meant for America. No way did the FASB say US GAAP was for the world, right?

So why should we be dependent on something purely US? It may be good but we

don’t understand it.” (Charlie Alindada, interviewed 15th February 2013).


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Following the adoption of IAS 19 in 1996, the Philippines adopted the IASC’s

standards on borrowing costs, and construction contracts. However, US GAAP was still a

key reference point when the IASC did not have a particular standard that the Philippines

needed, for example, it adopted two FASB insurance accounting standards in 1996: FASB

Statement No.60 Accounting and Reporting by Insurance Enterprises, and FASB

Statement No 113, Accounting and Reporting for Reinsurance of Short-Duration and

Long-Duration Contracts (ASC, 1999).

6.2.2 The decision-making period: 1998/1999 and 2004

The period from 1996-2000 could be classified as a harmonisation period in which

various created piecemeal amendments were made to Philippine GAAP. However the

Philippines Securities Exchange Commission (SEC) realised that the piecemeal

amendments would make their accounting standards mixed between US GAAP and IFRS.

So they decided that IFRS had to be adopted in full and US GAAP should be eliminated

entirely at some point in the future. According to the Chief Accountant of Philippine SEC:

“I think one the reasons if we will not adopt it in full, there will be convergence

within the local adoption. So our accounting standard[s] will be composed of US

standards also will compose of IAS, piecemeal on a piecemeal basis. So it make a

lot of differences. Of course that may be abused by some of these corporations.

And I think that’s the main reason also why we had to really commit or to agree on

one set of standard at given point.” (Interview with Chief Accountant of

Philippines SEC, 14th February 2012).

The Philippines SEC made a commitment to the International Organisations of

Securities Commissions (IOSCO) in 1998/1999 to fully adopt IFRS by 2005. An interview

with the Chief Accountant of the Philippines SEC revealed that before this commitment

was issued, internally the Philippine SEC had evaluated the advantages of adopting IFRS

“Actually the [SEC] commisioners, before we agreed to the [IOSCO] commitment,

had evaluated the advantages of having one set of financial reporting standards.

Because of the foreseeable cost of doing transactions, competitiveness it bring to


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our domestic corporations, all of these things are considered.” (Chief Accoutants

of the Philippines SEC, interview 14th February 2013).

In 2001, the World Bank’s assessment revealed that the Philippines SFAS still had

some gaps with its IAS counterparts, although in broad terms it was consistent (World

Bank, 2001). Amongst the recommendations of ROSC 2001 by the World Bank was the

full adoption of IFRS without any modification or any adaptation [p.12]. The

recommendation for full adoption was claimed by the World Bank to improve the

compatibility with IAS as stated on page eight of the report: “as international standards are

adapted to national circumstances, full IAS compatibility is often lost”. Since 2001, the

ASC worked towards the full adoption by adopting standard in batches to aim the full

IFRS adoption in 2005.

Respondents in the Philippines argued that the decision to adopt IFRS for the

Philippines was mainly driven by the recommendation in the World Bank ROSC. The

World Bank ROSC and IOSCO were very influential in the Philippines decision-making

process, that confirms similar findings in other developing countries such as Bangladesh

which identified the World Bank and the ADB as international organisations pressuring

them to adopt IFRS (Mir and Rahaman, 2005).

Upon the recommendation from the World Bank, the country decided to ratify the law

to adopt IFRS as mentioned by the chairman of the Board of Agency (BOA) during the

interview:

“ROSC report suggested many things. They reviewed our accountancy law. [...]

they said that the recommendation is for the Philippines to adopt IFRS by law. So

there was the accountancy law in 2004 which prescribed adoption of IAS and best

practices. So it’s adoption by law. But prior to that, our SEC had committed in

their IOSCO meeting saying that we will adopt IFRS, we will adopt these rules, it

is a commitment of the government. Apart from this commitment, the ROSC team

came over and suggested that we study what will be good for the country and the

consultant at that time recommend that we should adopt IFRS and we have to have

a law to make it enforceable.” “The Chairman of BOA, Interview 11th February

2011).


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The Philippine Congress ratified an Accountancy Act in 2004 providing a mandate for

the BOA to adopt international accounting and auditing standards. The Accountancy Act

2004 (otherwise known as the ‘revised accountancy law’) stipulated the power and

functions of the BOA in Section 9 of its documentation. The main function of the BOA

was stated to develop accounting standards and regulate the accountancy profession in the

Philippines. The adoption of international accounting standards was mandated by the Act,

requiring the BOA:

To monitor the conditions affecting the practice of accountancy and adopt such

measures, including promulgation of accounting and auditing standards, rules and

regulations and best practices as may be deemed proper for the enhancement and

maintenance of high professional, ethical, accounting and auditing standards:

Provided, that domestic accounting and auditing standards, rules and regulations

shall include the international accounting and auditing standards, and generally

accepted best practices; (The Philippines Accountancy Act 2004 Section 9 (g)).

The BOA delegated the authority to develop and promulgate the accounting standards

to the ASC. Although the Accountancy Act did not explicitly state that the international

accounting standard had to be IFRS, the Philippines has been harmonising their standards

with IAS for several years and as the IFRS has also been recommended by the ROSC, the

members of the board decided to adopt IFRS. The transcript of the interview with one of

the ASC's former members depicted her interpretation of the Accountancy Act as follows:

Interviewer: Why do you think the Accountancy Act 2004 stipulated that you

have to adopt [a set of] international standards?

Respondent: (…) One of the functions of the Board of Accountancy is the

standardisation of best practices, which includes international

standards. Not only domestic, but international. The emphasis was

there.

Interviewer: But US GAAP is also an international standard.

Respondent: But there was no ruling at that time that we have to adopt US

GAAP. We did have in our law there was no mention as to what we


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should adopt. So, at that time, they didn’t feel the need to put the

law to adopt US GAAP. Because I mean… We were born with it.

So nobody questioned why we are adopting US GAAP.

Interviewer: But nobody asks questions as to why we are adopting international

accounting standards?

Respondent: Nobody. Because actually I think the belief is that if it’s

international, it’s not just US. It’s all other accounting bodies.

- Member of the ASC on the period of 2004-2011, Interview 11th February 2014

Most of respondents in the Philippines mentioned that there was not any strong

rejection from the stakeholders around 2005 when IFRS was implemented. As reflected in

the interview below with the chairman of the Philippines auditing standard-setter, who

was also an audit partner of one of Big Four firms in the Philippines:

Interviewer: Is there any reservation from the industries in 2004-2005?

Respondents: Perhaps at that time not yet. They were not aware.

- Interview with the chairman of the Philippines Auditing Standards Board, 30th

November 2012

6.2.3 The transition period: 2001-2005

The adoption of IFRS had also encouraged the establishment of new accounting

standard-setter in the Philippines. The derivative of the Accountancy Act 2004, R.A 9298

created the new FRSC which replaced the ASC. The FRSC was formally established by

the BOA in 2006 while the ASC was a less-formal council established and funded under

the PICPA. The ASC had been created in 1981 as an initiative of the chairman of SGV at

that time, who later became the chairman of the ASC for 28 years. In contrast, the FRSC

limited the membership terms to three years, including the term of chairman, although

memberships were renewable. In August 2006, the FRSC established the Philippines

Interpretation Committee (PIC) to assist the FRSC in issuing implementation guidance on


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PFRSs (Philippines Financial Reporting Standards). While FRSC members were

appointed by the BOA, members of the PIC were appointed by the FRSC.

After a gradual adoption which began in 2001 the FRSC completed adoption of the

IFRSs issued by the IASB in 2005. That year, all companies both listed and non-listed

were required to adopt IFRS as published by the IASB at that time with very little

transitional relief provided. The transitional relief included the permission to amortise the

transitional liability for defined employee benefit planning for a period up to five years.

Commodity hedges of mining companies entered into prior to 2005 were exempted from

accounting under IAS 39 and for trust fund assets, the valuation provisions only applied as

of 31st December 2005.

The interest of accountants and preparers in general in participating in the debate over

accounting standards development was very low in the Philippines. Mostly, the exposure

drafts were approved without any feedback or comments from stakeholders according to

one of the respondents.

Interviewer: Did you get any feedback, comments (from the exposure

drafts)?

Respondent: “Zero to very few, based on my personal experience. “

Interviewer: “why do you think people didn’t comment?”

Respondent: “I think it’s more of because of a lack of interest. Sometimes,

they raised concerns or issues when the standards were

already adopted”

- Past Member of IFRSC, Interview 14th February 2014.

Another respondent in a separate interview provided a similar answer:

“We posted on the website the ED, and we used the same deadline as the IASB.

Normally we usually don’t get any feedback.” (FSRC Secretariat Staff, interview

12th February 2013).


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Lack of response from stakeholders does not necessarily mean that users of the

standards were not confronted with technical accounting issues. For example, in the case

of certain complicated standards, instead of raising their concerns to the FRSC, some

companies contacted their auditors. The auditors, especially if they are among the global

Big Four firms would try to answer their client’s questions through their firm’s global

network, or the partner of the firm will raise the issue with the FRSC.

“The reason, probably, why we didn’t get comments is… companies here if they

want to comment, they post it to the auditors. And normally in the Big Four we

have the process of comment. If we have questions, we write on the comments of

EY. We have the network, we send them to EY, and EY consolidates the comments

and sends it to the IASB. I guess that’s how companies here do it…” (Partner of

SGV (EY), Interview 12th February 2013).

Although the IFRS adoption process may have been perceived as fast and ambitious in

the Philippines, two respondents revealed that there were some reservations closer to the

adoption time, dated 1st January 2005. One of the partners of SyCip Gorres Velayo & Co

(SGV), a member firm of Ernst and Young Global Limited since 2002, who was close to

some key decision-makers in the Philippine’s SEC shared his recollections about these

delicate moments in December 2004.

“Yes, (what Philippines had in 2005 was a) big-bang approach. But, it is not as big as

if we had not done our homework earlier. But, it’s still difficult. Because I think I even

recorded, up to the last minute up to December of 2004, when there was still no clear

issues whether it goes or not. So as far as SGV’s concerned, we were ready. But, if

given the choice, we would rather have had more time. But at the same time, we’ve got

SEC Philippine government’s commitment to IOSCO that by 2005 (made) years ago.

And, I think that time there were lobbyists from several sectors, telling the SEC, can

you defer (...) I was talking to some of my friends in the SEC around this time. So, I

think if I am not wrong the SEC memo came out in the last week of that year and the

BSP [Bangko Sentral ng Pilipinas, the central bank] also said, “Okay, we will be

adopting IAS or IFRS 2005, effective from 2005.” (A partner of SGV, interview 12th

February 2013).


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Surprisingly, Washington SyCip the founder of SGV offers a different perspective of

full IFRS adoption in Philippines. As a nationalist, a founder of SGV who is now living

mostly in Washington D.C, SyCip argued that the Philippines does not have to make its

own unique standard but he also went against the full adoption of IFRS word for word.

SyCip expression during the interview:

“What you do must be good for the country. They [ASC] should not adopt

everything. They should do... so (they should) say we adopt this we adopt that, this

we disagree…They should see whether it is applicable or not, it does not matter it

is IFRS or US GAAP. I am not object to foreigners or to foreign capital.”

(Interview with Washington SyCip, 16th February 2013).

6.2.4 The implementation period beyond 2005: New option for non-listed companies

Starting in 2005, IFRS was used in the Philippines with some minor transitional relief

for the standards on employee benefits and financial instruments. However, as most

companies in the Philippines are small and medium-sized enterprises, IFRS was a

particular challenge26. When the Philippines adopted IFRS in 2005, IFRS for SMEs had

not been issued by the IASB. Thus, IFRS became the only standard available for both

listed and unlisted companies.

When IASB issued the IFRS for SMEs in 2009, the Philippines adopted it which

effective from January 2010. Nevertheless, SMEs in the Philippines had already endured a

tough transition time in learning and adopting IFRS in 2005. When the IFRS for SMEs

became an available option for SMEs, there was some confusion amongst SME

practitioners in the Philippines as they had just learned IFRS. As stated by the Director of

the PICPA:

“In 2005, we found ourselves studying all of these (IFRS) because they made it

apply. Well in fact 80% of them (companies) are SMEs, so everybody got confused

and they started using IFRS even for small companies. I said the best thing that

26 Interview with an auditor in the Philippines who serve SME clients, 5th March 2013.


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ever happened (to the Philippines) was in 2009 (when) IFRS for SMEs came.

Everybody was surprised. So now everybody who (started) to get used to IFRS and

moved to IFRS in full, has to move to IFRS for SMEs. So everybody was still

confused. It’s really chaos. I think, even IFRS for SMEs, it should not really be

applied to the really small one (companies), we have to retain the old system for

small ones at least” (Director of the PICPA, Interview 30th November 2012).

In summary, the IFRS adoption in the Philippines had a strong legal mandate following

the ratification of an act of parliament and the clear support of the government. The

Philippines SEC took the initiative to declare the country’s commitment of IFRS adoption

to IOSCO. The biggest accounting firms in the country played a significant role during the

transition period in convincing key decision-makers to go ahead with the decision. Table

X below provides the time line of IFRS adoption in the Philippine. The case of Brazil

offers a different insight from the Philippines as will be discussed in the next section.

Time

Institutions

Decision

1999-2000

Philippine Accounting

Standard Council (ASC)

Adopting IAS in piecemeal basis

1998/1999 Philippines SEC Gave commitment to ISOCO for IFRS

full adoption by 2005

2001 World Bank ROSC was issued providing

recommendations for IFRS full adoption

2001-2004 ASC Starting to adopt IFRS in stages

2004 Philippine Congress Accounting Act was ratified, stipulated

the adoption of international accounting

standards.

2005 ASC IFRS was adopted in full to Philippine

GAAP and IFRS was mandatory for all

companies

2006 Board of Accountancy Established FRSC, the new standard-

setter replacing ASC.

2010 FRSC IFRS for SME is adopted for non-listed

companies in the Philippine.

Table 8. Timeline of IFRS adoption in the Philippines


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6.3 IFRS adoption in Brazil

Brazil, the 7th largest world economy in 2013 has enjoyed high economy growth over

the last decade. In 2012, Brazil had 353 listed companies in its capital market and

although Brazilian companies listed on US stock markets have been decreasing over the

last five years, there were still 26 Brazilian companies listed on the US bourse in 2012

(SEC,2012). The country has been strongly influenced by Anglo-American audit firms in

the past, with such firm bringing with them a strong tradition of audit procedures and

manuals, and the habit of giving training courses to companies on accounting standards

and procedures (Iudícibus and Lopes, 2004 as cited in Beuren and Klann 2010). All this

resulted in certain similarities between the accounting procedures adopted in Brazil, and

those already established under US GAAP (Beuren and Klann, 2010).

However, the US influence came to Brazil only in the 1950s. Prior to 1950s, pre-

modern Brazilian accounting practices had been influenced by European countries (Italian

accounting). Since the end of the 19th century, Brazilian accounting had been influenced

by Italian equity theory which had certain laws in principles (Rodrigues et al., 2012).

Accounting education in the universities was also influenced by Italian accounting. The

heavy influence of continental accounting in Brazil led to accounting practices being

largely governed by tax and corporate law, as well as by regulations formulated by

governmental bodies such as the Brazilian central bank and securities commission

(Niyama and Silva, 2005).

In the 1950s, the US became the most important international partner for Brazil in

building key industrial sectors. The introduction of the automobile industry in Brazil at the

end of 1950s brought with it the adoption of American accounting practices (Rodrigues et

al., 2012). In the period of ‘Target Plan’ between 1955 and 1963, Brazil enjoyed high

economic growth. As more US subsidiaries came to Brazil, accounting education also

started to shift from an Italian to an American approach.

In 1964, Professor Jose Da Costa Bouncinhas of the University of Sao Paulo

introduced a new accounting teaching method following American accounting textbooks.

Accounting education in Brazil started to depart from the Italian school of thought and


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was replaced by American influences. In the late 1960s and the 1970s the Brazilian

volume of trade with the US increased significantly and the influence of US accounting

practices became stronger (Rodrigues et al., 2012).

The modern history of accounting in Brazil began in the mid-1960’s building on the

development of the capital market27 and other reforms in the financial system. These

reforms in the Brazilian financial system included the legal requirement for listed

companies to be audited, the requirement for listed companies to comply with the financial

reporting standards issued by the central bank of Brazil and the enactment of corporate

law28 which was strongly influenced by US GAAP (Carvalho and Salotti, 2012). As will

be explained throughout this chapter, the Brazil’s central bank, Banco Central do Brazil

(BCB) has been an important standard-setter and played an important role in the IFRS

adoption process. In 1972, BCB issued Resolution 220 which included Circular 179

which, for the first time, officially mentioned ‘Generally Accepted Accounting

Principles’. Following the central bank resolution, the Federal Accounting Council’ (CFC)

also issued Resolution 321-72 which adopted the concept of GAAP. In both resolutions,

GAAP was not defined as the US GAAP, however de facto common understanding of

GAAP in the resolutions was US GAAP as taught in accounting education.

The American influence on Brazilian accounting standards was reinforced in 1976

with the enactment of a new Corporation Law (Law 6404). The new law is regarded as a

copy of the Model Business Corporation Act from the US (Rodrigues et al., 2012) and

pivotal in laying strong foundations in the Brazilian capital market. The Brazilian

Securities and Exchange Commission (Comissão de Valores Mobiliários / CVM) was

established in 1976 with the enactment of law 6385 using the regulations similar to those

that were used to create the US SEC (Da Silveira, 2014).

The similarities between US GAAP and Brazilian GAAP were reflected in two capital

market studies. Beuren and Klann (2010) tried to compare Brazilian GAAP with US

GAAP in the areas of recognition, measurement and disclosure requirements. They

compared financial statements of Brazilian listed companies which had dual listing in

27 First Capital Market Act was issued in 1965 (Law 4.728/65) 28 Initial Corporation Law was ratified in 1976 (Laws 6.385/76 and 6.404/76)


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Brazil and the New York Stock Exchange (NYSE). The authors found that financial

statements of 2004-2005, respectively using Brazilian GAAP and US GAAP did not have

any significant differences. Research by Bandyopadhyay et al. (1994) also failed to find

any significant differences between income figures under Brazilian GAAP and US GAAP.

The CFC, as the national accounting profession's organisation produced fundamental

accounting principles in 1981 to replace the term GAAP in the previous Resolution. As

they were ‘compulsory’ and not only generally accepted, the CFC stated that the principles

should be called ‘fundamental’ and they were considered to be necessary in harmonising

accounting principles prevailing in Brazil at that time (Rodrigues et al., 2012). In 1993,

the CFC issued another Resolution replacing the 1981 Resolution, and defining seven

basic accounting principles. However as argued by Niyama and Silva (2005) resolutions

issued by the CFC did not have a strong legitimacy, with the compliance with regulatory

requirements being more important for the financial report preparers. The relationship

between tax reporting and financial reporting was very strong in Brazil. Some Brazilian

companies refused to employ certain acceptable accounting principles for the fear that

they would be challenged by the tax authorities (World Bank, 2005).

Prior to the adoption of IFRS, Brazilian GAAP was very hard to comprehend as

there was no single accounting standard-setter. Before the establishment of the Committee

of Accounting Pronouncements ( CPC) in 2005, there were several different regulators for

firms of varying size and structure and each company was required to follow the

accounting standards issued by their respective regulators. Table 9 below presents the

accounting standards in Brazil before 2005.


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Regulatory

agency

Accounting and

Financial

Reporting

Standards

Audit requirement

Listed Corporations

(S/A)

CVM

BOVESPA

Corporation Law

CVM rule

COSIF

Yes, by auditor registered

with CVM

Non-listed

corporation (S/A)

- Corporation Law No

Limitadas - Civil Code No

Financial

Institutions

BCB Corporation Law

COSIF

CVM rules


with BCB and CVM

Investment Funds CVM Corporation Law

CVM rules

COSIF


with CVM

Insurance

companies and open

pension funds

SUSEP Corporation Law

CNSP/SUSEP

rules

Yes, by Auditor regulated

with CVM

Closed Pension

Fund

SPC CGPC rules Yes

State-Owned

Enterprise

Ministry of

Planning – DEST

(all)

CVM (listed SOE)

Law that creates

respective SOE

Corporation Law

(for listed SOE)

Yes (Listed SOE)

No (Non-listed SOE)

Table 9. Accounting standards applied in Brazil prior to IFRS adoption

Source: World Bank ROSC 2005

US GAAP was popular among listed companies in Brazil and had been perceived by

the stock exchange as an international standard. The Sao-Paulo Stock Exchange

(BOVESPA) believed that companies preparing and disclosing their financial reports

under internationally recognised standards, i.e. IFRS or U.S. GAAP, would obtain greater

visibility among investors. BOVESPA in 2001 introduced Novo Mercado, the highest

listing segment designed for shares issued by companies that voluntarily undertake to

abide by corporate governance practices in addition to those already requested by

Brazilian law and CVM. One of the additional obligations for Novo Mercado was the

disclosure of a balance sheet, in accordance with US GAAP or IFRS. According to the

World Bank, 54 listed companies in the Novo Mercado segment reported under US GAAP

and only one company chose IFRS (World Bank, 2005). According to the World Bank

report, in 2005, Brazilian GAAP was also less aligned to IFRS compared to its Chilean

and Mexican counterparts.


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In terms with the accounting profession development in Brazil, the CFC is the national

regulator. CFC was created by Law No 9,295 on May 27, 1946 and served a similar role

to the BOA in the Philippines. Accountants are regulated by the CFC through each

regional entity or each state in which each state plus the relevant federal district has

representatives sitting in the council. CFC and IBRACON (Brazil’s Auditor Association)

played a crucial role in the IFRS adoption process in Brazil. IBRACON is the official

entity authorised to translate and publish annual IFRS as issued by the IASB 29 and

therefore it has had a major input in CPC pronouncements30.

6.3.1 The harmonisation period: Before 2006

Before deciding to adopt IFRS in 2007, Brazilian GAAP effectively derived from a

variety of sources, including corporation law and the standards and interpretations issued

by up to eight different institutions. This was highlighted by the World Bank as inefficient

for creating duplication of effort and lack of comparability, clarity and consistency of

financial statements (World Bank, 2005). Brazilian authorities chose to abide by the

World Bank recommendation to adopt IFRS and to set up a single accounting standard-

setter immediately.

Prior to 2005, Brazil did not have one single authority concerned with accounting

standard setting, thus the de facto accounting standard-setter in Brazil was the BCB and

the CVM. The BCB is a powerful institution which supervises 2,078 financial institutions

as of December 201231. Along with the Brazilian SEC, BCB was responsible for issuing

accounting standards and guidance for financial institutions and non-banking listed

companies, respectively.

The decision to harmonise Brazilian standards with the IAS originated at the BCB. An

interview with Amaro Gomez, a former head of the financial system regulation

department of the BCB revealed that the discussion to adopt IFRS for financial institutions

in Brazil started around 1995. In March 2006, the BCB issued Communiqué no. 14.259 to

29As stated in jurisdiction profile published by the IFRS Foundation in their website: www.IFRS.org 30 Mentioned by one of the respondent, member of CPC. 31 Management report of Central Bank of Brazil 2012, available at :

http://www.bcb.gov.br/pre/Surel/RelAdmBC/ing/management_report_2012.pdf, accessed 21st April 2014

http://www.bcb.gov.br/pre/Surel/RelAdmBC/ing/management_report_2012.pdf


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require all financial institutions (including banks, leasing companies, savings and loans

institutions and credit unions) to prepare their consolidated financial statements under

IFRS, effective for the calendar year 2010 (CReCER, 2007).

“The decision by the central bank, in Communique 14.259, was formalised in 2006

but it was a longer discussion about the adoption of IFRS, which started in 1995.

Why 1995? We started discussing [in this department], after the economic

stabilisation process in Brazil, in regard with accounting what would be the best

model of international accounting to be used in Brazil” (Amaro Gomez, Interview

13th July 2014).

In 2002, another department of the BCB established a project to adopt IFRS for their

2006 annual report. The unit in charge of the project was the Financial Administration

Department (DEAFI). The BCB hired Ernst and Young as its consultants for the project32,

and set a target goal in 2003 to publish IFRS based financial reports by 2006. This

adoption of IFRS by the BCB in 2006 was a crucial influencing factor which led Brazilian

President Lula Da Silva to pass the bill on the new accounting law.

In parallel with the regulators moving closer to IFRS, the national accounting body,

Federal Accounting Council (CFC) decided to bring together all standard-setters and

created one single authority in the form of a new council: Comitê de Pronunciamentos

Contábeis (CPC). The CPC was duly established on the 19th October 2005 with the

mission to streamline the process of accounting standard-setting. The CPC is made up of

representatives from the Brazilian association of publicly owned companies (ABRASCA),

the association of analysts and professionals from the capital investments market

(APIMEC), the São Paulo stock exchange (BOVESPA), the Federal Accounting Council

(CFC), the Foundation Institute of Accounting, Actuarial and Financial Research

(FIPECAFI) and the Institute of Independent Auditors of Brazil (IBRACON).

32 The decision to adopt IFRS for BCB financial report is based on BCB Vote No.235/2002. The plan of

the adoption project is available at: https://www.bcb.gov.br/ingles/adequa/projeto_ingles.pdf, accessed 21st

April 2014.

https://www.bcb.gov.br/ingles/adequa/projeto_ingles.pdf


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However the first pronouncement issued by the CPC was in 2008 after the decision on

IFRS had been made. Specifically the aim of CPC stated in CFC Resolution No 1.055/05

is to:

To study, the preparation and issuance of Technical Pronouncements on accounting

procedures and dissemination of such information to enable the issuance of

regulations by the Brazilian Regulatory Authority, aimed at centralizing and

standardising its production process, taking into account the convergence of Brazilian

and International Accounting Standards. 33(CFC Resolution No.1.055/05, Article 3).

Between 2006-2007, the BCB and the Brazilian SEC, together with the insurance

regulator SUSEP made a decision to require all companies under their authority to prepare

and make consolidated financial statements based on IFRS as from 31st December 2010

(Carvalho and Salotti, 2012). Thus, listed companies and financial institutions started to

prepare for IFRS adoption.

6.3.2 The decision-making period: 2007

In December 2007, Brazil issued a major amendment to its corporation law which

marked an important milestone in the adoption of IFRS. Law No 11638 was labelled by

Carvalho and Salotti (2012) as “the most ambitious piece of legislation dealing with

accounting in the past 50 years”. The new law required almost all companies in Brazil to

adopt IFRS; listed and non-listed companies, as well as large (as defined) limited liability

companies.

The bill was passed on the 28th December 2007 with an effective date of 1st January

2008. The timing, lack of a transition period and the degree of IFRS adoption was taken as

a surprise by the people it affected, as one of respondent stated:

“We were surprised with the time because we were expecting that it would be

(enacted) in early year of 2008. Instead they enacted the law in 2007 to be

implemented right after two or three days. It was quite chaotic. For example, listed

33 Excerpted from CPC website at 18th April 2014: http://www.cpc.org.br/CPC/CPC/Conheca-CPC


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companies, they have to adopt it for their quarterly financial statements. CVM then

gave them relief to use the old GAAP (for the first quarterly financial statements of

2008)” (Member of CPC, Interview 19th September 2013).

One member of the CPC, Eliseu Martins, had also been involved in the working group

on the revised corporation law, and he shared an interesting behind-the-scenes story of the

ratification of the new law in 2007. Bill No. 3741 had been discussed in Congress for

seven years since 2000, however, the main reason for resistance from limited companies

in Brazil which emerged during long debates, was not about adopting IFRS but about the

requirement to publish the summary of financial reports for all type of companies in the

national newspaper. Most Brazilian companies have said that publication on their

company website is sufficient, especially for non-listed companies, as newspaper

advertisements are expensive.

Eliseu Martins recalled that, in July 2007, President Lula received enquiries from the

audience in the World Economic Forum meeting in Davos, Switzerland about the use of

IFRS in Brazil. The audience highlighted that China was moving towards the use of IFRS.

After that session, the president summoned his financial minister, who also attended the

Davos meeting and asked him about the status of IFRS adoption in Brazil. The financial

minister duly had conference call with the president of the BCB and the president of the

CVM from Davos. The president of the BCB then said that they were aware of IFRS and

in fact had already used IFRS to produce their own financial report in 2006.

According to Eliseu Martins, the president of CVM told President Lula about the fact

that Brazil had a bill for the adoption of the new company law in congress since 2000 but

it had not been ratified. The bill included the requirement to adopt IFRS. President Lula

firmly believed that the bill should be ratified and upon his return from Davos in July

2007 the bill’s enactment progressed very quickly. In 28th December 2007, the president

signed the law which was to be effective by 1st January 2008.

Although pressure from the president, was pivotal in the decision to adopt IFRS,

members of parliaments also sought a great deal of input from individuals who were


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supporters of IFRS34. Among them was names such as Roberto Taixeira da Costa (a

trustee member of the IFRS foundation), who was invited to speak at the first public

hearing on 20th August 2003. Amaro Gomez, was also invited to the third public hearing

of the bill on 17th May 2007 and he later became a member of IASB in July 2009.

The arguments raised in parliament in favour of the bill to adopt IFRS were

widespread, including its adoption in many countries after the Asian financial crisis, and

the mega accounting scandals of US corporations. The decision from other jurisdictions

who had adopted IFRS (the bill mentioned the European Union, China and Russia) as well

as the convergence efforts between the IASB and the FASB (following the signing of their

MoU in 2006) were highlighted in the bill as incentives for Brazil to adopt IFRS35. It is

important to note that there is no evidence of any specific references to the quality of IFRS

when the bill was discussed in the period prior to adoption.

In the interview, most respondents admitted that there was no strong resistance to the

adoption of IFRS in Brazil, as being stated by one of respondent below:

“I would say that there were some arguments. But it was very, very, very small.

During the public hearings (of the bill), all, even the private companies listed in

the US they were in favour for IFRS adoption. That little argument is not

something IFRS versus US GAAP. It was just people saying that our accounting is

good and they think it is not necessary to go to international level as it brings a lot

of problems. We will lose our ability to do our own accounting and some

arguments like those.” (Eliseu Martins, Interview 21 October 2013).

Another member of the CPC from IBRACON, also mentioned that auditors in Brazil

supported the adoption of IFRS. This was despite the close relationship between the

Brazilian auditing firms and their US counterparts:

34 Page 5 and 7 of document PRL 1 CFT – PL 3741 – 2000 document available from

http://www.camara.gov.br/proposicoesWeb/prop_mostrarintegra?codteor=447237&filename=PRL+1+CFT+

%3D%3E+PL+3741/2000 (accessed 18th April 2014) 35 Page 7, ibid.


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Interviewer: If we are talking about before 2007. I guess there are many Brazilian

auditors that are expert in US GAAP more than [those who are] experts

in IFRS?

Respondent: Sure.

Interviewer: How did they react when Brazil made the decision to adopt IFRS?

Respondent: They supported the decision; they were part of a decision process. So,

not a big deal. In the IFRS world, if you were expert in US GAAP, your

transition is easier than when you are expert in IFRS then you learn US

GAAP

- Member of the CPC, Interview 19th September 2013.


Compared to other countries in this study, Brazil has the shortest transition period.

Upon enactment of the law, the CPC started to work on adopting IFRS, issuing the first

‘batch’ of accounting pronouncements based on IFRS in 2008. During 2008-2009, the

CPC translated all existing IFRS into Portuguese. Some accounting options in IFRS were

carved-out in the adoption process such as the revaluation model in IAS 16 Property, Plant

and Equipment and IAS 38 Intangibles Assets. Thus, the historical cost model has been

the only measurement option available for property, plant and equipment and intangibles.

On 13th July 2007, the CVM required listed companies to publish their consolidated

financial statements according to IFRS, starting with reporting periods ending in 2010.

Use of IFRS (in Portuguese) would be optional for listed companies from 2007 through

2009. Starting in 2010, Brazilian GAAP ceased to exist and all listed companies were

required to use IFRS. IFRS for SMEs in Portuguese was adopted in 2009 as an option for

SMEs in Brazil.

The year 2008-2010 have been acknowledged as the transition period with full IFRS

adoption in Brazil for financial statements to be completed by the 31st December 2010.

The two year transition period was too short according to another member of the CPC:


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“(For the transition period) I think it needs at least five years. As if you have to

make it a decision, I think you need five years at least and not go to all ways. But I

think you have to keep the simplified GAAP, like other countries are doing.[In the]

UK they still have their UK GAAP for unlisted company.” (Member of CPC,

Interview 19th September 2013).

On 28th January 2008, MoU between IASB, CFC and CPC was signed to improve the

cooperation between the IASB and CPC. One of the clauses in the MoU is excerpted

below:

The CPC and the IASB will establish a formal and continued dialogue, including

regular and periodic face to face, video or telephonic meetings between their

representatives, in order to enhance co-operation and foster greater participation

in the international standard-setting process from Brazil with the ultimate goal of

ensuring acceptance, expediting adoption, and facilitating proper implementation

of new standards or improvements to existing IFRSs under development or to be

developed by IASB. (MoU between IASB, CFC and CPC, page 10).

Although most of stakeholders did not resist for the adoption of international

standard, such transition with only two-year period training was not an easy process for

most companies in Brazil. Accountants with IFRS expertise were scarce which make some

of accounting firms needed to import accountants from Europe to Brazil36. The short

transition period also brought challenges to the accounting education system in Brazil

because the academics and students had been studying “rules-based” accounting standards

(Carvalho and Salotti, 2012). One of the respondents identified the first two-year

transition as “a lot of challenge. It’s not easy”37 . Table 10 below provides the timeline of

the IFRS adoption process in Brazil.

36 Interview with member of CPC and partner of big four auditing firm, 19th of September 2013. 37 ibid


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Time Institutions Decision

2002 BCB Published their own financial report according to IFRS in

December 2006.

3rd October

2005

CVM Issued Deliberation 488. Article 177, para.5 established that

rules issued by CVM should be developed in line with

international accounting standards adopted in major

international securities markets.

7th October

2005

CFC CFC Resolution 1055, The establishment of CPC as the

accounting standard-setter in Brazil

March 2006 Central Bank

of Brazil

Financial intermediaries under its supervision should publish

consolidated accounts in compliance with IFRS by December

2010.

July 2007 President Attended World Economic Forum in Davos, Switzerland and

received enquiries about the status of IFRS adoption in Brazil.

December

2007

Congress New Legislation of Law 11,638 was enacted requiring all listed

companies and all profit-oriented companies who meet certain

requirements to adopt IFRS progressively from 1st January

2008.

28th January

2010

IASB, CFC

and CPC

An MoU was signed to establish “principles of future

cooperation aiming at supporting adoption of IFRS in Brazil

and fostering CPC engagement in the international accounting

standard-setting process”

Table 10. Timeline of IFRS adoption in Brazil

6.3.4 The implementation period beyond 2010: Onerous application of few standards

The implementation period in Brazil was identified by respondents as having been

chaotic. There were a few IFRS new standards which were problematic in Brazil. IFRIC

12 Service Concession Arrangements and IFRIC 15 Agreements for the Constructions of

Real Estate were problematic in Brazil as equally they were difficult to implement in other

countries such as Indonesia and the Philippines.

One of the Brazilian top executives, an accounting controller of a big transportation

company in Brazil shared his view early in the first year of implementation.


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“Absolutely chaotic. We work[ed] very closely with KPMG, doing a lot of

diagnosis. The transition is very short but it was two steps. It was absolutely

chaotic. Depends on the industry, for manufacturing it was no impact. For my

sector, concession was heavily impacted by IFRIC 12. There were huge changes in

the financial statements. Another problem was also with IFRIC 15, huge

problem.” (Brazilian Top Executive, interview 14th July 2014).

Brazil also had implementation challenges with accounting for industries which was

highly regulated by the governments such as utilities companies. Some industries are rate

regulated by the government rules and the entities in such industries were identified as

rate-regulated entities. Rate regulated entities are usually quasi-public sector companies,

such as utilities companies, who provide public services. These companies are usually

owned by the government and provide goods and services which are regulated in term of

price (such as the price of electricity or water), quality or cost of production. In some

countries, companies are allowed to capitalise cost to maintain a certain standard of

quality. The cost then will be recovered in the future based on the new negotiated price.

The account to capitalise these cost is Regulatory Deferrals Account (RDA which may

create Rate Regulatory Assets (RRA) or Rate Regulatory Liabilities (RRL). The practice

varies among countries; some allow utilities companies to recognise RRA and RRL while

other countries do not.

Prior to the adoption of IFRS, Brazilian companies’ booked RRA in their balance

sheets. IFRS did not have a specific standard about rate regulated activities back then in

2010, so most countries including Brazil and Canada adopted US GAAP which allowed

such accounting policy. Rate regulated assets were usually on the balance sheet of

companies in the regulated industries who perform public services on behalf of

governments. In the adoption year, these assets were written off as the consensus among

the Big Four accounting firms was that they were not assets according to the IFRS

Conceptual Framework. According to Big Four in Brazil, such assets could not satisfy the

definition of assets in the IFRS conceptual framework.

However, due to lobbying from stakeholders, mainly from Canada, the IASB in April

2013 issued an exposure draft of IFRS 14 Regulatory Deferral Accounts which allowed


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the use of local GAAP until the IASB issued a comprehensive IFRS about rate regulated

activities. In January 2014, the IASB ratified and issued IFRS 14, but it did not allow

retrospective application which meant Brazilian companies could not put back the assets

and liabilities which had been written off from their balance sheet. Two Brazilian

respondents expressed their frustration during a separate interview.

“Billions of reals were written off. Brazilians are pissed off.“(Brazilian top

Executive, interviewed 13th July 2014).

“They complain … from Brazilian electricity companies, at the end we adopted

(IFRS) earlier and we are required to rip-off all the (regulated) assets and

liabilities because they’re not IFRS compliant. And in a couple of moments later,

they are going to be allowed to retain those assets. It’s not fair.” (IFRS Foundation

staff from Brazil, interviewed 8th September 2013).

The Brazil’s acquiescence to adopt IFRS in full despite the onerous implementation

period was similar to the Philippines. Both countries applied no carve outs in IFRS and no

industry was excluded from mandatory application. Both countries were very committed

to full adoption of IFRS. However the case of rate regulated activities and the success of

the Canadian lobby encouraged Brazil to get tougher in negotiations with the IASB to

allow the use of the equity method in separate financial statements.

“No carve outs (in IFRS adoption), no restrictions, but you can see that the

comment letters from [the] CPC to [the] IASB are getting tougher and tougher.

[The] CPC has [concerns with) this equity thing, you can see they are raising their

tone” (IFRS Foundation Staff from Brazil, interviewed 8th September 2013).

One of the gaps between Brazilian Corporate Law and IFRS is the use of the equity

method to measure investments in subsidiaries. Under IFRS, separate financial statements

only use the fair value or the cost methods to measure investments in subsidiaries while

Brazilian Corporate Law only allows the equity method. After the adoption of IFRS, the

CPC lobbied IASB to bring back the equity method as an option in IAS 27 Separate

Financial Statements. After two years of lobbying, the IASB finally included its

amendment in their agenda in 2012 and it was approved on 12th August 2014. The CPC


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chose to lobby the IASB to amend the standard than initiate the amendment of the

Corporate Law.

Upon the adoption of IFRS, Brazil improved its position in the international arena. It

became an active member of GLASS (Group of Latin American Accounting Standard-

setters) established in 2011 and gained more representation in the IFRS-making arena. For

example, Amaro Gomez was appointed as an IASB member in July 2009 and Carl

Douglas as an IFRIC member in 2014. They are the only representatives from South

America on the IASB and IFRIC.

6.4. Discussion: A strong legal mandate has encouraged adoption

Before the adoption, Philippines and Brazil went through the harmonisation process.

In the harmonisation process, countries assessed each standard individually, and made

necessary adjustments to the standard based on the specific needs of stakeholders. In the

harmonisation period, countries still retained their local unique standards which were

mostly based on US GAAP. The first IFRS adopted in the Philippines in 1996 during the

harmonisation period was a standard on employee benefits. Each country assessed which

standard they needed the most, and investigated whether there was an IFRS based standard

that was relevant for their need. If IFRS did not regulate such a transaction, then they

looked to other GAAPs, (arguably the most sophisticated GAAP available in the 1990s, it

was US GAAP). As a member of the FRSC in the Philippines explained:

“The framework (IFRS Framework) provides that if there is no standard in the IAS

that is applicable and there is a need to adopt this particular accounting

treatment, you can refer to other acceptable standards, for example US GAAP and

other standards that will be applicable, for example business combinations under

common entities. We adopted the US standard on that, since we don’t have it until

now under the IFRS. They (companies) just have to refer to particular acceptable

standard, which was the U.S. GAAP” (Member of FRSC from the Philippines

SEC, Interview 14th February 2014).


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The harmonisation with IAS was a conspicuous trend in the 1990s for countries who

decided to adopt IFRS later in the next decade. Australia, for example, has a similar

timeline with the Philippines. Australia harmonised its standard with IAS on a standard by

standard basis in 1996 before fully adopting IFRS in 2005 (IFAD, 2002). Indonesia which

was also used as a sample in an International Forum on Accountancy Development

(IFAD) study started their harmonisation with the IAS in 1994. Further details on

Indonesia’s story can be found in the next chapter of this thesis. The IFAD 2002 survey of

54 countries revealed that 22% of these countries harmonised their standards with IFRS on

a standard-by-standard basis in the early 2000s (IFAD, 2002).

The standard-setters in both Brazil and the Philippines are not strong institutions like

the Japanese ASBJ or the US FASB which have dozens of full time technical staff. Both

the Philippines and Brazil, compared to other sampled countries in this study have the

least resourced accounting standard-setters. The accounting standards councils in both

countries comprise of representatives of various stakeholders such as auditors,

accountants' associations, securities exchange commissions, financial analysts'

associations and others relevant stakeholders. The members of the council work

voluntarily without the support of adequate technical staff. Brazil’s CPC and the

Philippine’s FRSC were supported only by one part-time staff. In the Philippines the

technical staff of the council is on secondment from a 'Big Four' firm and still holds her

position as a partner of the firm, so she can only work part time for the council.

The World Bank highlighted a lack of dedicated resources for the ASC Philippines.

The council received miniscule funding support from the PICPA, covering only meals

during meetings and other incidentals. The ASC members served on a voluntarily basis

without any remuneration. From the six sampled countries in this study, the FRSC is the

least resourced standard-setter. With a minimal budget and no dedicated technical staff,

the standard-setter in the Philippines does not have a strong presence in the country or in

the regional standard-setting arena.

“It’s a lunch meeting usually from 12 am to 2 pm. We have quick lunch than have

meeting. Every month the council meets and then I present the new issues for the

month. They deliberate if there are any proposal that could have significant impact


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or if the changes are so significantly [different] from the current practice. So

mostly it gets approved immediately except for IFRIC 15.” (FRSC secretariat staff

Interview 12th February 2013).

IFRS which has been represented as an internationally endorsed set of standards in

Brazil and the Philippines, arguably has served as a catalyst for accounting reforms. IFRS,

which has been claimed by the IASB as a principles-based and high quality accounting

standard has improved the technical legitimacy of the financial reports produced by firms

in countries with weak standard-setting arrangements, such as Brazil and the Philippines.

By adopting IFRS both countries have benefited from bringing their accounting rules to

the international level with minimum effort.

Nevertheless, most of respondents in both countries agreed that there was almost no

resistance from the stakeholders towards the IFRS adoption process. The law served as a

fait accompli for all the doubtful stakeholders and made the transition less contested. The

Philippines Accounting Act of 2004 stipulated that one specific responsibility of the BOA

is to promulgate accounting and auditing standards, and shall include the international

accounting and auditing standards (Article 2; Section 9). The Brazilian Corporation Act

No 11638/2007 also stipulated that the accounting rules by the CVM should be prepared

in accordance with international accounting standards adopted by the main securities

market. The Brazilian Corporation Act was discussed in the congress for seven years

before it was ratified as Bill No 3741. In the Philippines the idea of revising the

Accountancy Act of 1975 was discussed for many years, but the revision process started

after the World Bank ROSC report recommended it in 2001.

With this strong legal mandate from parliament, the decision to adopt IFRS attracted

little resistance from stakeholders according to respondents. Brazil and the Philippines,

despite their strong connection to US GAAP before the adoption of IFRS, made the

decision to adopt IFRS in a relatively short period without significant debate between

IFRS supporters and US GAAP supporters. In both countries, the degree of adoption was

also ambitious, as IFRS became mandatory for all companies both listed and non-listed,

consolidated and individual financial reporting.


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In parallel with the adoption of IFRS, the institutional arrangements of the standard-

setter in the country also changed. The new law in Brazil created the new standard-setter,

CPC in February 2006 (CPC, 2007). For the first time in history the country had a

legitimate accounting standards council. The Philippines’s ASC was transformed into the

new FRSC with clearer selection criteria and a maximum period for a member to serve in

the council. Upon the decision to adopt IFRS, Brazil also improved their cooperation with

IASB by signing the MoU and seems to have better representation in the IFRS Foundation

bodies with Brazilian sitting as one of the members of the trustee of IFRS foundation,

IASB and the interpretation committee.

The improved representativeness in the international arena after the IFRS adoption

was also expressed by one of the respondent from Brazil:

“No point of return now. It is good for the country, Brazil is a full member of IFRS

countries club now [proud tone]. In 2011 I went to IFRS conference in Zurich. We

just adopted IFRS in our consolidated and individual financial report bot listed

and non-listed very massively. Since then we are IFRS princess [in attracting the

attention of the conference’s participants] […] to have representative as IASB

member also help Brazil (for example) to be aware of the IFRS standard

development” (Interview with financial report preparer of Brazilian companies,

13th July 2014).

Pressure from international organisations such as IOSCO and the World Bank for the

Philippines, or the World Economic Forum for Brazil, was pivotal in encouraging the

decision-maker to adopt IFRS. The key player in the IFRS decision-making process in

Brazil was the central bank when it started to mandate IFRS for all financial institutions

before the enactment of the law. In contrast, the biggest accounting firm in the Philippines,

SGV, played a significant role through the network of ‘SGV’s alumni’ sitting in various

key positions such as chief accountant of the Philippines SEC and the chairman of

standard-setters.


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6.5 Conclusion

This chapter discussed the ambitious IFRS adoption process in two countries where

the decisions were supported by strong legal mandates and undertaken by the newly

established standard-setter. IFRS adoptions in these two countries were relatively fast and

without significant resistance from the stakeholders. A strong legal mandate is a big factor

in rendering the IFRS adoption process efficient and unchallenged. The law which

stipulates IFRS adoption has provided support for the accounting standard-setters to carry

on their duties in adopting IFRS. The enactment of the law also provided a clear cut in

disrupting the use of old standard and providing a firm target date for IFRS

implementation.

The next chapter will discuss the case studies of Indonesia and Canada where the

decisions to adopt IFRS were not supported by strong legal mandates. The two countries

also share similar institutional arrangements such as the accounting standard-setters being

funded by the accounting profession and having strong technical legitimacy. Both

countries had an era of ‘hybrid’ accounting standards which were a mixture of the IFRS

and US GAAP before deciding to adopt IFRS fully almost simultaneously, in 2006 for

Canada and 2008 for Indonesia. Without a strong legal mandate, the accounting standard-

setters acted as the major institutional facilitators in gaining support and resources for

IFRS adoption in their respective countries.

Chapter 7. Lobbying Mechanisms in IFRS Adoption

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Chapter 7. Lobbying Mechanisms in IFRS Adoption: The Case of

Canada and Indonesia

7.1 Introduction

Chapter six has discussed the IFRS adoption process in Brazil and the Philippines,

demonstrating that the use of the legal mechanisms can lead to an expeditious and less

contested process of IFRS adoption. In contrast, Indonesia and Canada pursued the

adopting IFRS without the support of a strong legal mandate, an approach that resulted in

more challenges in persuading stakeholders to accept IFRS. Indonesia revised its IFRS

target year several times and Canada took several rounds of public consultations over two

years and a transition period of five years before finally adopting IFRS in 2011.

Canada and Indonesia have many similarities in the IFRS adoption process. Firstly, the

standard-setters in both countries were established and funded by the professional

accounting associations. Secondly, both countries had already begun harmonising their

standards with the IASC’s IAS and US GAAP in the 1990s. In 1998 Canada decided to

harmonise its standards with IAS and eliminate differences with US GAAP at the same

time (TFOSS, 1998). In 1994 Indonesia adopted the IASC’s IAS but US GAAP remained

an important reference in its accounting standards development. The decision to adopt

IFRS fully for Canada and Indonesia, made in 2006 and 2008 respectively were a highly

significant and analysing such decision is the focus of this chapter.

Indonesia and Canada encountered different degrees of pressure when they decided to

adopt IFRS and abandon US GAAP. Being more dependent on the US economy and US

GAAP, Canadian stakeholders arguably had a more difficult choice to make when they

decided to adopt IFRS. With 336 Canadian companies listed in the US (2012 US SEC

data), Canada has more companies listed in the US than any country in the world. Before

switching to IFRS, US GAAP was a much more popular standard in Canada than in


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Indonesia which may explain why there were strong objections to the decision to prohibit

US GAAP after IFRS adoption.

In general terms, it appears that that IFRS was adopted in the Canada and Indonesia

not primarily because it was of a better quality than US GAAP. Some respondents argued

that while US GAAP was a more comprehensive standard than IFRS, IFRS was more

attractive as it was perceived to be an international standard – with US GAAP being seen

as a ‘national’ standard. Recommendations from international bodies such as the G20 and

IFAC to adopt IFRS were significant for Indonesia, while Canada decided to adopt IFRS

to maintain its influence in the IFRS-making arena.

This chapter will discuss both the history of IFRS adoption in Canada, and the IFRS

convergence process in Indonesia, highlighting the lessons learned and the key processual

differences to the cases of Brazil and the Philippines. The word ‘convergence’ is used for

Indonesia in this chapter instead of ‘adoption’, as Indonesia made use of the strategy of

converting its local standards to IFRS instead of adopting them in full. Its accounting

standard-setter (DSAK) refused to refer to the process as IFRS adoption and continues to

retain a few non-IFRS local standards.

7.2 IFRS adoption in Canada

The geographical position of Canada has made the country highly dependent on the

US economy. Although Canada’s trade with non-US countries has been increasing, the US

remains the primary trading partner for Canada, with 80% of Canadian exports in 2009

going to the US (Statistics Canada, 2011). Canadian companies have always dominated

the list of foreign companies registered on the US SEC. As of 31st December 2012, 336

Canadian companies were registered in the US SEC (SEC, 2012), which has made US

SEC rules and US GAAP relevant to most Canadian companies.

US GAAP was widely used in Canada before the decision in 2006 to adopt IFRS.

Since 1991, the US SEC and Canadian Securities Association (CSA) adopted the

Multijurisdictional Disclosure System (MJDS) which made Canadian GAAP and US


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GAAP acceptable in both jurisdictions38 for qualifying companies. This implies that the

CSA accepted US GAAP for domestic reporting and US regulators accepted Canadian

GAAP for Foreign Private Issuers (FPI) without a reconciliation to US GAAP.

Initially, the Canadian environment produced generally accepted accounting practices

based on English traditions. The origins of the Canadian accounting profession are

historically related to the UK (Gaa, 2007). However, as the US economy began to

dominate the Canadian economy in the 1920s, US accounting standards started to

influence the development of Canadian accounting standards. American textbooks began

to be more influential than British texts while the rapid increase of American investment

in Canadian business also drove the usage of US accounting standards ( Zeff 1971 as cited

in Gaa, 2007). A similar pattern was evident in Indonesia where the influence of US

accounting practices replaced the Dutch influence by the use of accounting textbooks and

the increase in US investments (Yunus, 1992).

Since 1946, the Canadian Institute of Chartered Accountants (CICA) began to

establish itself as a key actor in the development of Canadian accounting standards

(Baylin et al., 1996) with accounting and auditing standards in Canada being set

respectively by three standard-setting boards: the Accounting Standards Board, (AcSB);

the Auditing and Assurance Standards Board, (AASB); and the Public Sector Accounting

Standards Board (PSAB). All three are funded by the CICA. In 2014, the CICA merged

with two other professional bodies in Canada and re-established itself as the CPA Canada

(Chartered Professional Accountants Canada).


In 1998 Canada started to harmonise its accounting standards with IAS with the

issuance of Task Force on Standard Setting (TFOSS) Report providing a new fundamental

platform for modern Canadian standard-setting. The report, issued by CICA,

acknowledged the need for a global accounting standard (p.2) and highlighted the

agreement between the IASC and IOSCO in 1995. In the agreement IASC agreed to

38 Source: SEC Release No.33-6902 (21st June 1991)


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complete a work plan encompassing a core set of standards covering the main areas of

financial reporting while IOSCO, in turn, agreed that successful completion of this work

plan will pave the way for it to review and, if found acceptable, endorse IASC standards

for cross-border securities registration. However at that time in 1998, IFRS was not as

developed as it is today and US GAAP was a prominent accounting standard globally. At

that time it was not very clear if one set of global accounting standards would eventually

emanate from the IASC, as being argued in the TFOSS report:

From a Canadian business perspective, we do not believe the IASC/IOSCO

agreement will result in the ultimate goal of internationally-accepted standards

unless it has the complete accord of the US Securities and Exchange Commission

(SEC). Failure of the agreement would, in the eyes of some, make the US Financial

Accounting Standards Board (FASB) the de facto world standard-setter in

accounting. (TFOSS report, 1998, p. 2).

The CICA accordingly decided to pursue a balancing act between the twin objectives

to harmonise with US GAAP while increasing its role in the international arena:

Under this option, the CICA would accelerate its harmonisation programme with

FASB standards and increase its involvement with the IASC and other

international groups, with the objective of reaffirming Canada’s significant role in

establishing international accounting standards (TFOSS report, 1998, p.4).

This resulted in the AcSB issuing accounting standards in compliance with US GAAP

even tough US GAAP was not seen as superior. An example of this was the issuance of

the Canadian accounting standard (Sec 3870) in 2001 for stock-based compensation which

matched the controversial US GAAP SFAS 123 (see Gaa, 2007 pg.88). Although the

AcSB made it very clear in the TFOSS report that its intention was to harmonise and not

to adopt US GAAP outright, but there was a common understanding among stakeholders

that Canada was in the process of adopting US GAAP. As Paul Cherry, the former chair of

the AcSB from 2001-2009 observed:


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“Because there is such a strong connection between the Canadian economy and

the US economy, Canada is the largest foreign SEC registrant, Increasingly the

Canadian board senses that harmonisation with US GAAP was starting to more of

adopting US GAAP [...]. In 2004 we said, if we just project out in the next 15

years, unless we do something differently, Canada will have de facto really

adopted US GAAP.” (Paul Cherry, Interview 10th July 2014).

Due to the past influence of the British accounting profession, Canadian accounting

standards were traditionally more principles based than US accounting standards. (Gaa,

2007; Webster and Thornton, 2005; Milburn and Skinner, 2000). An example of how

Canadian standards were more principles-based came from the CICA accounting

handbook which was less prescriptive than its US counterparts (Webster and Thornton,

2005). However the continous pursuit of harmonisation with US GAAP and IFRS resulted

in the Canadian GAAP becoming more rule-based than IFRS, but more principle-based

than US GAAP.

In early 2000, AcSB started to think about whether developing its own unique set of

standards was really that beneficial, given that the Canadian capital market constitutes

only a small fraction of the total world capital market. The market capitalisation of

Canadian issuers only represented 3% of the total world market capitalisation (Nicholls,

2006) and most of listed companies were small companies. There was a clear risk that

Canadian GAAP would never gain recognition as international GAAP. Thus in 2004 the

board sought feedback from stakeholders on a clear strategy for the future of Canadian

accounting standard-setting.

7.2.2 The decision-making period: 2004-2006

The decision to adopt IFRS in Canada was deliberated for about two years between the

standard-setter and the stakeholders. The role of the AcSB in Canada as the initiator of the

IFRS switch was confirmed by the capital market regulator.


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“It was not the securities regulators signalling or saying let’s make the switch to

IFRS. Certainly securities regulators were very aware of IFRS for that time

period. They monitored the evolution of the IFRS or the IAS at the time as they

were improving. So by the time the Canadian board get a consultation and made a

decision to move in this direction, we were comfortable with that because we are

comfortable with the set of standards that has been evolving internationally and

how they are becoming a more comprehensive set of standards. So by the time of

decision, we were comfortable with the switch.” (Senior Staff of the Ontario

Securities Commission, interview 16th July 2014).

The formal decision-making process to adopt IFRS by the AcSB was started in May

2004 by the issuance of a discussion paper “Accounting Standards in Canada: Future

Directions”, followed by a series of public consultations between 2004-2006. However

prior to that, since 1999, Certified General Accountants of Canada (CGA) has published a

position paper “The Case for International Accounting Standards in Canada” which

strongly supported the adoption of IFRS and the withdrawal from harmonising with US

GAAP. The CGA advised that adopting FASB standards would be a flawed choice for

Canada even though the US had been its major trading partner and that there were many

parties supporting the adoption of US GAAP in Canada (Richardson and Hutchinson,

1999).

The CGA report claimed that US GAAP was a more sophisticated standard than the

IASC’s IAS, but argued that it would not be prudent for Canada to adopt US GAAP

because of the ‘closed’ nature of the FASB’s standard-setting process which was designed

to accommodate US interests only. In contrast, the IASC’s standard-setting process has

seen to be more open to political representation and provided opportunities for the AcSB

to elevate its role and influence at an international level.

According to Paul Cherry, the AcSB had started in 2002 to discuss with various

stakeholders to issue the 2004 discussion paper. He saw the discussion paper as a vital

way of getting input concerning the future strategy of the AcSB:


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“The purpose of that invitation to comment was to ask three basic questions. First

of all do you agree that Canada needs a system of reporting that has global

recognition and global credibility in the major capital markets? Do you agree that

Canadian GAAP does not meet that standard, does not have that level of

recognition? If so, only two choices that Canadian board could see were [either]

US GAAP or IFRS. And that was the purpose of that invitation to comment. We

used that as a device to form the national debate around those three questions”.

(Paul Cherry, Interview 10th July).

The board offered four possible scenarios for the future development of Canadian

accounting standards (CICA, 2004):

1. maintain its own standard-setting capability;

2. maintain its own GAAP or adopt either US GAAP or IFRS;

3. maintain the current strategy of working to support the international

convergence of accounting standards while harmonising with US GAAP;

and

4. consider the possibility of modifying current GAAP requirements to

provide better information to the users of financial statements in terms of

various types of entities through, for example, a wider application of

differential reporting.

The response from stakeholders to the 2004 documents was a concensus that Canada

did not need to develop its own unique accounting standards, especially given the small

size of its capital market. The next question which was more challenging to answer was

which international standard should they adopt, US GAAP or IFRS. At that time Canadian

stakeholders were more familiar with US GAAP (as it was widely used by SEC registered

Canadian companies and Canadian standards had been harmonising to US GAAP for

some years). However one respondent commented, there was significant discontent among

stakeholders regarding the increasingly detailed rule-based nature of Canadian standards.

“The more we have adopted the individual US standards, the more people in the

community at large start to get the familiarity with what their standards were like.

And there was a lot of discontent with what they were seeing. It was an interesting


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phenomenon. The abstract idea of adopting US GAAP may have sounded

appealing to some people, but when they got to the specifics of actually having to

apply one of the standards as we were importing them, they were less and less

happy.” (Member of the AcSB, interview 20th September 2013).

Public roundtables and private meetings were held across Canada between July

and October 2004. The AcSB conducted 10 roundtable discussions with 106 participants

and received 64 comment letters from various organisations. The AcSB published a

summary of comments on October 28, 2004, and then presented its findings and

recommendations to the Accounting Standards Oversight Council (AcSOC) in February

2005.

The nature of the public consultation according to Paul Cherry was not to compare

whether IFRS or US GAAP was better on a standard by standard basis, but more to

determine which strategic decision of which standard would be most beneficial for Canada

in the future.

“Clearly we thought they were both high quality. With respect to IFRS, I think we

were saying based on the work programme, the changes IASB had made [to the

standards] in recent years and projecting forward that by the time the

implementation would come we thought IFRS would be the same quality with US

GAAP. But we constantly told people don’t come here arguing that that standard

is better than that standard, it was strategic. [...] we didn’t want people arguing on

specific technical issues. “ (Paul Cherry, interview 10th July 2014).

However, as Canadian stakeholders were far more familiar with US GAAP, arguably it

was difficult for the stakeholders involved in the debate to compare IFRS and US GAAP.

Thus another important role of the AcSB in that period was to educate stakeholders about

IFRS to assist them in making an informed decision.


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“It took some education. The Canadian board developed all sorts of material39 ,

more technical in nature. We made high level comparisons topic by topic. And say

here is how the current Canadian GAAP compares to IFRS, and we did more

detailed version. That is a fair comment that IFRS and the old IAS were not used

per se in Canada. It took a while to explain to people what our position was

[Canadian GAAP vs IFRS].” (Paul Cherry, interview 10th July 2014).

US GAAP supporters pointed out the lack of industrial guidelines within IFRS for key

Canadian industries, such as oil and gas. From a summary of discussions compiled by the

AcSB in 2004, there were stakeholders who were in favour of adopting US GAAP entirely.

Such US GAAP advocates argued that it was a set of predominantly global accounting

standards. Table 11 compiled the list of arguments for and against US GAAP by Canadian

stakeholders during July-October 2004.

Arguments for US GAAP

Arguments Against US GAAP

There should be harmonisation, but there

should also be a national structure to

highlight the differences. The AcSB should

continue to work with the US to ensure

Canadian circumstances are taken into

consideration.

US literature is voluminous and extremely

complex. There is a lack of familiarity with

US GAAP. Canadian GAAP should

therefore be preserved.

Full US GAAP convergence should be

supported. US GAAP is not perfect, but is

certainly predominant in global accounting

standards; therefore, Canada should move to

US GAAP as soon as possible in order to

eliminate unnecessary work involved in

reconciling Canadian GAAP information to

the US GAAP equivalent. Decisions made

today often take practitioners to a US

solution — to the extent an issue is not

addressed in detail under Canadian GAAP,

there are many who refer to US GAAP to

obtain further insight. Markets dictate the

financial reporting, hence US GAAP should

We cannot adopt US GAAP without also

adopting some of the US tax regime,

judicial processes, etc. Many Canadian

companies prefer not to get involved with

the US complexity. Not all Canadian

companies aspire to participate in

international capital markets (e.g., income

trusts).

39 The document produced by the AcSB in 2007 containing the implementation plan for IFRS adoption

was accompanied by an appendix containing a high level comparison table between IFRS and Canadian

GAAP. More educational materials were published by the AcSB after 2008 when Canada confirmed 2011 as

the effective date for IFRS adoption.


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be adopted in Canada. The influence of the

US should not be ignored, but at the same

time its influence should not dictate the

accounting standards that smaller entities are

required to apply. Large companies should

follow US GAAP in order to obtain access to

the markets they intend to participate in.

US financial reporting is perceived as

rules-based. There is a lack of support for

rules-based standards in Canada. The

risk is that the standards would be treated

like laws.

Adopting US GAAP is impossible due to

lack of expertise. There is a shortage of

expertise in small and medium-sized

companies, as well as larger companies,

to handle changes to US GAAP.

Independence concerns also compound the

issue, since a public practitioner cannot

prepare a client’s financial statements and

then review or audit them. There is a lack

of expertise at the senior level. US GAAP

should be avoided and the Canadian

standard-setting system should remain

autonomous.

Adopting US standards is “force-fitting”

foreign requirements into the Canadian

context, in particular with regards to small

private companies. US rules are not

relevant and should not be imported. The

cost and benefit of importing a standard

should always be assessed. Consideration

should also be given to the fact that small

companies vastly outnumber public

companies.

Table 11 Arguments for and against US GAAP in Canada

Source:http://www.frascanada.ca/accounting-standards-board/what-we-do/strategic-

plan/item69803.aspx, downloaded 4th April 2013.

The table above shows that arguments against US GAAP focused on the view that US

GAAP was an accounting standard for US business and that the US legal environment

may not fit well with Canada. Arguments against IFRS in Canada highlighted the

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independence of the IASB and the influence of European political lobby. Table 12 below

lists the arguments for and against IFRS in Canada during the decision period in 2004.

Arguments for IFRS Arguments against IFRS

Adopt IFRS, but without ignoring US

GAAP. Global harmonisation should be

encouraged. Canada should not “speak its

own language” or have separate

requirements as there are not enough

resources to support them

Canada should learn from experiences with

implementing IFRS in Europe and Australia

in 2005. The principles may sound fine in

theory, but practice is another matter. One

respondent expressed concern with IFRS, in

particular IFRS 41, Agriculture.

Canada should adopt IFRS. One standard is

essential if you want the free flow of capital

around the world and to avoid entities

having to apply multiple GAAPs, which is

confusing to the public. Industry-specific or

other issues should be brought to the IASB

and should be addressed in terms of their

specificity and uniqueness

We may be creating more confusion by

going to IFRS. Some of the standards

implemented have been driven by political

motives, in particular IAS 39, Financial

Instruments: Recognition and

Measurement. The problem with IAS 39 is

that banking in Europe is different. There

are other factors that can create

differences.

The US will not converge globally; hence

consider whether IFRS is the appropriate

option for convergence.

The AcSB should maintain its current

strategy except in instances where the

existing Canadian standard is “better” and

the new standard may provide lower quality

information. It should be considered that in

some instances, there are political

motivations underlying standards specific

to a country or region, which results in

entities being required to adopt a sub-

optimal standard.

Principles-based accounting applied with

professional judgment is preferable, hence

there is some concern about the movement

towards US GAAP.

Canada should follow Europe with the “IAS

2005” requirements, but for listed

companies only.

Table 12 Arguments for and against IFRS in Canada

Source: http://www.frascanada.ca/accounting-standards-board/what-we-do/strategic-

plan/item69803.aspx, downloaded 4th April 2013

In March 2005, the AcSB for the second time invited stakeholders to comment on its

Draft Strategic Plan. The second invitation particularly solicited comments on the overall


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suitability of the proposed strategies as, for example, if it would be appropriate to apply

different strategies to different categories of reporting entities. This time, the AcSB

received 66 letters of comment, as well as additional input from a large number of

individuals through public roundtable meetings and private discussions with key

stakeholder groups. Finally in January 2006, the AcSB ratified a new strategic plan that

significantly affected the way financial reporting was to be carried out in Canada. The

AcSB pursued separate strategies for three major categories of reporting entities: public

companies, private businesses and not-for-profit organisations (CICA, 2006).

For public companies, Canadian enterprises to adopt globally accepted, high

quality accounting standards by converging Canadian GAAP with International

Financial Reporting Standards (IFRSs) over a transitional period. At the end of that

period, a separate and distinct Canadian GAAP will cease to exist as a basis of

financial reporting for publicly accountable enterprises.

For private businesses, the AcSB began, as a matter of urgency, a

comprehensive examination of their financial reporting needs and then determine

and implement the most appropriate model to meet those needs.

For not-for-profit organisations, the AcSB continues to apply those elements

of GAAP for profit-oriented enterprises that are applicable to their

circumstances, and develop other standards dealing with special conditions for

the not-for-profit sector.

One of the major reasons for Canada to adopt IFRS and abandon US GAAP was to

maintain its influence in the IFRS-making arena. This argument was discussed in the

AcSB strategic plan “Accounting Standards in Canada: New Directions” (CICA,2006).

See excerpt below:

If Canada would have continued with a strategy of US GAAP harmonisation, it

would have continued to import more and more the detailed rules embedded in US

legacy standards. It would then be faced with the effects of replacing those


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standards with higher quality standards as global convergence continues. Canada

would also have lost some of the influence it might otherwise have in global

standard-setting, since that influence can come most readily through the IASB and

the adoption of IFRS. Accordingly, the AcSB has chosen a direction that avoids the

importation of US legacy standards and allows Canada to retain its position as a

contributor to improved global standards. (AcSB strategic plan, para. 42 p. 23).

Although the AcSB genuinely committed to adopt IFRS without carve outs, the

strategic plan also clearly stated that during the transition period, the AcSB would not

relinquish its power to modify or add to the requirements of IFRS under Canadian GAAP.

The AcSB also stated that it intended to continue to work with the IASB and the FASB to

bring Canadian views and experiences to the global standard-setting process.


The 2006 strategic and implementation plan stressed that the AcSB would monitor its

strategy and the state of readiness of Canadian investors and the business community. In

March 2007, Canada issued a detailed 57 page implementation plan (The “IFRS

Implementation Plan”) which required the AcSB to monitor the progress through the

transition period before the planned confirmation (in 2008) of 2011 as the formal adoption

year. In October 2007, the AcSB issued its preliminary report trying to answer the

following questions40 (p.2):

1. Is sufficient progress being made in Canada to establish the infrastructure for IFRS

implementation?

2. Were there any significant difficulties encountered in the initial adoption or

ongoing application of IFRS in the European Union (EU), Australia and other

countries that the AcSB should consider in determining the timing for

implementing the strategy for publicly accountable enterprises?

3. Does the IASB continue to develop high-quality standards that are accepted as

contributing to the improved functioning of global capital markets?

40 The report can be downloaded at : http://www.frascanada.ca/accounting-standards-board/what-we-

do/strategic-plan/item18491.pdf (accessed, 17th September 2015)

http://www.frascanada.ca/accounting-standards-board/what-we-do/strategic-plan/item18491.pdf

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In answering these three questions, the AcSB met with various stakeholders both

domestic and international. The October 2008 preliminary report detailed the extensive

consultations undertaken by the AcSB prior to the specification of the formal year of

adoption. Before making a decision in 2008, AcSB also paid close attention to the

development of other jurisdictions that had already adopted IFRS earlier.

“The Canadian board had made a promise to review decisions on the changeover

date. Because we knew that was a strategic change, five years was a long time.

What we did is to canvas the development around the world to see if there was

anything adverse that might suggest that we need to reconsider the strategy. We

looked at what happened in Europe and elsewhere in the world.” (Paul Cherry,

interview 10th July 2014).

Compared to Brazil, Philippines and Indonesia, the Canada adoption process was better

documented and communicated to the public through various reports. Canada seems to be

able to have more engagement with its stakeholders in public meetings. In the other three

countries many discussions took place behind closed doors where the minutes of the

meetings or reports are not available to the public. With comprehensive public

consultations over two years, members of the AcSB IFRS Advisory Committee (IAC)

agreed that Canada seems to be doing a better job in planning its transition than other

countries who have adopted IFRS41. Table 13 lists various consultation activities by AcSB

members to various stakeholders both domestic and international stakeholders.

Time Stakeholder Matter to discuss

July-October

2007

Two meetings with the CSA Chief

Accountant and OSFI Accounting

Policy Group. (CSA is Canadian

Securities Administration and

OSFI is The Office of the

Superintendent of Financial

Institutions

CSA to issue Concept Release in late 2007

to consult on matters within their

jurisdictions.

41 Summary of IAC public meeting on 22th October 2007. The short summary of the meeting is

available at: http://www.accountingeducation.com/index.cfm?page=newsdetails&id=145698, Accessed 22nd

January 2016.

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August 2007 OSFI Accounting Policy Insurance Companies seem to have little

preparation to date.

June 2007 User Advisory Council (UAC) UAC members expressed views that analyst

have not yet taken, and probably will not

take, actions to prepare for the changeovers

to IFRSs until closer date.

May 2007

Canadian Association of Petroleum

Producers (CAPP) and the Small

Explorers Associations of Canada

(SEPAC)

Concerns with the the current Canadian

GAAP standard for full cost accounting (the

accounting method used by most oil and gas

companies in Canada).

June 2007 Chief Accountants from the

Canadian Bankers Association

(CBA)

CBA expressed preference for the adoption

of IFRSs to follow a phase-in approach and

for new standards that would require a

second change shortly after the changeover

date to be delayed.

October

2007

Financial Executives Institutes’

Committees on Corporate

Reporting

Companies are only just beginning to focus

on the issues and because of a current focus

on new regulatory reporting controls, many

companies will not actively focus on that

until 2009

September

2007

Investor relations officers of major

companies

Generally aware of AcSB’s plan but had not

yet done much evaluation of its impact on

their activities.

2007 Rate-regulated Entities Rate-regulated operations have expressed

concerns about the application of IFRSs to

rate-regulated activities.

September

2007

Forest Product Association Not Specified

July 2007 Deputy President of the Association

of Chartered Certified Accountants

(ACCA) and the head of the

ACCA’s Canadian branch.

Not Specified

April 2007 Chair of the Australian Financial

Reporting Council (FRC)

Lessons Learned from the Australia

Experience in adopting IFRS. The FRC

Chair explained that Australia has reversed

its initial decision that AASB would

eliminate choices and modify disclosures in

order to protect Australia’s national interest.

April 2007 Staff of US SEC SEC focused on compliance with ‘IFRS as

promulgated by the IASB’ and not modified

version of IFRS. The meeting also

discussed the number of years for which

comparative figures are needed in the year

of transition to IFRSs, a question concern to

Canadian SEC registrants.

April 2007 Senior official visiting the UK

Financial Services Authority

To learn of the UK and European

experience in adopting IFRS.

Table 13. Public engagement activities by AcSB members/staff to stakeholders

during 2006-2008

Source: AcSB Various Reports.


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During this transition period, the US SEC made an important decision which served as

a major push in terms of Canada choosing to converge to IFRS. In November 2007, the

US SEC voted to eliminate the reconciliation requirement for foreign companies if IFRS

as issued by the IASB was used. This was a big surprise to the AcSB as they were not

expecting this decision when the consultation period had started in 2004. Canadian

companies comprised the majority of foreign registrants in the US stock market, thus the

US SEC’s decision to allow IFRS as an option provided great support for IFRS adoption

in Canada. As being revealed by Paul Cherry in the interview:

“I think one of the things that helped a great deal was the SEC announcement that

removed the US GAAP reconciliation requirement if companies were using IFRS

as issued by the IASB. That was a tremendous bonus for us. We didn’t expect that

when we started the consultation process back in 2004.” (Paul Cherry, Interview

10th July 2014).

As IFRS became an option for Canadian companies listed in the US, CSA started to

make a long term plan of prohibiting US GAAP for Canadian filing by these dual-listed

companies. US GAAP has been an option for Canadian filing since 200442. However, in

February 2008, CSA issued concept proposal 52-402 43 which asked if CSA should

prohibit the use of US GAAP for Canadian domestic companies by 2013:

CSA staff believe that, on balance, the factors discussed above support eliminating

our current provisions relating to the use of US GAAP by domestic issuers.

Specifically, CSA staff's tentative conclusion is that we should not allow a domestic

issuer to use US GAAP for a financial year beginning on or after January 1, 2009,

with the exception that a domestic issuer filing US GAAP financial statements in

Canada for its most recent financial year ending on or before December 31, 2008,

could continue doing so for five years (i.e. 2009 to 2013). (CSA Concept proposal

52-402 pg. 3.).

42 Document of National Instruments 52-107. 43 The concept paper is available from this link

http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20080215_52-402_cp-fin-rpt.jsp, accessed 9th September

2014.

http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20080215_52-402_cp-fin-rpt.jsp


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CSA argued three main reasons for their proposal to prohibit US GAAP in Canada.

Firstly, by retaining US GAAP as an option, CSA believed that it might undermine the

goal of achieving “a single set of high-quality accounting standards”. Secondly, CSA

highlighted the cost and complexity of multiple standards as the other reason. CSA argued

that allowing multiple standards for preparing financial reports of domestic issuers would

reduce comparability of financial statements in the market and increase cost and

complexity for market participants. And lastly, CSA argued that the initial rationale of

allowing US GAAP (to reduce the burden for dual listed companies) had been largely

eliminated by SEC decision in 2007 to allow foreign private issuers to file financial

statements prepared using IFRS.

The CSA concept proposal received 41 comment letters from various stakeholders in

Canada including international accounting firms and Canadian companies44. While the

comment papers widely supported the adoption of IFRS in Canada most of the

stakeholders strongly disagreed with the CSA’s tentative decision, and arguing that US

GAAP should remain as an option for eligible Canadian companies. The majority of

comments or 68.3% (29) disagreed with the proposal to prohibit US GAAP and only 9.7%

(4) agreed. Retaining US GAAP as an option was supported by all Big Four firms and

dual-listed technology companies such as Research in Motion Limited (producers of the

Blackberry), at least until US domestic companies were required to adopt IFRS. With the

strong rejections from Canadian stakeholders, the CSA rescinded their tentative decision

to prohibit the future use of US GAAP and retain US GAAP as one of the options for

Canadian domestic issuers who were also US SEC registrants.

“It was a document to indicate that, yes, we are really in to IFRS and that

document, one of the decisions being made was to no longer allow US GAAP for

SEC companies (Canadian companies registered by the US SEC). And so that

consultation document was issued with that as a tentative decision and a lot a

concern was raised. A lot of backlash from the public companies using US GAAP.

44 All the comment letters are available at: http://www.osc.gov.on.ca/en/24314.htm, accessed 25th July

2013

https://outlook.manchester.ac.uk/owa/redir.aspx?C=_iZFD-hWOEaq8_BwGfPWsA5KUNvdidEIKXmiMcYCdd1idBeyNrNFADQt3wKrWnbQsWmiLPtlSXc.&URL=http%3a%2f%2fwww.osc.gov.on.ca%2fen%2f24314.htm


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They wanted to continue to use US GAAP and so we eventually changed our

decision. We decided to continue to allow US GAAP but the initial decision was to

eliminate that permission.“ (Senior Staff of Ontario Securities Commission ,

Interview 16th July 2014).

The reason why some Canadian companies strongly supported US GAAP option was

because their competitors were mostly US companies, thus by reporting using US GAAP

they maintained the comparability of their financial reporting. Another argument was the

concern of the high transition costs from US GAAP to IFRS as discussed by one of

respondents below:

“[The] technology sector, for example, Blackberry and internet-based companies,

was quite interested in the US GAAP for a long time. Because a lot of Canadian

technology competitors are in the US, so there was a desire to use US GAAP.“

(Senior Staff of Ontario Securities Commission, Interview 16th July 2014).

Nevertheless in 2011, Canada went live with IFRS. Many respondents agreed that the

transition was smooth and the capital market did not panic at the beginning of the adoption

year. As the chairman of AcSB commented:

“The adoption of IFRS in Canada in large part, you know, it went very smoothly.

There was a five year period from beginning to end, we gave companies lots of

time. As I said we started moving certain standards to IFRS so that ultimately

when the transition to IFRS [came] it wouldn’t be a huge change. That was

different with the European adoption. I think Europe experienced much more

change going to IFRS than we did. So, I mean, I think it’s fair to say that in many

respects, when you saw the reports, the interim of filing starting to come out in

IFRS there was almost no commentary from the investment analysts that said:

“wow, this report is now under IFRS!” it was just business as usual. (Chairman of

AcSB, interview 24th September 2013).

In a summary, the chain of events of adoption of IFRS in Canada is listed in Table 14

below


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Dates Milestones

May 1998

CICA issued the Task Force on Standard Setting (TFOSS) final

report. A decision was made to harmonise Canadian standards with

US GAAP and IAS.

1999 CGA report published: The Case for International Accounting

Standards in Canada.

May 2004 AcSB began a process to develop a five-year strategic plan for the

period 2006-2011. AcSB issued ‘Invitation to Comment’ document:

Accounting Standards in Canada: Future Directions.

March 2005 AcSB issued ‘invitation to Comment’: Accounting Standards in

Canada: Future Directions - Draft Strategic Plan.

April 2005 US.SEC introduced a possible road map to eliminate the

reconciliation requirements for the foreign private issuers that use

IFRS.

2004-2005 Series of public consultations through public meetings and private

meetings held to seek input from domestic stakeholders and

international stakeholders. For example ten roundtable meetings were

held in 7 cities between July and October 2004.

January 2006 AcSB adopted its 2006-2011 Strategic Plan. In this Strategic Plan,

Canada decided to adopt IFRS by 2011 and the target year would be

reconfirmed in 2008.

March 2007 AcSB issued the IFRS Implementation Plan which required AcSB to

monitor progress over the next 24 months of its strategic plan.

October 2007 AcSB issued a progress review (Preliminary Report). The report

delineated the activities of the AcSB in consulting various

stakeholders, both domestic and international.

November 2007 US SEC voted to eliminate reconciliation from IFRS to US GAAP for

US Foreign Private Issuers who use IFRS as issued by IASB.

February 2008 AcSB issued a final review and confirmed that 2011 would be the

adoption year

February 2008 Canadian Securities Administrators issued a concept paper with

tentative decision to prohibit the use of US GAAP in Canada by 2013.

This paper received 41 comments which mostly rejected this proposal.

2008-2009 AcSB issued three omnibus exposure drafts on “Adopting IFRS in

Canada”

January 2010 IFRS was adopted. AcSB released Part I of the CICA Handbook


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which consists of IFRS

2011 IFRS became effective in Canada. Publicly accountable enterprises,

other than pension plans, are required to adopt IFRSs as Canadian

GAAP for interim and annual financial statements related to fiscal

years beginning on or after 1st January 2011.

Qualifying entities with rate-regulated activities, investment

companies and segregated accounts of life insurance enterprises can

defer their changeover to fiscal years beginning on or after 1st January

2014.

Table 14 Timeline of Canadian IFRS adoption and relevant events in the US

Source: AcSB various reports

7.2.4 The implementation period beyond 2011: The case of rate-regulated entities.

During the transition period, stakeholders in the adopting countries have escalated

their efforts in learning and applying IFRS. Usually during the transition period (before

the formal IFRS implementation year), countries made adjustments to provide transition

relief for certain industries or delayed the adoption of onerous IFRS. In a previous chapter,

Brazil for example decided to carve-out aspects of accounting policy from IAS 16

Property Plant and Equipment and IAS 38 Intangible Assets. Similar with Brazil, Rate

Regulated Entities (RRE) also became an issue during the implementation period in

Canada.

When Canada adopted IFRS in 2011, rate regulated entities were given a longer

transition period for IFRS adoption to mandatory adoption in 2012. In the meantime,

AcSB and utilities companies lobbied the IASB to re-open its rate-regulated activities

project which had been paused in September 2010 – and continued to do so, delaying the

adoption of IFRS for Canadian utilities companies.

Before the issuance of IFRS 14 Regulatory Deferral Accounts in 2014, there was no

specific standard for rate regulated activities. Many countries including Brazil and Canada

follow US GAAP (ASC 980 Regulated Operations) which allowed the recognition of

RRA and RRL. Around 2007-2008 the Big Four accounting firms deliberated if US

http://www.frascanada.ca/international-financial-reporting-standards/pension-plans/index.aspx

http://www.frascanada.ca/accounting-standards-board/item64425.aspx

http://www.frascanada.ca/international-financial-reporting-standards/projects/completed/item55668.aspx

http://www.frascanada.ca/international-financial-reporting-standards/projects/completed/item55668.aspx


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GAAP for utilities was in compliance with IFRS and their consensus was that RRA and

RRL cannot be recognised based on IFRS. This has made billions of dollars of rate

regulated assets written off in Brazil when they adopted IFRS in 2010.

The AcSB and rate-regulated sectors in Canada were very active in ensuring their

concerns were heard by the IASB. For example, Canadian stakeholders contributed the

most comment letters to the “Request for Information on Rate Regulation” issued by the

IASB in May 2013 (12 comments letters from total 79 from 25 countries). Canada was

also represented better than other countries in the IFRS Consultative Group for IFRS 14

project with 3 seats; other countries mostly only have 1 seat. During the IASB public

roundtable on March 2012 for its ‘Agenda Consultation 2011’ in Toronto, the rate-

regulated sector was also well represented and much of the resulting discussion at the

meeting was on this topic

The IASB subsequently issued an interim standard (IFRS 14) which basically allowed

whatever the current accounting practice was until its Rate Regulated Activities project

was completed. Paul Cherry viewed that IFRS 14 as a big success of Canadian lobby.

“We considered it to be a success story in the sense that the Canadian board was

quite aggressive in making the IASB understand the importance of this issue […] I

didn’t say that US GAAP was the exact right answer, but was there for Rate

Regulated activities to give rise to Rate Regulated Assets and Rate Regulated

Liabilities? In certain aspects, I think the answer is yes. We were saying to the

IASB, look, this is becoming a hugely controversial issue. The accounting firms

were arguing with each other. This is too big a question to be put to the

Interpretations Committee. So the Canadian board strongly [advised] the IASB to

undertake the project which they agreed to do.” (Paul Cherry, Interview 10th July

2014).

However, the Canadian success may disappoint other countries which had adopted

IFRS earlier, such as Brazil. The role of Canada in influencing the IASB to issue the


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interim standard, IFRS 14, was conspicuous and had been highlighted by two Brazilian

respondents. As one Brazilian respondent, an account preparer in an infrastructure with

rate-regulated entities, commented the interview.

“They were written off [rate regulated assets] when Brazil adopted IFRS, billions

of Brazilian Reals. Now they issued IFRS 14, we were pissed off. A Canadian

lobby. Truly truly pissed off. […] Canadian adopters are in a more comfortable

position different from us four years ago.” (Interview with Brazilian accounting

controller, 13th July 2014).

In summary, the IFRS adoption process in Canada has been led by the accounting

standard-setter and through a series of public consultation and decision making due

process. With a strong influence of US GAAP over so many years and a weak legal

legitimacy of the decision, Canada was very concerned with the procedural legitimacy of

the decision. They realised that the decision to adopt IFRS would need to involve adequate

public consultation and follow the agreed due process to ensure that it would be accepted.

Compared to Indonesia, Brazil and the Philippines, Canada undertook a more rigorous

decision-making process in this regard.

The decision making process in Canada was also well documented in the AcSB

website which suggests a more inclusive process when compared to the developing

countries such as Indonesia and the Philippines. Respondents from standard-setters and

the regulator acknowledged the importance of a proper due process of decision-making

process.

“When the strategy was being developed, the board had an extensive conversation

with the securities commissions across the country, the major four (who are) really

active. So we met with them. They didn’t have strong views one way or another but

they said they would trust the process.[…] They were certainly interested in the

debate but they were much were more concerned that the process was appropriate.

The due process, public hearings, all of those things. That is true for our federal

government too when we tried to talk to the tax authority.” (Paul Cherry, interview

10th July 2014).


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“People want to be able to make decisions based on the evidence. The

commissions (CSA Commissioners) in Canada needed to make sure that decisions

were based on evidence from the public consultation. Without that we were

reluctant to make a decision to be honest […] If they the (AcSB) had not done a

public consultation and just made a decision, we, as regulators, would probably be

concerned because that is not our approach.” (Senior staff of the OSC, Interview

16th July 2014).

The decision to adopt IFRS, instead of US GAAP, was more to maintain the Canadian

influence in the international standard-setting arena than choosing a better standard from

the other. Adopting US GAAP has been perceived as unfavourable for Canadian interest

as the US FASB would only consider the interest of US stakeholders when developing US

GAAP. The case of IFRS 14 showed the Canadian strong influence in the IFRS-making

arena. Canada will be more likely to continue building up their influence in the

international arena, however, this power and influence is rarely found in other countries

with less technical resources such as Indonesia or Brazil. As it will be detailed in the next

session, Indonesia also faced turmoil in its decision-making process leading up to IFRS

adoption.

7.3 IFRS convergence in Indonesia

US influence is arguably less dominant in the Indonesian economy than in Canada, but

nevertheless since 1965 US and Japanese investment in Indonesia has significantly

increased. During the 1970s and 1980s, Indonesian accounting standards were not well

developed and US GAAP was the ubiquitous standard widely implemented in Indonesian

business entities.

“During those times most of my clients were foreign companies and they used

US GAAP at that time. But many Indonesian big companies like Astra, Salim

Group, they also asked to use US GAAP.” Utomo Josodirjo, interview 1st

December 2012.


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The first set of Indonesian accounting standards was formulated in 1973 and was an

adaptation from Accounting Research Study No.7, ‘Inventory of Generally Accepted

Accounting Principles for Business Enterprises’ published by the AICPA. The second

milestone was in 1984 when the accounting standard committee produced a handbook of

PAI 1984 (Indonesian Accounting Principles 1984) with the aim of adapting accounting

provisions to the recent rapid business development. US GAAP was the main reference to

develop PAI 1984.

An Indonesian standard-setter (DSAK) was established in 1998 replacing the informal

standard-setter council. Since its establishment DSAK has been funded by the IAI and IAI

National Council having the prerogative to appoint members of board. The IAI National

Council board also has a veto right, although it is very rarely exercised, to abrogate the

board’s decision.


The 1984 handbook or PAI 1984 mainly derived from US GAAP was used without

any modification since early 1990s45. Starting in 1993, Indonesia adopted IAS in a Big

Bang approach, endorsing all of the IASC’s IAS at the same time. With the funding

support from the World Bank, the Indonesian Accounting Standard Board (DSAK) started

to translate and incorporate IAS into the local set of standards. The translation and

deliberation process which started in 1993 took about one year. At the 1994 IAI

quadrennial congress, IAI decided to adopt IAS and started to depart from US GAAP. The

decision was heavily contested by US supporters, as Hans Kartikahadi, the chairman of

the Indonesian Accounting Standards Council at that time revealed in his autobiography

(Kartikahadi et al., 2012):

“The council has worked very hard to adopt IAS. The standards were translated,

discussed at a public hearing, and had been approved by the plenary meeting of

the IAI national representative council. But then in the congress, the decision to

adopt IAS was contested, mostly by accountant academics who just returned from

45 According to Hans Kartikahadi during the interview on 3rd December 2012, there were no revisions to

PAI 1984 until 1993 due to lack of funding and resources for the accounting standard-setting activities.


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their postgraduate studies in the US. Realising that all the hard work may be

rejected, I then stood up and spoke very loudly and firmly to defend the council’s

decision and clarify the ill-advised arguments against IAS. […] The congress then

approved the IAS and that day was a historic day for the development of

Indonesian accounting standards.” (Kartikahadi, 2012 p. 62-63.).

The main debate between US GAAP supporters and IAS supporters, literally took

place in the IAI general meeting in 1994. Many respondents who attended the event

remember vividly the lively debate between academics who supported US GAAP and

those who supported IAS. One accountant recalled the debate in some detail :

“ I was one of the witnesses (to the debate). Our colleague who just came back

from the US brought the FASB flag to Indonesia. They were really expert, even

they remembered US GAAP word for word. They became very disappointed to

observe that the standard-setting committee [has] switched its direction to IAS.

They then protested, stood up and said “it is not acceptable to downgrade the level

of Indonesian accounting which has been built up sophisticatedly following US

GAAP; downgraded to IAS which are adopted by developing countries and

countries with the least sophistication in their accounting standards. Our

standards will detoriate and it will harm the accounting association”... I feel they

were a little bit rude at that time” (Former member of the Indonesian standard-

setting committee, Interview 12th September 2012).

According to the 2009-2014 DSAK Chairman, Rosita Uli Sinaga, who also attended

the 1994 congress, the main argument against IAS at that time was the suspicion that it

would not be suitable for the Indonesian culture and its business context. The opposing

group argued that IAI should make some research whether IAS was suitable for the

Indonesian business environment before deciding on adopting it.

“I still remember in 1994 that the capital market was booming and a lot of foreign

investors came to the Indonesian market. Hans Kartikahadi tried to argue that

argument by saying that such research will takes time and also the essence of

accounting standards is actually the ‘language’ of financial reporting. If most

investor who read financial reports are Indonesian, then such research is needed.


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However if most investors are foreign and we would like to attract more foreign

investors then we should use an international ‘language’, which is IAS” (Rosita

Uli Sinaga, Interview 26th October 2012).

One of the professors in accounting who was identified by three respondents as the

voice of the US GAAP supporters countered the need to adopt IAS, noting that he argued

as follows:

“Why don’t we wait until IAS becomes more complete and then begin the approach of

adopting IAS but keep referring to US GAAP when IAS does not cover the topic. If we

are going to switch to IAS, we should wait until IAS is complete, that was my

suggestion. But my proposal as well as others (Other US GAAP supporters – added)

were denied by the board and they carried on to adopt IAS in 1994” (US GAAP

supporter academic, interview 2nd January 2013).

The adoption of IAS in 1994 was part of a bigger capital market reform funded by the

World Bank. Indonesia received two grants from the World Bank to develop its

accounting standards both in 1988 and 1994. These two grants included technical

assistance in translating IAS from English to Indonesian language. The IAI with limited

funding and technical staff to support the accounting standards board was greatly assisted

by this technical assistance provided by the finance ministry. Most respondents agreed that

the World Bank grant was pivotal in supporting the work of the board in adopting IAS.

The chief accountant of the Indonesian SEC and also a member of DSAK, mentioned

that the World Bank grant was not only promoting accounting standards development but

also the development of capital market law which was enacted in 1995 and effective in

1996. The development of accounting standards was part of a larger project to improve the

capital market infrastructure and push the capital market to the next level.

“I know that we received World Bank grants to improve our capital market

infrastructure, including [assisting with] the adoption of IAS in 1994 and the

development of capital market law. We also received a lot of technical support

from World Bank consultants to develop capital market regulations after the law

was enacted. I remember I worked with two World Bank Consultants from the US


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SEC, and if you look into our capital market regulation the format is very similar

to US SEC regulation.” (Chief of Accountant of Indonesian SEC, interview 10th

January 2013).

The funding from the World Bank46 was confirmed by the IAI executive director and

also by Rosita Uli Sinaga. The World Bank’s grants enabled the IAI to benchmark its

standard-setting achievements against other accounting associations in developed

countries and also to develop professional certification (Indonesia CPA exam). Although

the grants were important for the IAI to fund the IAS adoption project, however, actors

involved in the process denied that the decision to adopt IAS was imposed by the World

Bank as a prerequisite to using the grant money.

“I believe that we received a grant from the World Bank via Ministry of Finance to

fund the 1994 IAS adoption. However I didn’t witness the Board having any

pressure from the World Bank to adopt IAS. It was the Board decision.” (Rosita

Uli Sinaga, the interview 26 October 2012).

“The council members of the IAI were very determined at that time to seek funding

for the adoption of IAS (in 1994), if we did not get the funding from the World

Bank, we would try something else.” (IAI Executive Director, Interview 21 May

2012).

The funding support from the World Bank may have been pivotal in supporting the

adoption of IAS, however from several interviews of board members of that period (1990-

1994) as well as the chairman of Indonesian SEC for that period; we could not find any

evidence that there was a pressure from the World Bank to adopt IAS. All of our

respondents from that period believed that the decision to adopt IAS was a collegial

decision by board members.

According to Hans Kartikahadi, the decision to adopt IAS was carefully and

exhaustedly discussed in DSAK meetings. One of the considerations to shift to IAS was

46 Indonesia received World Bank loan for USD 25 million in 1994 for a project named “Accountancy

Development II” to improve public sector accounting but one of KPI was the development of accounting

standard for private sector. The evaluation of the whole project (Report No: 22443) can be downloaded from

World Bank website: http://documents.worldbank.org/curated/en/2001/06/1614847/indonesia-second-

accountancy-development-project

http://documents.worldbank.org/curated/en/2001/06/1614847/indonesia-second-accountancy-development-project

http://documents.worldbank.org/curated/en/2001/06/1614847/indonesia-second-accountancy-development-project


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because US GAAP sometime did not fit in to Indonesian’s need because it was developed

for US country. One of the standards being scrutinized was accounting for foreign

exchange where the Board compared the standard under US GAAP and IAS, it observed

that IAS offered more principle-based standard and would be more relevant to be adopted

in Indonesia (Kartikahadi, 2010).

In Indonesia although US GAAP was perceived as a better standard than IAS

(especially during the mid 1990s) but US GAAP was not a better option as it was

considered to be a national GAAP, not an international set of standards. This was

confirmed by the former chairman of the Indonesian capital market regulator in the

excerpt below:

“Many listed companies in Indonesia were foreign affiliations so they also brought

their accounting culture to Indonesia. Mostly the accounting culture they used was

American culture. We often referred to US GAAP at that time [during the 1990s]

as IAS was not sophisticated at that time. US GAAP already has more detailed

rules and guidelines […] I personally liked US GAAP and I personally wanted US

GAAP to continue to be used but we are part of the international (society) while

America is a single country.” (Interview with former chairman of Indonesian SEC,

7th February 2013).

Upon the adoption of the claimed principles based IAS in 1994, the IAI still issued

several industry-specific rules based standards, to answer requests from the industry’s

regulators. Some of the examples are: accounting for telecommunication revenue (1995),

general mining (1995), forestry cultivation (1995), toll road operation (1997), real estate

industry (1994), cooperatives (1999), the banking industry (1999). US GAAP remained an

important reference to develop these industry-specific standards.

“In 1994 Indonesia took the “Big Bang” approach by adopting the whole set of

IAS. During the five years after that, we faced implementation challenges. 1994

was the first time we had a complete set of principles based accounting standards

so Indonesian companies were struggling to apply the standards, thus they asked

DSAK to make more detailed standards specific to the industry. That is the reason


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we had so many industry’s specific standards.” (Rosita Uli Sinaga, Interview 26th

October 2012).

In its development, financial accounting standards in Indonesia have been revised

several times in the period of 1994-2004, whether in the form of improvements or

additions of new standards. IAS/IFRS remains the major reference for the accounting

standards development, however Indonesia also considers US GAAP or Indonesian law as

references for some of accounting standards.

7.3.2 The decision-making period: 2004 – 2008

In contrast to the IAS adoption decision where respondents denied the existence of

strong international pressure in the decision-making process, all respondents agreed that

international pressure certainly influenced the decision to adopt IFRS in the period of

2004-2012. For most of respondents, IFRS adoption was inevitable as international bodies

such as IFAC and ROSC had recommended it. Two international pressures which jointly

influenced the decision for IFRS adoption, in chronological order were: compliance with

IFAC Statement of Membership Obligation (SMO) in 2004 and the World Bank ROSC

Assessment of Indonesia in 2005 (and also 2010). The recommendation of G20 to its

members to adopt IFRS was also influential to reaffirm Indonesia’s commitment to IFRS

during the transition period 2009-2012.

The decision to adopt IFRS fully and abandon US GAAP entirely was announced by

the IAI’s chairman, Ahmadi Hadibroto, at a national accounting convention in 2004. The

pressure of IFAC SMO was mentioned by many respondents as the main reason for the

IFRS adoption announcement by Hadibroto. In April 2004, the IFAC board issued its

SMO’s stipulating in SMO No 7 that its members should incorporate IFRS in their

national accounting requirements. The effective date of SMO No. 7 was December 2004.

“Basically it is very simple. IAI is a member of IFAC. IFAC issued SMOs [making

it] mandatory for all members to adopt IFRS. So to me, if you are a member of a

certain organisation, you have only two choices, follow whatever the requirements

are or you wait. That is the consequence if you are member of an organisation.


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Now, if we didn’t follow IFRS, we would have been excluded from the accounting

world. So definitely not a choice.” (Ahmadi Hadibroto, interview 20th September

2012).

However after the announcement, Hadibroto faced challenges in gaining support from

stakeholders (including DSAK itself, especially with respect to the implementation year)

Most DSAK board members at that time were very sceptical about achieving full IFRS

adoption by 2008. There was a subsequent series of negotiations between the IAI national

council and DSAK. In 2006 the target year was moved to 201047 but finally in 2007 the

IAI council, the advisory board and DSAK agreed to delay the IFRS adoption target to

2012.

“I was worried the board couldn’t finish the project because everything seemed to

be business as usual. No extra effort or specific strategy on how to achieve the

target.” (Former member of the Board of the Indonesian SEC, interview 10th

January 2013).

“Even when the target was moved for the second time to 2012, I still felt sceptical.

I believed that 2012 was still too soon. My estimation was that it should be reached

by 2015.” (Former member of the board, Big Four partner, interview 9th December

2012).

The failure to meet the IFRS adoption target several times raised World Bank concerns

over the ability of the IAI (and DSAK which is fully funded by the IAI) to bear its

responsibilities as the national accounting standard-setter.

…The convergence of Indonesian accounting standards to IFRS is too important to

be left to a private sector organisation like the IAI, which failed to meet the IFRS

convergence target a few times in the past… - World Bank 2010 ROSC Para 71

The executive director of IAI, in interview revealed some of the reasons, as to why

the IAI had failed to meet these targets. One of the claimed reasons was a lack of technical

resources and funding allocated to DSAK. She also mentioned the issue of effective

47 Two members of the Boards we interviewed remember that the target year moved twice.


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leadership of DSAK and a lack of international communication as additional impediments

of IFRS adoption, but above all she believed in 2004 that all stakeholders especially the

IAI were not ready for the change.

“If I can be honest, in 2004, the announcement of IFRS adoption at that time was a

little bit immature. But IAI’s chairman decided to announce it in that national

event in the hope of gaining support from the profession and also the government

to achieve that goal together. Besides the focus of the IAI at that time, honestly,

was not on IFRS adoption but more on the strengthening of its funding source of

because we just bought a new building.” (IAI Executive Director, interview, 21st

May 2012).

Many respondents during the interview acknowledged that the 2004 decision had not

been made with adequate consultation with other governing bodies in the institute. At that

time the chairman of the institute, Ahmadi Hadibroto, was a very strong figure and even

he in the interview also admitted that the 2004 announcement had been premature:

“I have to admit; in 2004 the announcement was a little bit premature. We didn’t

realise how difficult it was to adopt IFRS.“ (Ahmadi Hadibroto, interview 20th

September 2012).

7.3.2.1 The World Bank Influence

Beside IFAC SMO, Indonesia also received pressure from the World Bank ROSC’s

first review in 2005. Although the ROSC report was issued in 2005, the survey was sent

months before to be filled by relevant stakeholders. This is confirmed by two respondents,

Ahmadi Hadibroto and Hans Kartikahadi.

“I met a World Bank consultant after the Asian financial crisis [in early 2000], he

assessed the financial report of our listed companies and gave harsh comments

about the quality of our accounting standards which in his assessment did not

comply with international standards. I told him we have actually adopted IAS since

1994, but he said our adoption is not 100%, I replied back can you tell me which


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country complied with IAS 100%, and the World Bank consultant was in silence.”

(Hans Kartikahadi, former chairman of DSAK, Interview 3rd December 2012).

The World Bank’s assessment of Indonesian accounting standards influenced the then

chairman of the IAI, Ahmadi Hadibroto, to opt for full adoption to IFRS. After IAS had

been adopted in 1994, the subsequent revisions of IAS had been ignored by DSAK.

Instead, after 1994, DSAK had issued many industry specific rule-based standards which

sometimes referred to the US GAAP.

“I was asked by the World Bank consultant when we will adopt IFRS. It brought

pressure. Before the ROSC 2005, there was a study as well by the World Bank as

well to benchmark Indonesian accounting standards against IFRS. I remember the

result. They said that our standards in general were benchmarked to international

standards but it’s very confusing for them to assess because our numbering

standard system is different and also [because] the modifications we made. They

had reached their conclusion after reading our standards one by one. So when the

IFAC SMO was issued, I was thinking why don’t we adopt IFRS fully so it will be

easier for external analysts to review our standards.” (Ahmadi Hadibroto,

interview 3rd December 2012).

In December 2008, the IAI managed to mobilise the support it needed to be able to

make a bigger public statement entitled entitled ‘IFRS Convergence 2012’. This

announcement was made possible through to a series of lobbying attempts by Ahmadi and

Herwidayatmo (former chairman of Indonesian SEC) to various stakeholders groups. To

avoid another embarrassment of missing a target year and to be able to announce firmly

the target year of 2012, Ahmadi realised that the IAI needed to secure support from the

Indonesian SEC and also sought support from capital market institutions and the ministry

of finance.

Herwidayatmo was the chairman of Indonesian SEC 2000-2004 and became the World

Bank executive director for South East Asia in 2006. Upon Herwidayatmo return from

Washington, he was persuaded by Ahmadi to lead the Accounting Standards Advisory

Board (DKSAK) at the IAI. Herwidayatmo had a strong network inside the ministry of

finance and the capital market institutions and had been mentioned by other respondents


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as playing important role for securing the support from these institutions. Herwidayatmo

pushed Ahmadi to take a firm position on 2012.

“I am the one who pushed Ahmadi to announce 2012 as the target year for full

IFRS convergence. I remember when we had coffee at Le Meridien Hotel, I told

him we have to be confident. I shared my experience when I was the chairman of

Indonesian SEC and executed scriptless trading [and] so many securities

companies complained. [I said to Ahmadi] It is a tough decision that will provoke

controversies, but we just need to be firm.” (Herwidayatmo – Interview 1st

February 2013).

Ahmadi and Herwidayatmo met with the Minister of Finance, Sri Mulyani in 2007 to

ask for support. Both gentlemen also lobbied the capital market authority to support IFRS

convergence. They had meetings with the chairman of the Indonesian SEC and secured

funding support commitment from three capital market Self Regulatory Organisations

(SROs) for the 2008-2012 IFRS convergence project. The funding was pivotal in

supporting DSAK in reaching its goal. With that funding from SROs, the IAI was able to

hire more technical staffs to support DSAK and held more DSAK meetings, printed more

exposure draft books and hosted more public hearings and seminars.

Beside the finance ministry, the IAI also secured support from the central bank and the

education ministry. Thus in the grand launching of the IFRS convergence project at 23rd

December 2008, the event was well attended by government officials such as the

education minister, the chairman of Indonesian SEC and the deputy governor of the

central bank. The event was widely broadcasted in the media and a snowballing effect

took place immediately after the event making IFRS convergence as hot topics among

accountants in Indonesia. Many seminars, training sessions and other public discussions

were held beginning in early 2009.

The support from the central bank was crucial in the implementation of IAS 32 and

IAS 39 (standards on Financial Instruments) in 2010. With one of central bank deputy

governors sitting on DKSAK, and also one member of the DSAK were from the central

bank, the IAI had very strong support for IFRS convergence. Although the standards were

delayed by one year (they were supposed to have been effective on 1st January 2009),


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there could have been a further delay until 2011 without the strong support from the

central bank, given the strength of objections from the industry at the end of 2009.

7.3.3 The transition period: 2009 – 2011

IFRS convergence in Indonesia started to unravel in 2009 with many parties doubting

whether DSAK would be able to finish IFRS adoption on time. A delay in the

implementation of the financial instrument standards (IAS 32 and IAS 39) at the end of

2008 was also a big defeat for DSAK and the IAI. IAS 32 and 39 were supposed to be

effective on 1st January 2008, but the banking industry complained for lack of transition

year and high cost of adoption and urged the central bank and DSAK to delay the

implementation of these standards. Strong resistance from the banking industry to the

financial instruments standards also created a major impediment for full IFRS

convergence in Indonesia.

The change of DSAK leadership in July 2009 was essential in restoring public

confidence in the IFRS convergence process in Indonesia. Jusuf Wibisana, senior partner

of PWC was DSAK chairman for eight years since 2001 and succeeded by Rosita Uli

Sinaga in 2009. Her communication with IASB’s staff clarified that IFRS should be

adopted word by word with the similar effective date as IFRS or maximum 6 months

difference between the effective date stipulated by IASB and DSAK (especially for new

standards issued by IASB). Rosita was not comfortable with this term especially as she

thought that IASB had been moving faster than DSAK, and decided to redefine

Indonesian ‘IFRS Convergence’ with “Revising PSAK to reach material compliance with

IFRS as of 1st January 2009, which will be effective at year 2011/2012.”. With this new

definition, the IFRS application in Indonesia would have three year gap with the IFRS

applied in other jurisdictions which adopt IFRS fully such as the Philippines and

Australia.

The redefinition from IFRS adoption to the IFRS convergence was communicated

both nationally and internationally. Although communicating a new message was not

easy, redefinition was beneficial to calm nervous stakeholders (regulators, accountant

professions and users) who were thinking the whole transition to IFRS was very fast.


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Stakeholders were also nervous that DSAK would just adopt IFRS word by word without

proper deliberation if modifications may be necessary to adjust with local needs. DSAK

chairman in many public engagements firmly confirmed that this will not be the case for

Indonesia where DSAK reserve their rights to modify the standards whenever necessary.

Subsequently upon her appointment, Rosita Uli Sinaga established a detailed working

plan for each working group to finish all IFRS in two years. The style of board meetings

changed dramatically. The typical DSAK meetings under Jusuf Wibisana were relaxed,

unstructured, full of humour, and relatively short, only two to four hours twice a month48.

With Rosita Uli Sinaga as the meeting leader, the meetings were more formal, the agenda

was more structured and the decision-making were more efficient49. The meeting also took

longer hours as the board had the meetings over the weekend for two days. Her leadership

and progression were acknowledged by many respondents and in the ROSC report 2010

…Since 2009, DSAK, under IAI, made substantial progress in trying to accelerate the

convergence process, by dedicating full-time staff and allocating a workload to

working groups with clear targets. However, they lack resources and there is no

accountability if the target of full convergence by 2012 is not met. Hence it is

important to set up a Financial Reporting Council with that responsibility. In the

interim, the government should provide all possible assistance to IAI DSAK on

continuing towards full convergence. (World Bank 2010 ROSC Report on

Accounting and Auditing in Indonesia, para 71).

Due to such strong leadership at DSAK, IAI gained more attention from the IASB. In

2011 for the first time, the IAI hosted an IFRS international event, the IFRS Policy Forum

in Bali. The IASB also sent its director for international activities, Wayne Upton to meet

with DSAK and the preparers to discuss the impediments preventing or delaying IFRS

convergence. There were two discussions, one in May and another in October 2010.

Indonesia was also invited to become a member of the IASB working group for Emerging

Economies (EEG) which holds meetings twice a year. After 2009, despite being a country

which provided no funding to the IASB, Indonesia’s voice became more dominant in the

48 Interview with the former technical director of DSAK. 49 The leadership style differences were also highlighted by the members of DSAK which experienced

two term of membership.


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international arena than ever before. Table 15Error! Reference source not found. below

summarises the IFRS convergence process in Indonesia.

Time Decisions

1994 The adoption of IAS by Indonesian Accounting Standard Board (DSAK)

1994-2004 The development of other accounting standards

2004 The chairman of Indonesian Institute of Accountant announced the plan

for IFRS adoption by 2008

2006 Revising the target year of IFRS adoption to 2010

2008 Revising the target year of IFRS adoption to 2012

December

2008

Delaying the effective date of IAS 32 and 39 for one year, from 2009 to

2010, after a strong objections from the financial industry

July 2009 The chairman of DSAK changed the term adoption to ‘convergence’ and

clarified the target of 2012 convergence year as to adopt IFRS as of 2009.

Table 15. Timeline of Indonesia’s convergence process

The international pressure for IFRS convergence also came from the G20. At its

second summit in London April 2009, the G20 issued a leader’s statement with 29

recommendations to its country members. One of the recommendations to strengthen the

financial supervision and regulation was the adoption of IFRS.

To call on the accounting standard-setters to work urgently with supervisors and

regulators to improve standards on valuation and provisioning and achieve a

single set of high-quality global accounting standards. – G20 Leader’s statement

para 15

On 23-24th July 2009, IFAC held a G20 accountancy summit in London to compose

IFAC recommendation for the G20 September meeting. At this summit, the IAI Chairman

Ahmadi Hadibroto who was also the immediate past chairman of the AFA (ASEAN

Federation of Accountants) delivered a presentation. In his presentation before the IFAC

summit, he affirmed Indonesia’s commitment to fully adopt IFRS by 2012. Indonesia’s

involvement in the G20 also improved political support from the Indonesian government.

For example in 2010, the Ministry of State Owned Enterprise (SOE) sent a letter to all

SOE’s directors requiring all SOEs to use PSAK (IFRS-based standards) and prohibit

SOEs from applying SAK-ETAP (Standards for SMEs). This request from the Ministry of


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SOE has encouraged the SOE, especially the listed SOEs, to create their roadmaps in

adopting IFRS50.

The pressure from the G20 and the World Bank provided a strong argument for DSAK

to use in trying to convince doubtful parties regarding the suitability of IFRS for the

Indonesia business environment. “If the G20 and the World Bank have recommended

IFRS and Indonesian leaders are committed to it, it is not a question of ‘Why IFRS?’

anymore, but more a question of “how and when we will fully comply with IFRS’.“

Those were commonly heard statements from DSAK’s chairman and other DSAK

members when they gave public seminars regarding IFRS during 2009-201051.

The pressure of ROSC assessment become one of the factors of due process rush in

2009-2010. The assessment for the 2010 ROSC report started in August 2009 when the

IAI need to fill in a survey sent by the ROSC consultant with regard to the accounting

standards development. DSAK received a significant amount of pressure to finish some

standards so they could be included in the ROSC assessment. The ROSC assessment was

included in DSAK’s agenda across several meetings from November 2009 – October

2010.

In the draft ROSC Report dated 8th March 2010, it was mentioned that the World

Bank’s assessment of IFRS convergence in Indonesia was ‘slow’. DSAK took this report

seriously and discussed a response letter in its board meeting on 27th April 2010 (DSAK

minutes of the meeting, 2010). On 10th May, DSAK sent a letter to the Ministry of Finance

to object to some paragraphs for the ROSC failed to acknowledge the significant progress

in the last six months. It was not easy to convince the ROSC consultant that significant

progress had been made and needed to be acknowledged in the report. The lobbying

process continued through emails and meetings and resulted in a delay in the publication

of the ROSC 2010 until April 2011. As a result of strong lobbying from DSAK, the

ROSC final report was published with revisions more favourable to the IAI, as detailed in

the Table 16 belowError! Reference source not found.:

50 For example, the IFRS roadmap published by one of the biggest Indonesian SOE, PT. Telkom

Indonesia is available in: http://www.telkom.co.id/UHI/UHI2011/ID/0912_IFRS.html (accessed 21st

September 2015) 51 Observations and past experience of the researcher as well as comments from some interviewees.

http://www.telkom.co.id/UHI/UHI2011/ID/0912_IFRS.html


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ROSC draft report as of 8th March

2010

ROSC final report as published on

the World Bank website

Indonesia’s programme of

converging PSAK with IFRS has been

very slow due to inadequate resources at

the disposal of the Financial Accounting

Standards Board. The progress of issuing

IFRS-based PSAK is quite slow mainly due

to the fact that the DSAK finds it difficult

to catch up with the growing number of

new and revised IFRS and interpretations

issued by the IASB…

Indonesia’s program of converging

PSAK with IFRS was slow in the past

due to inadequate resources at the

disposal of the Financial Accounting

Standards Board. However, a serious

effort was undertaken by the Financial

Accounting Standards Board to expedite the

convergence process in 2009. By March 31,

2010 the Board had significantly reduced

the gap between local standards (PSAK)

and IFRS by revising 15 standards and

revoking 15 non-IFRS based standards. The

progress of issuing IFRS-based PSAK is

quite slow mainly due to the fact that the

DSAK finds it difficult to catch up with the

growing number of new and revised IFRS

and interpretations issued by the IASB...

Table 16. Comparison between the ROSC draft and the ROSC final report of

Indonesia

Souce: DSAK document

By 1st January 2012, all IFRS as of 1st January 2009 has been effective except for

IFRS 1 First Time Adoption, IAS 41 Agriculture and IFRIC 15 Agreements for the

Constructions of Real Estate. Indonesia should have made formal decision in 2012 when

DSAK would fully adopt IFRS (closing the 3 year gap). However in March 2013,

Indonesian FSA made a public announcement that Indonesia was not in rush to fully adopt

current IFRS. Chairman of Indonesian FSA, Muliaman Hadad, in his speech in front of

IASB chairman made it very clear that only a stable IFRS will be adopted by Indonesia,

which indicates that DSAK will only translate and adopt IFRS that has been ratified by

IASB52. Any non-standard output from IASB such as discussion papers or exposure drafts

will not be circulated among Indonesia’s stakeholders

52 Muliaman Hadad keynote speech on seminar of “IFRS Dynamics 2013 and beyond: impact to

Indonesia” in Jakarta, 6th March 2013. In his speech, he also admitted that the IFRS implementation in Indonesia had many challenges as being highlighted by the media, for example :

http://bisnis.liputan6.com/read/528610/ojk-penerapan-standar-akuntansi-berbasis-IFRS-penuh-tantangan


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7.3.4 The implementation period beyond 2012: The case of accounting for land and

IAS 41

If accounting for rate regulated entities became an issue in Canada during the

implementation period, Indonesia had an issue related to accounting for land. Before the

adoption of IFRS, Indonesia had a specific accounting standard for land which was driven

by national land law. Indonesian GAAP basically stated that land was recognised as

property plant and equipment (PPE) and should not depreciated over its economic useful

life – it, in short, considered that land had an infinite life. During the IFRS convergence

period of 2008-2012, accounting standard for land was one of many non-IFRS standards

being withdrawn by DSAK. IFRS did not have a specific standard for land as the standard

for land would depend on the land law for each jurisdiction.

The Big Four accounting firms in Indonesia had different interpretations to Indonesian

law. Their view under IFRS according to accounting firms varied, some recognised the

land as PPE, others as finance lease, or even as operating lease. This had created different

practices among foreign subsidiaries in Indonesia, especially subsidiaries of European

companies, when they need to reconcile their financial statements from Indonesian GAAP

to IFRS for their parent companies.

Around the convergence period, the Indonesian board analysed the case for land under

IFRS. A focus group discussion was held among members of DSAK and the government

to interpret Indonesian land law with IFRS framework. The conclusion was that land

should be recognised as PPE and should not be depreciated. The board then issued an

exposure draft of interpretation No.25 to seek stakeholder’s comment. The board also

wrote a discussion paper and presented this at EEG meeting in India, on 19-20th December

2011.

On 13-14th March 2012, this issue was discussed at an IFRIC meeting where there was

disagreement with the Indonesian conclusion and a decision taken that according to IFRS,

land in Indonesia should be recognised as a finance lease. Unlike the Canadian standard-

setter, who seemed to be able to lobby the IASB successfully in its favour, Indonesia

lacked lobbying experience at an international level and achieved a negative result. In May


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2012, IFRIC was provided with more information by the DSAK, in the hope that they

would change their decision but IFRIC responded that this was a national jurisdictional

issue and could not be included in its meeting agenda.

Another issue in the implementation period was the adoption of IAS 41 Agriculture,

which also became an issue for Malaysia and India. Malaysia which was also targeting

2012 as its IFRS implementation year lobbied Indonesia to postpone the adoption of IAS

41 Agriculture. The use of fair value in measuring biological assets, according to

Malaysia, failed to consider long-lived biological bearer assets such as the palm

plantation. Malaysia as the number one palm oil producer in the world had a vested

interest to protect its industry. And because most Malaysian palm companies have

subsidiaries in Indonesia or plantations in Indonesian soil, it was also important for

Malaysia that Indonesia has the same effective date for the standard. If Indonesia decided

to adopt IAS 41 earlier than Malaysia, it would complicate the consolidated financial

reports of Malaysian parent companies.

Together Indonesia, Malaysia, India and other countries in the Asia-Oceania region

lobbied the IASB to revise IAS 41. After a series of lobbying efforts through the AOSSG

this issue was discussed by the IFRIC and the IASB in 2011. In June 2013 the IASB

issued an exposure draft allowing bearer biological assets to be measured at historical cost

and on 30th June 2014, the IASB published the ammendement of IAS 16 Property Plant

and Equipment to include bearer biological assets in the scope of IAS16. The example of

these two issues faced by Indonesia, compared to Canada showed that for countries

without a strong influence in the international arena, they need to lobby harder and

sometimes even join forces in their lobbying efforts where there are common issues facing

more than one jurisdiction.

7.4 Discussion

The case studies of the Canadian and Indonesian adoption processes demonstrate that

the decision to adopt IFRS without a strong legal and political mandate may result in a

longer and more challenging process. The decisions to adopt IFRS in Canada and

Indonesia were initiated by the accounting profession involving individuals with oversight


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over the national accounting standard-setter. Compared to the case of Philippines and

Brazil where the decisions were supported by strong legislation, the accounting standard-

setters in Canada and Indonesia needed a longer period to convince stakeholders that the

decisions to adopt IFRS would be good for the country.

The accounting standard-setters of both countries received more technical support

from their foundation compared to the Philippines and Brazil which enabled the boards to

carry out more detailed deliberations and ensure that all the steps required in the process

were carried out. The study documented some debate in Indonesia and Canada when they

had to make an important decision to switch from US GAAP to IFRS. In Indonesia the

switch (which received strong resistance from US GAAP supporters) took place between

1993 to 1994 while in Canada, the debate took place more recently, between 2004 and

2006.

The IFRS vs US GAAP quality debate in Canada and Indonesia emerged in two

different periods. The major shift from US GAAP to IFRS took place when Indonesia

adopted IAS for the first time in 1994 when IAS was arguably, not as good as IFRS at the

later stage when Canada adopted it in 2004. Nevertheless in two different periods, US

GAAP had been claimed as ‘local’ standard whereas IAS/IFRS was claimed as

‘international’.

In the previous case of Brazil and the Philippines, the decision to adopt IFRS had

strong legal and political support leaving national accounting standard-setters with fewer

burdens to convince doubtful stakeholders. However in the case of Canada and Indonesia,

the accounting standard-setters were the dominant actors to institutionalise IFRS.

Standard-setters in Canada and Indonesia were involved in extensive lobbying activities to

secure support from stakeholders. In Indonesia, the role of the chairman of the Indonesian

Institute of Accountants, Ahmadi Hadibroto, as the key actor was obvious and confirmed

by various respondents. In Canada, the decision-making process was more through

collegial activities of the board as an organisation. The accounting association (which

funded the standard-setter) instead of the government agency, introduced the idea of IFRS

adoption to the country, mobilising resources and actively getting involved in a series of

lobbying activities to ensure that the idea of IFRS was accepted.


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Apart from lobbying the domestic stakeholders, both countries also got involved in

international lobbying activities during the transition period. Canada’s lobbying activities

were more ‘international’ than Indonesia’s which had less international influence in the

IFRS-making arena. Both countries had challenges during the transition period of IFRS

adoption, but Canada seemed to have been able to influence the IASB to their favour

while Indonesia needed to form an alliance with Malaysia and India to amend IAS 41.

Indonesia and Canada are examples of active IFRS adopting countries, which did not just

adopt IFRS without reservations. The case of Indonesia and Canada show how national

regulatory field are interconnected with the regional or international field during the

decision making process and especially after IFRS was implemented.

The case studies of Canada and Indonesia also show more contested processes in

institutionalising IFRS to the national regulatory field. The IFRS supporter in Canada and

Indonesia were involved in the ‘creating’ institutional work by introducing the idea of

‘one global accounting standard’ to the field and at the same time ‘disrupted’ the idea of

developing their own unique accounting standards. For example in Canada, the small size

of its capital market had been used as an argument to undermine the idea of developing its

own unique accounting standards. During the decision making process, some arguments to

maintain US GAAP (or local standard which was derived from US GAAP) were also

observed for example by arguing that US GAAP was still a predominant accounting

standard (Canada) and a more sophisticated standard than IFRS (Indonesia).

Although the US GAAP supporters failed during the decision making period, but

during the transition period the US GAAP supporters were able to avert the decision to

prohibit US GAAP in Canada. During the transition period, Indonesia also redefined their

commitment to full IFRS adoption to IFRS convergence by reserving their rights to divert

from IFRS whenever necessary. DSAK exercised its right to take different position from

IFRIC in regard with the accounting for land. These developments during the transition

period, which is the period between the decision and the implementation year,

demonstrated that the IFRS adoption process is a continuous process and the contested

interplay between actors remains relevant even after IFRS adoption has been decided.


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7.4.1 IFRS vs US GAAP adoption decision: Was it ever about quality?

Internationally uniform accounting rules are a leap of faith, untested by experience or

by a significant body of academic results (Ball, 2006). Arguably switching from one good

quality accounting standard to another good quality accounting standard needed a bigger

leap of faith. A recent study in Canada revealed unintended consequences of IFRS

adoption where more Canadian companies reported under US GAAP after Canada adopt

IFRS in 2011. A study by Burnett and Jorgensen (2013b) found that more cross-listed

companies in Canada which could voluntarily adopt IFRS or US GAAP, decided to switch

from Canadian GAAP to US GAAP. Before IFRS adoption, about 20% of Canadian cross-

listed companies (45 out of 285) reported under US GAAP. In 2011, those 45 companies

continued to report unders US GAAP, but another 29 companies voluntarily chose US

GAAP over IFRS. When companies have options to choose standards, IFRS does not

always win the battle. In Switzerland where qualified listed companies have options to

choose IFRS, US GAAP or Swiss GAAP, 24 companies switched from IFRS to Swiss

GAAP since 2008. This is after the companies have adopted IFRS for a few years as

companies mostly used IFRS in 2005 (Fiechter et al., 2012). In Japan, since IFRS became

an option for more than 600 qualified listed companies in 2010, there were only less than

20 companies voluntarily adopting IFRS by 2013 (Bloomberg, 2013). This recent

phenomenon implies that companies differ in their perceived costs and benefits of

competing accounting standards.

However allowing few accounting standards in the capital markets increased the

monitoring cost by regulators which most countries avoided. With very few studies

comparing the reasons why companies voluntarily switch from one quality standard to

another, it is very diffucult to test the quality of IFRS as compared to US GAAP. As was

discussed in Chapter Three, some quantitative studies even revealed that US GAAP

produced better quality financial information than IFRS. (Lin et al., 2012; Bartov et al.,

2005; Leuz, 2003; Barth et al., 2012). Yet IFRS has been touted as a good quality set of

international accounting standards, on par with US GAAP, by advocates when educating

stakeholders in Canada and Indonesia.


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Although Canada and Indonesia exhibited more IFRS vs US GAAP debates than in

Brazil and the Philippines, however IFRS was not adopted because of its claimed superior

quality. In Canada respondents agreed that during the decision-making period, IFRS was

not ubiqutious knowledge among the stakeholders who were familiar with US GAAP. The

standard-setters needed to educate the stakeholders regarding the difference between

IFRS, US GAAP and Canadian GAAP. In Indonesia the educational materials and the

IFRS seminars were only available after the decision was taken in 2008. For Canada the

ability to get involved in the IFRS standard-setting process was a significant argument to

choose IFRS over US GAAP.

Most respondents from Indonesia and Canada commented on the importance of being

part of the international community. Canada has been taking part in in the international

arena of IFRS-making, while Indonesia’s international role and activities has increased

since the adoption of IFRS. Three international organisations often used by Indonesian

key actors were IFAC, the World Bank and the G20. On the other hand Canada’s

respondents were proud to mention that they were members of G4+1 and the fact that

Canadians hold several positions in IFRS governing bodies such as IFRS trustee, IFRIC,

IASB, IFRS Advisory Forum and ASAF.

Although Indonesia is not as influential as Canada in the international IFRS arena,

nevertheless the country’s international exposure and involvement has increased in Asia

since the decision to adopt IFRS in 2008. Indonesia’s standard-setters became more active

in the international activities of standard-setting. For example, Indonesia became the host

of the IFRS Policy Forum, an international event organised by the IFRS Foundation every

15 months which started in 2005. Indonesia also became active in the AOSSG and EEG.

Philippines, on the other hand, although it adopted IFRS since 2005, was not active in the

international arena.

7.5 Conclusion

The presented case studies of IFRS adoption processes in Canada and Indonesia have

some evident contrasts to the previously reported experiences in the Philippines and

Brazil. The adoption decision was risked to considerably more debate in Indonesia and


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Canada, emerging not from a governmental decision but being initiated by national

accounting standard-setters.

The accounting standard-setters may weigh the economic reasons of adopting IFRS,

i.e making accounting standards with minimum resources, but they may also have political

reasons to escalate their role as ‘partners’ of the IASB and being part of the greater world.

However one may argue that countries with a bigger capital market may face even more

pressure to adopt IFRS and abandon US GAAP entirely. Canadian securities regulators

tried to eliminate US GAAP as an option but they failed due to the strong resistance from

the users. Strong resistance from US GAAP users was also observed in Japan which will

be detailed in the next chapter.

The remaining two empirical chapters, Japan and the US exhibit two advanced

economies with capital markets of a significant size. Japan has a far less number of dual-

listed companies in the US compared to Canada, but the size of Japanese dual-listed

companies are much bigger like Mitsubishi, Toyota and Sony.

Chapter 8. Market Mechanisms and IFRS Convergence in Advanced Economies

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Chapter 8. Market Mechanisms and IFRS Convergence in Advanced

Economies: The Case of Japan

8.1 Introduction

The competition in the international accounting standard-setting arena between US

GAAP and IFRS has forced countries to take sides. Chapter six discussed the IFRS

adoption process which utilised a legalistic mechanism (in the Philippines and Brazil),

whilst chapter seven discussed the adoption process which involved lobbying mechanisms

(in Indonesia and Canada). Whilst, some countries have prohibited the use of US GAAP

completely, others such as Canada, encountered strong support from US GAAP users in

the country, which compelled market regulators to allow US GAAP to remain as an option

after IFRS adoption. Japan provides an illuminating case study of a country with

international influence which is caught in the middle of the rivalry between IFRS and US

GAAP.

Japan, took a different path in institutionalising demonstrating how the decision-

making process to adopt IFRS can be an uneasy pathway for a developed economy when

strong lobbying power is exhibited by its multinational corporations. Japan’s capital

market is the second largest in the world (WFE, 2013) suggesting that any decision about

accounting standards would have a significant impact for both national and international

stakeholders.

The Japanese business system is dominated by a large powerful group of affiliated

companies (or keiretsu). Compared to previous sample countries, representatives from

Japanese corporations have more political power in influencing the government’s business

decisions. Japanese corporation representatives, sit in various decision-making bodies

such as the IFRS Advisory Council, Business Accounting Council of Japan (BAC), a

subset of the Japanese Financial Services Agency (JFSA) and the Accounting Standards

Board of Japan (ASBJ).


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Although, in international IFRS discourse, the US and Japan are often classified as

non-IFRS adopter(s), there is one significant difference between the Japanese and US in

regard to their IFRS convergence programmes. IFRS is available for listed and non-listed

companies in Japan while in the US, domestic listed companies do not have an option to

choose IFRS over US GAAP. Between 2001-2013, Japan changed its position towards

IFRS adoption several times in response to international pressure and developments in the

US. This chapter will discuss the IFRS convergence process in Japan emphasising the

particular institutional work undertaken in attempt to institutionalise IFRS.

This chapter will briefly discuss the history of Japanese accounting standards and its

route to IFRS convergence starting with its “Big Bang” regulatory reform in 1996. The

golden period of IFRS convergence in Japan began in 2005 and ended in 2010, followed

by a divergence from its stated adoption pathway after the tsunami of 2011. Japan made

few significant decisions during the transition period 2010-2013 which illuminates how

the US development influenced Japanese decision which led a strategic repositioning of its

IFRS adoption. The discussion section of the chapter then will discuss the institutional

work and the key actors in IFRS adoption process in Japan.

8.2 “Big Bang” and the harmonisation period: 1996-2004.

Historically, accounting developments in Japan have been largely controlled and

orchestrated by the government as it pursued economic expansion and enhanced level of

tax collection. Accounting practices are regulated by three laws – the Commercial Code

(CC), the Securities and Exchange Law (SEL) and the Corporate Tax Law. The CC,

enacted in 1890 follows the German Commercial Code. Accounting for CC requirements

operates under a codified law system and provides highly codified accounting system,

characterised detailed rules, conservatism and a lack of transparency(Shiba and Shiba,

2007; Koga and Rimmel, 2007). The SEL, a contract of CC, was promulgated in 1948 and

is closely based on the US regulatory framework (Shiba and Shiba, 2007). As Japan tried

to modernise its market infrastructure after the end of the second world war, it took half a

century for the Anglo-Saxon system to be assimilated into the Japanese (Saito, 2008). The

Japanese capital market grew rapidly and the Tokyo Stock Exchange (TSE) became the


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second largest market after NYSE and has a higher market capitalisation than the London

Stock Exchange (Roxburgh et al., 2011). Around 30 Japanese major corporations are dual-

listed on US and Japanese stock markets and US GAAP has always been an important

reference point for development in Japanese GAAP.

In the 1980s and early 1990s, internationalisation of financial and capital markets had

pushed Japan into market-capitalism without the necessary institutions functioning as they

should (van Mourik, 2007). In the mid-1990s, Japan suffered from severe financial crisis

when various banks and securities companies went bankrupt and government bond ratings

were degraded (van Mourik, 2007). This forced Japan to undertake institutional and

regulatory reform. In 1996, the Japanese government announced a ‘Financial Big Bang’

and commissioned BAC to reform the financial reporting system. This resulted in a series

of major changes to the regulation of financial reporting in Japan (Doupnik and Perera,

2007). One of the major objectives of the “Big Bang” accounting reform was to ensure

that Japanese accounting standards were equivalent to other international standards which

were US GAAP and IAS (van Mourik, 2007).

Prior to the “Big Bang” in 1996, accounting weaknesses were exploited by some

companies in Japan. The Japanese business system is unique, dominated by intertwining

main banks with Keiretsu which is a groups of companies that work together in order to

support each other’s activities and to reduce contracting costs (van Mourik, 2007). From

an international perspective, unique characteristics and the behaviour of Japanese firms

have been criticised severely for being closed and secretive which is reflected in Japanese

corporate accounting policy choices and disclosure practices (Koga and Rimmel, 2007).

The Japanese “Big Bang” in 1996 reformed the financial reporting system in Japan by

embracing the IASC’s IAS and moving closer to a market-oriented accounting standards

system (Asami, 2006). A number of IAS became effective in Japan between 1999 and

2003 with the emphasis on consolidated financial statements and significant revisions of

accounting standards in financial instruments, research and development costs and pension

accounting (Duangploy and Gray, 2007). However, the adoption of new IAS did not

necessarily generate comparable practice with other jurisdictions. For example, following


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the adoption of deferred tax accounting in 1998 (under IAS 12 Income Tax) major

Japanese banks recognised $55 million worth of deferred tax assets, without which the

banks have been insolvent (Skinner, 2008).

Amongst the important changes of the “Big Bang” reforms was the transfer of

financial services regulation from the Ministry of Finance to a new independent agency,

JFSA. The JFSA, which emulated the UK FSA was established in July 2000 and

responsible for ensuring that the financial system is reliable, vigorous, fair and efficient

(Benston et al., 2006). With the establishment of the JFSA, any accounting standard

produced by the BAC was given legal status by the JFSA pronouncement.

Japan had been relying on the slow-moving BAC to develop its accounting standards

since 1952. Its productivity was not sufficient to match the market participant’s

expectations to keep up with international development in the early 2000 as the IASC was

transformed into the IASB (Uozumi, 2007). The lack of ability and speed was the most

crucial problem as the council’s members were part-time. The BAC spent several years

developing just one new standard (Uozumi, 2007).

In 2001, Japan established the Financial Accounting Standards Foundation (FASF) as

the parent organisation of ASBJ. The establishment of FASF shifted the accounting

standard-setting in Japan from the hands of the government to the hands of an independent

private sector entity. FASF was supported by 10 associations53, politicians and regulators

and received funding from market participants. The ASBJ took over the function of the

BAC and the JICPA (Japanese Institute of Certified Public Accountants) in developing

accounting standards and providing practical guidelines. The main purpose of the ASBJ in

2001 was to facilitate the harmonisation of international accounting standards (Nishikawa,

2011).

53 1) Nippon Keidanren, 2) JICPA, 3) The Tokyo Stock Exchange, 4) The Japan Securities Dealers

Association, 5) The Japanese Bankers Association, 6) The Life Insurance Association of Japan, 7) The

Marine & Fire Insurance Association of Japan, Inc., 8) The Japan Chamber of Commerce and Industry, 9)

The Security Analyst Association of Japan, and 10) The Corporation Finance Research Institute, Japan.


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In seeking to harmonise its accounting standards to IFRS, Japan’s approach still

appeared at this time to be heavily influenced by US GAAP with some study claiming that

Japan would opt for whichever of US GAAP and IFRS offered the most conservative

accounting options (Koga and Rimmel, 2007). Japanese GAAP has been developed in to

a unique set of standards that have been influenced by IFRS and US GAAP but ‘less

transparent’ in general (Benston et al., 2006). For example, the business combinations

standard in Japan still allows pooling of interest under strict conditions and requires

amortisation of goodwill, whereas both IFRS and US GAAP prohibited pooling and

systematic goodwill amortisation (Benston et al., 2006).

“The development of accounting standards in post-war Japan had been a process

of catching-up with the US. Although, the process was almost completed by the

accounting ‘Big-Bang’ in the late 1990s, US GAAP, except [for] immoderately

ideological fair value measurement, had as much influence on the development of

our standards as IFRS did during the new challenging stage of global

convergence. No social system can get rid of path dependency, so we tended to

feel strong affinities with US GAAP. “ (Prof. Shizuki Saito, interview 31st July

2013).

Nevertheless, as Japanese companies developed into multinational corporations,

Japanese GAAP became a significant accounting standard in the global capital market. In

2005, among the Fortune 500 companies, Japanese GAAP was applied by 81 companies

(about 16.2%), while 200 companies used IFRS and 176 companies used US GAAP

(Prada, 2006). Before the EU adopted IFRS, Japanese GAAP was also one of the foreign

standards acceptable in European capital markets.

8.3 The decision-making period: 2005-2010

When the “Big Bang” accounting reform was more or less complete in 2001, the

general opinion in Japan at that time was that Japanese GAAP, after the “Big-Bang”


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overhaul, had achieved international equality 54 (Benston et al., 2006). Then the

unexpected Enron scandal erupted in the US. The American rules-based accounting

system as the major benchmark for Japanese “Big Bang” reform lost its international

credibility. Moreover, in 2002, the EU announced that companies listed in the EU capital

markets would have to use IFRS for the basis of their financial statements or standards

deemed equivalent.

Many stakeholders in Japan, including the ASBJ and Nippon Keidanren, believed that

Japanese GAAP was equally as good as IFRS but this message was not well understood or

received by the rest of the world. In 2002, IFAD assessed Japan as a country with no

commitment to IFRS convergence (IFAD, 2002). Shizuki Saito commented that the IFAD

assessment had been as follows:

Our objective was (and is) to seek international convergence working together

with the US and EU, and simultaneously developing our national standards

independently. In the first place, however, the idea was not understood abroad and

Japan was once labelled as a country that did not make a commitment to

convergence, together with Iceland and Saudi Arabia (the US was not considered

though). (Saito (2008), pg. 4.).

Similar to the business association Nippon Keidanren, the ASBJ also believed that

Japan, US and IFRS accounting standards were comparable, good quality international

standards and each had to respond to their own issues rather than just following the

standards of others (Saito, 2008). Saito also believed that Japanese GAAP and IFRS

should be both accepted by capital markets in Japan and the EU. Also, he argued that the

market mechanism should be allowed to decide which accounting standard is better than

others (Saito, 2008).

54 See the policy proposal issued by Nippon Keidanren in 2003: Seeking International Collaboration on

Accounting Standards, http://www.keidanren.or.jp/english/policy/2003/096/proposal.html, accessed 11th

August 2014.

http://www.keidanren.or.jp/english/policy/2003/096/proposal.html


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The Business Association, Nippon Keidanren on its a policy statement, complained

about the international criticism that Japanese GAAP was not on par with other

international standards.

In the past there were criticisms by some that Japanese accounting standards

lagged behind those in other countries, and that accounting and auditing in Japan

was unreliable. However, developments such as those referred to above have

already raised Japan's accounting and auditing standards to a level that compares

favourably with international levels. It is imperative that this should be fully

understood by people involved in the market both within Japan and overseas.

(Nippon Keidanren statement, 21st October 200355)

In response to the international criticism, the Ministry of Economy, Trade and Industry

(METI) of Japan issued a report in June 2004 advocating the acceptance of Japanese

GAAP as being equivalent to IFRS (METI, 2004). According to the report, some

accounting standards in Japan such as business combinations were comparable to IFRS,

but in fact were more conservative and therefore more comparable to US GAAP (van

Mourik, 2007).

Unfortunately, the CESR (Committee of European Securities Regulators) held a

different view to METI with regard to Japanese GAAP being equivalent to IFRS. The

CESR assessment of Japanese GAAP on June 2005 concluded that there were 26 areas of

difference between Japanese GAAP and IFRS (CESR, 2005). The CESR considered

Japanese GAAP not to be the equivalent to IFRS and this brought concern for Japanese

companies listed in the European market. The CESR assessment had a significant impact

on Japanese companies raising funds in EU markets (Skinner, 2008; Kaneko and Tarca,

2008). The number of Japanese listed companies on EU markets plummeted from 83 in

2006 to 24 companies in 2006. Japanese mega-corporations such as Toshiba, Hitachi, and

Matsushita Electrics delisted during this period (Uozumi, 2007). The number of bond

55 Available from http://www.keidanren.or.jp/english/policy/2003/096/proposal.html, accessed 11th

August 2014.

http://www.keidanren.or.jp/english/policy/2003/096/proposal.html


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issuers also declined from 182 in 2004 to 156 in 2005. The market participants expected a

clearer political strategy from the Japanese government with regard to IFRS adoption.

In response to the pressure from market participants, the ASBJ started to work closer

with the IASB at the beginning of 2005 by launching a joint programme for convergence

between the two boards. In July 2006, the BAC issued an interim report “Towards the

International Convergence of Accounting Standards” outlining the future direction for

international accounting standards convergence by being more proactive and allocating

more human resources to the project.

The Japanese accounting standards should maintain its global feature, not to

become a local rule, which would continue being accepted in global markets. […]

It is noted that the IASB had extended an invitation to receive the ASBJ staff in its

convergence programmes with the FASB. It is expected that such invitation be met

favourably, with a view to enhancing Japanese involvement in the international

standard setting process. Business and accountancy industries are also expected to

provide a full cooperation in ensuring qualified human resources. (JFSA press

release, 31st July 200656).

An important change of leadership at ASBJ took place in April 2007. Ikuo Nishikawa

was appointed to lead the ASBJ in replacement of Prof. Shizuki Saito who was not a

supporter of one set of global accounting standards and his position was clear through his

writings (Saito, 2011; Saito, 2008) and during his interview for this study. The former

IASB chairman, Sir David Tweedie acknowledged that Saito was opposed to IFRS in his

interview with Bloomberg (Bloomberg, 2013). In contrast, the subsequent ASBJ

chairman, Nishikawa had been perceived as more cooperative and pro-IFRS. The support

for full IFRS convergence in Japan became stronger after Saito was replaced by

Nishikawa as ASBJ chairman in 2007. As the Japanese representative on the IASC from

1993 to 1998, and a partner of Ernst and Young ShinNihon from 1990 to 2001, Ikuo

56 Available at: http://www.fsa.go.jp/en/news/2006/20060731.pdf, accessed 1st August 2014

http://www.fsa.go.jp/en/news/2006/20060731.pdf


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Nishikawa had been involved in the discussions on the making of certain IASs and

arguably was more supportive of the idea of one global accounting standard.

Upon the appointment of Ikuo Nishikawa, the IFRS convergence process in Japan

was expedited. The Tokyo agreement was signed in August 2007 between the IASB and

ASBJ to detail the working plan of IFRS convergence in Japan. The agreement aimed for

an ambitious target: 2008 to eliminate major differences between Japanese GAAP and

IFRS and set a target date of 30th June 2011 for resolving other issues. Based on the Tokyo

agreement, the ASBJ published a revised project plan in December 2007. The Tokyo

agreement and other developments had convinced the CESR to advise that Japanese

GAAP was equivalent to IFRS as stated in paragraph 10 of its report issued in December

2007:

CESR would recommend that, come June 2008, the Commission should consider

Japanese GAAP equivalent, unless there is no adequate evidence of the ASBJ

achieving to timetable the objectives set out in the Tokyo Agreement. - CESR (2007

p.4)).

The final decision of European Commission (EC) was issued in December 2008 to

acknowledge that Japanese GAAP was an international standard equivalent to US GAAP

and IFRS adopted by the EU. The EC issued Commission Regulation No:1289/200857 on

12th December 2008 to stipulate four acceptable accounting standards for a consolidated

financial report on the European capital market: “EU IFRS”, “FRS other than EU IFRS”,

“US GAAP”, and “Japanese GAAP”.

Upon the CESR equivalent assessment, the momentum for full IFRS adoption was

built up in Japan, especially after the Vice Chairman of JFSA, Masamichi Kono, became

the chairman of the IFRS Monitoring Board in January 2009. A major step was taken by

the BAC in publishing its interim report in June 2009. It was a very important document in

the history of IFRS convergence in Japan as it outlined the pathway for future IFRS

adoption in Japan. The 20 page document titled “Opinion on the Application of IFRS in

57 The document is available at : http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:

32008R1289, downloaded 31st July 2014

http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:%2032008R1289

http://eur-lex.europa.eu/legalcontent/EN/TXT/?uri=CELEX:%2032008R1289


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Japan” 58 was a similar document to the US SEC roadmap issued in August 2008 59

(Nishikawa, 2011). The reports proposed that optional application of IFRS to qualified

companies should be allowed from the fiscal year ending March 2010. The report also

discussed that several issues needed to be monitored closely before Japan made a decision

in 2012 on the mandatory use of IFRS with a three year transition period. For example,

IFRS must accurately reflect the economic reality of businesses and trade practices in

Japan at the same time that it is a global standard (p.8). Other issues to be considered

before the 2012 decision were (p.8-11):

whether the governance of the IFRS Foundation had improved;

whether Japanese accounting stakeholders expressed opinions to the IASB

proactively and effectively;

whether IFRS was appropriately and promptly translated into Japanese; and

whether education and training on IFRS was sufficiently conducted in Japan.

The document also allowed the regulators to use their discretion in endorsing

individual IFRS as stated below:

… there may be cases in which Japan must suspend application of part of IFRS

developed by the IASB that are found seriously inappropriate and cannot be

recognised as accounting standards ‘that are generally accepted’ in Japan.“

(BAC Interim Report p.18, emphasis from the original document).

With the 2009 decision, IFRS would become an option for qualified listed companies

in Japan as from 2010. However, contrary to public understanding, the IFRS referred by

the BAC was not IFRS as issued by the IASB, but IFRS as endorsed by the JFSA or what

is popularly referred to in Japan as ‘Designated IFRS’. This IFRS is not identical with that

issued by the IASB because JFSA commissioners retain the right not to designate some

particular IFRS (although they cannot modify the original content of the IFRS). JFSA

58 The document is available at : http://www.fsa.go.jp/en/news/2009/20090701-1/01.pdf, downloaded

31st July 2014 59 The influence of US SEC roadmap in Japanese 2009 document was acknowledged by ASBJ

chairman, Ikuo Nishikawa in his article: A decade at ASBJ-from the past to the future.

https://www.asb.or.jp/asb/asb_e/asbj/message/voice/201109.pdf, accessed 6th August 2014

http://www.fsa.go.jp/en/news/2009/20090701-1/01.pdf

https://www.asb.or.jp/asb/asb_e/asbj/message/voice/201109.pdf


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endorsement or designation should occurs within one year of a standard or interpretation

being issued by the IASB or IFRIC.

The option of using ‘Designated IFRS’ from the end of March 2010 was also not

available for all Japanese-listed companies. Only companies which satisfied specific

requirements would have an option to use ‘Designated IFRS’. Based on an interview with

an ASBJ member, on this criteria, the ‘Designated IFRS’ would appear to be only

available to about 600 from a total of 3,470 listed companies in Japan. The main criteria

for companies to voluntarily apply for ‘designated IFRS’ were:

1. a listing on a securities exchange in Japan;

2. allocation of executives or employees with ample knowledge about ‘designated

IFRS’; and having in place a structure that enables them properly to prepare

consolidated financial statements in accordance with ‘designated IFRS’;

3. disclosure by companies, parent companies, other related companies or parent

companies of the other related companies either:

a. under laws and regulations of foreign jurisdiction periodically, as required

thereby, of documents on their business conditions prepared in accordance

with IFRS; or

b. under rules set by foreign securities exchange markets periodically, as

required thereby, of documents on their business conditions prepared in

accordance with IFRS; or

c. of ownership of a foreign subsidiary whose capital is equal to or exceeds

the equivalent of 2 billion yen.

Nevertheless, until the end of 2010 Japan seemed to be on track for adoption of IFRS.

The original intention for this BAC June 2009 decision was to make a decision on

mandatory adoption of IFRS around 2012 and to provide a transition period of three years.

Thus, if all criteria to adopt IFRS were satisfied in 2012, Japan would then make a

decision on when IFRS would be mandatory. In December 2009, JFSA made another

major decision to prohibit the use of US GAAP for qualified companies by 201660.

60 The decision by JFSA is available at http://www.fsa.go.jp/en/news/2009/20091211-8.html (accessed

6th August 2014)

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8.4 The transition period: 2010-2013

Before the tsunami hit Japan in 2011, the country was on a path to full IFRS adoption

by 2015 and prohibition of US GAAP use by 2016. Then on 11th March 2011, the

magnitude-9 earthquake hit the north eastern part of Japan and a tsunami followed one

hour after the earthquake. The earthquake and tsunami damaged nuclear plants in

Fukushima and several factories were forced to halt production due to blackouts. Large

factories owned by Toyota, Nissan, Honda, Nestle, and Sony suffered major damages

(Webb, 2011).

Two months after the tsunami, a group of Japanese manufacturing companies sent a

request to the Minister of Financial Services on 25th May 2011 (entitled “Requests on how

to deal with IFRS in Japan”). This was issued by major Japanese manufacturers and other

companies, such as Nippon Steel, Toyota Motor, Hitachi, Toshiba and Mitsubishi Electric.

They asked the government to re-consider the adoption of IFRS due to severe recovery

cost from the earthquake and the IFRS adoption cost would add their burden. The

objection from the manufacturers and also the damage caused by the tsunami forced the

JFSA to pull back its position with regards to their IFRS adoption pathway.

The Japanese Minister of Financial Services, Shozaburo Jimi publicly announced at a

press conference in June 2011, that the mandatory adoption of IFRS would not commence

in March 2015. The Minister also removed the termination date for the use of US GAAP

which had originally been set at 2016, so that the firms would be able to continue their use

of US GAAP61. Shozaburo Jimi also revised the transition time five to seven years. Should

Japan announce mandatory IFRS adoption in 2012, the application date would have

moved from 2017 to 2019. At this point, Japan was taking a similar position as the US

which had set no clear target on when they would make a decision on mandating IFRS.

The indecision of Japan’s ministry of finance was hugely influenced by the US’s

indecision towards IFRS convergence (also in 2011). The financial services minister

61 The transcript of press conference is available at :

http://www.fsa.go.jp/en/conference/minister/2011/20110621.html, accessed 6th August 2014

http://www.fsa.go.jp/en/conference/minister/2011/20110621.html


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explicitly stated in a press conference how the US SEC’s doubts about IFRS had also

encouraged Japan to re-assess its commitment to full IFRS adoption for:

“We are working on the assumption that the decision will be made in 2012 at the

earliest, so it is necessary to pay appropriate attention to the circumstances in

other countries, particularly the United States, which has made [it] clear that it

will make a decision over a period of five to seven years. To be extreme, my own

opinion is that Japan does not need to jump ahead and make its decision before the

United States. That is my frank opinion. After all, the United States is the world's

largest economy” (Minister of Financial Services Shozaburo Jimi answering

audience questions at a press conference, 21st June 2011).

An interview with members and staff of the ASBJ provided a similar view:

“We have been looking at US GAAP development and [the]US [position] back in

2008 to 2009 when [the] US seemed to have adoption of IFRS in a very short

period [in the future]. But looking at [how] subsequently the US seems they

[became] reluctant to [adopt] IFRS, the US development change the sentiment in

the Japanese community.” (ASBJ member, interview 1st August 2013).

“The simple statement of the Ministry means that Japan is not ready for the

decision. The reason behind that, first Japanese companies are not really happy

with IFRS adoption, partly because of the cost of transition to IFRS, but also they

are not convinced that IFRS is good quality. The other reason is the Japanese

earthquake in 2011 has affected the Japanese economy, so the government doesn’t

want to burden more. [The] US also has not adopted IFRS and it is the big factor

for the minister to postpone the decision about application of IFRS.” (Senior

technical staff of ASBJ, 23rd October 2012).

Many respondents from Japan revealed that stakeholders were not adequately

consulted before Minister Jimi’s decision, including the JFSA and the ASBJ. The chair of

the Securities Analysts Association of Japan (SAAJ) also admitted that he was not being


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consulted over the decision and did not agree with it, not least because it went against the

Japanese culture of decision-making, which views consensus amongst the key

stakeholders, as highly important for public policy matters62 . Other interviewees also

confirmed the tip-down nature of the decision:

“The decision by Mr. Jimi as Minister of Financial Services was rather a top-

down approach decision rather than bottom up. And we the Japanese government

are proudly operating the bottom up approach, but that decision was pretty much

a top-down approach. And the BAC did not recommend that. Other stakeholders

including the BAC and the ASBJ were not involved.” (One of the directors of

JFSA, interview 30th July 2013).

The decision to allow US GAAP currently still stands and Japan has never made a new

commitment to mandate IFRS for all listed and domestic companies. Since this 2011

announcement, the momentum for IFRS adoption in Japan has vanished. The June 2011

decision invited many negative responses especially from the European Commission. At

the IFRS advisory council meeting in June 2012, the director of the JFSA, Makoto Sonoda

received a very tough comment from Jeroen Hooijer, a meeting observer from the

European Commission,

“I’m flabbergasted, really I am flabbergasted. I don’t understand the strategy, I

am not sure whether there is still the political will in Japan to get there. […] at the

end of the day – and that is for your country, that was the same in my country, that

will be the same in the US – at the end of the day, it is a political decision. Do you

move to a new system or not.” (Jeroen Hooijer, observer from European

Commission – 19th June 2012 63).

62 Nemawashi is a Japanese term in business culture connotes patient, behind-the-scenes consensus-

building toward a decision of new policy. 63 Pod cast recording of the meeting is available from IASB website:

http://media.IFRS.org/AP8UpdateIFRSUSJAPAN18062012.MP3, accessed 3rd August 2014.

http://media.ifrs.org/AP8UpdateIFRSUSJAPAN18062012.MP3


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Tatsumi Yamada, a member of the IASB from Japan 2001-2011 expressed his

disappointment during a telephone interview with Bloomberg BNA in November, 22,

2011.

“[the] momentum to incorporate IFRS in Japan stopped. Japan has suddenly

changed direction, to the negative direction. That’s a pity. Why can’t Japan make

its own decision?” (Tatsumi Yamada(Bloomberg, 2013).

In November 2012, the IFRS Foundation opened its Asia regional office in Tokyo to

assist Asian countries in their transition to IFRS.64 The opening of the IFRS satellite office

in Tokyo could have been anticipated to improve Japan’s profile as the leader of IFRS

adoption in Asia. Instead, this decision was ridiculed at the IFRS advisory council meeting

which questioned why the IFRS Foundation would like to open an office in Japan which

abandoned their commitment to fully adopt IFRS.

“Why on earth would you open an office in a country that doesn’t apply IFRS?”

(Jeroen Hooijer, observer from the European Commission at the IFRS advisory

council meeting, 19th June 2012).

An IFRS Foundation regional office to assist Asian countries in their IFRS transition

could arguably have been better situated in countries such as Hong Kong or even South

Korea which have fully adopted IFRS in 2005 and 2011 respectively. However, Japan was

willing to assist in funding the operation of the IFRS Foundation office, as disclosed in the

IFRS Foundation Annual Report 2013:

Separate Funding of £315,000 / ¥50,000,000 (2012: £613,000 / ¥81,000,000) was

received towards the set up and operations of the Asia-Oceania office located in

Tokyo. (IFRS Foundation Annual Report 2013, pg. 54.).

During 2012, there were further discouraging developments in the US as the SEC

failed to provide a clear direction as to when the US would incorporate IFRS (discussed in

64 IFRS Foundation press release: http://www.IFRS.org/Alerts/PressRelease/Pages/IFRS-Foundation-

opens-regional-office-in-Asia-Oceania.aspx


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more detail in chapter nine). The BAC held several discussions from June 2011 to June

2012 but did not change the stance over IFRS. A summary of its discussions which

resulted in three major decisions:

accounting standards applied for consolidated and non-consolidated

financial statements should be different;

unlisted small and medium-sized entities should not be subject to IFRS

application;

cases of IFRS voluntary application in Japan should be accumulated

further.

In 2012, the BAC observed that Japanese companies were not enthusiastic in adopting

IFRS voluntarily. Although IFRS had been available since 2010, the number of Japanese

companies that adopted IFRS was small. In 2010, for example, there was only one

Japanese company which switched to IFRS and by June 2013, there were only 14

Japanese listed companies voluntarily adopting IFRS (see Table 17).

The Name of the Companies

Nihon DempaKogya Co., Ltd. SBI Holdings, Inc.

Sumitomo Corporation Tosei Corporation

Hoya Corporation Rakuten, Inc.

Nippon Sheet Glass Co., Ltd Chugai Pharmaceutical Co.,

Ltd

Japan Tobacco Inc. Nexon Co., Ltd

Anritsu Corporation Monex Group, Inc.

DeNa Co., Ltd Sojitz Corporation

Table 17. Japanese companies to have voluntarily adopted IFRS by June 2013

Source: Interview with the JFSA senior staff

The slow voluntary adoption of IFRS in Japan may have been caused by a lack of

incentives for Japanese companies. Companies which were dual-listed in the US would

mostly have adopted US GAAP and companies which raised capital in Europe were

allowed to keep using Japanese GAAP as it had been assessed as being comparable to

IFRS. Besides IFRS is only optional for consolidated financial statements while non-

consolidated financial statements need to be prepared in accordance with the CC.


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“I am afraid that there is not enough incentive for Japanese listed companies to

apply IFRS to their financial reports. As accounting standards are closely related

to legal and regulatory systems, full adoption of IFRS would cause a

corresponding cost of conflict with domestic legal environments. […] On the other

hand, Japan is a capital exporting country with a current account surplus. So,

most of the Japanese firms rely, primarily, on domestic capital markets to meet

their funding needs. […] Finally above all, I am afraid corporate managers are

fed up with the IASB’s ideological dispute over fair value measurement of assets

and liabilities.” (Shizuki Saito, interview 31st July, 2013).

The slow voluntary adoption of IFRS in Japan stands in contrast to South Korea,

where mandatory IFRS adoption began in 2011. Listed companies in South Korea had an

option, since 2009, to adopt IFRS and 33 Korean companies voluntarily adopted IFRS,

followed by another 153 voluntary adopters in 2010 (KASB, 2014). In the IFRS

implementation year of 2011, as many as 1,142 listed companies in South Korea adopted

IFRS (KASB, 2014). The success of IFRS adoption in Japanese neighbouring countries

arguably brought more peer pressure for Japan, especially as the accounting standard-

setters of China, South Korea and Japan have had annual meetings since 2001 (ASBJ,

2013). This peer pressure might also influence Japan to take some strategic repositioning

regarding IFRS adoption in Japan which will be discussed in the next section.

8.5 Strategic repositioning: IFRS in Japan beyond 2013

The international disappointment, in response to the Japanese 2011 decision and the

reluctance of Japanese companies to embrace IFRS did make BAC consider taking

another strategic position. On 19th June 2013, the BAC of Japan published a policy paper

entitled “The Present Policy on the Application of the International Financial Reporting

Standards (IFRS)”65. The new policy aimed to encourage the wider use of ‘Designated

IFRS’ in Japan and to extend it to non-listed companies. The BAC removed two out of

three requirements relating to the use of IFRS, making more companies eligible to use

65 Available at http://www.fsa.go.jp/en/news/2013/20130621-1/01.pdf, accessed 5th August 2014

http://www.fsa.go.jp/en/news/2013/20130621-1/01.pdf


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IFRS. The requirements of being ‘listed in the market’ and ‘owning a foreign business or

being foreign funded’ were removed, leaving one remaining requirement, which was

having sufficiently suitable accounting system for companies to produce consolidated

financial statements using IFRS. With this decision, ‘Designated IFRS’ became an option

for more than 4,000 Japanese companies, where as previously it was only available for

around 600 companies.

However in parallel with this decision, the BAC also introduced a new layer of GAAP

for Japanese companies, designated as ‘Japanese-endorsed IFRS’ (or dubbed J-IFRS in

Japan). J-IFRS is different from ‘Designated IFRS’ which is the IFRS as endorsed by

JFSA without any modification. J-IFRS is a set of accounting standards which reflects

Japanese perspectives on IFRS and allows the ASBJ to adopt IFRS with modifications if

necessary. One of the modification for example is to allow amortisation of goodwill which

is prohibited under ‘Designated IFRS’. ‘Designated IFRS’ is a set of IFRS designated by

the JFSA without modification but JFSA reserved its rights to delay the effective date of

new IFRS standard. On July 2014, ASBJ named this J-IFRS in to Japanese Modified

International Standards (JMIS)66.

The creation of JMIS, the ASBJ argued, would simplify the comparison as the ASBJ

would modify the IFRS instead of adopting the substance of IFRS in various documents

under the umbrella of Japanese GAAP.67 Japanese GAAP has a different taxonomy to

IFRS. Therefore although IASB claimed that Japanese GAAP has been harmonised with

IFRS in substance, it is a daunting task to map a particular IFRS with its corresponding

Japanese GAAP standard. Understanding what constitutes Japanese GAAP can be

challenging. Under the securities and exchange law, Japanese GAAP consists of the

following (Yaekura, 2005):

1. ordinances issued by the JFSA including regulations of financial statements

2. BAC principles

3. BAC opinions, standards and interpretations

66 Exposure Draft of ASBJ Japanese Modified International Standards on 31st July 2014. Available at:

https://www.asb.or.jp/asb/asb_e/endorsement/exposure_drafts/exposure_20140731_02_e.pdf (Accessed at 11th August 2014

67 Interview with vice chairman and member of ASBJ, 30th July 2013.

https://www.asb.or.jp/asb/asb_e/endorsement/exposure_drafts/exposure_20140731_02_e.pdf


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4. JICPA practical guidance including Accounting Standards Committee Reports

; and

5. (where applicable) industry-specific regulations (e.g., banking regulations

The strategy to create ‘Japanese IFRS’ was against the common norm that IFRS

should be adopted without any modifications. Some jurisdictions which have adopted

IFRS have made minor alterations, for example, Brazil did not adopted the revaluation

model for property, plant and equipment and only allowed the historical cost model.

Allowing such exceptions in the IFRS adoption process is still acceptable for the IASB

(private conversation with senior staff of IASB). JMIS, on the other hand, may replace one

principle with another opposite principle such as bringing back the amortisation of

goodwill. Table 18 provides the comparison of permissible accounting standards in Japan

before and after the 2013 decision.

2010-2013 After June 2013

Japanese GAAP: Many are still rules-based

or industry specific. This may include

accounting standards, practical guidelines,

practical solutions and JICPA reports.

Japanese GAAP: Many are still rules-based

or industry’s specific. This may include

accounting standards, practical guidelines,

practical solutions and JICPA reports.

US GAAP for US SEC registrants US GAAP for SEC Registrants

Designated-IFRS: IFRS as designated by

the JFSA available for all qualified listed

companies (around 600 listed companies).

JFSA cannot modify the standard but can delay

the effective date of a single IFRS.

Designated IFRS: IFRS as designated by

the JFSA available for listed and non-listed

companies.

Not available JMIS: IFRS as modified by the ASBJ.

Available for listed and non-listed companies as

long as the internal company infrastructure

allows

Table 18. Accounting standards in the Japan before and after June 2013

Japanese delegates at the IFRS Advisory Council meeting in October 2013 strived to

convince the international community that J-IFRS would be a temporary decision to

encourage Japanese companies to use the ‘Designated IFRS’ which is considered as ‘the


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pure-IFRS’. However the decision to create J-IFRS also indicated that Japan wanted more

flexibility in adopting IFRS while retaining its sovereignty over Japanese GAAP.

While continuing to allow the use of pure IFRS, creating an endorsement system that

examines individual standards from the Japan’s viewpoint of ‘IFRS as they should be’

or ‘IFRS suitable for Japan’ and adopts the standards after deleting or revising some

standards as necessary, is considered useful for the purpose of ensuring the

implementation of flexible responses in Japan. (BAC policy statement pg.7).

Such a decision to allow four different standards (Japanese GAAP, US GAAP,

Designated IFRS and JMIS), although JFSA claimed it would be temporary, have raised

some concerns from other international stakeholders as to whether this new development

would be a long term condition in Japan. Members of the IFRS Advisory Council, which

comprise a wide range of international organisations including the Big Four accounting

firms, the World Bank, IOSCO, the IMF and standard-setters, and challenged the JFSA at

the meeting in October 2013:

“Is there something in the legislation that you are reporting to us today that

requires it would be revisited in five years’ time, three years’ time to actually make

sure that this doesn’t exist as four sets of GAAP for 25 years of time.“ (A member

of the IFRS advisory council, meeting at 18th October 2013).

JFSA delegates answered that Japan has no plans to revisit the decision in the near

future as to how long the temporary J-IFRS would be available for use. This was

discomforting, not least because the permission to use US GAAP in Japan also started

(nearly 40 years ago) in 1976 as something ‘temporary’. The Japanese Minister of

Finance’s decision in the Ministerial Ordinance No.28 stated that for the time being

consolidated financial statements according to US GAAP and filed with the US SEC could

be issued instead of consolidated financial statements in accordance to Japanese GAAP

(van Mourik, 2007). US GAAP was never meant to be something permanent in Japan

when it was allowed for the first time. US GAAP was permitted because Japan was still


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developing its accounting standards for consolidated financial statements which were

completed in 1997.

There was concern among the member of IFRS Advisory Council that the decision to

permit more accounting standards would cause confusion among market participants.

“As a regulator does your agency have any concern about the ability to oversee

and monitor four different sets of standards. With four sets of standard does it

create any problem for you as regulator? Have you solicited any input from

analysts or from the user community in Japan and how do they feel having four

sets of standards.” (A member of the IFRS advisory council, meeting at 18th

October 2013).

JFSA answered confidently in the 18th October meeting that it had secured support

from the Japanese business communities for this decision. A few days before the BAC

decision, the Keidanren68, published a policy proposal on 10th June, 2013: “Basic Stance

on Japan’s Future Corporate Accounting System”. Keidanren’s policy proposal was very

similar to the BAC proposal. The policy proposal stated in their summary69 no 2, 3 and 4:

(2) Under the current international situation, it is necessary to maintain the

current system in Japanese market where JGAAP (Japanese GAAP), IFRS, and US

GAAP co-exist. (3) At the same time, measures should be taken to expand the

voluntary application of IFRS. (4) As for JGAAP, its quality needs to be

maintained at a high level. As for IFRS, an endorsement process for evaluating the

validity of each standard should be introduced. (The summary of Keidanren’s

policy proposal, 10th June 2013)

The IASB and the IFRS Foundation have been against such locally modified IFRS for

years and have strongly requested countries to adopt IFRS word for word. Producing

68 Kaidenren is the Japan Business Federation, an organisation with a membership of 1,309

representative Japanese companies of Japan, 112 nationwide industrial associations and 47 regional

economic organisations (as of 1st July 2014). 69 The summary of policy proposal is available in http://www.keidanren.or.jp/en/policy/2013/056.html,

accessed 5th August 2014.

http://www.keidanren.or.jp/en/policy/2013/056.html


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Japanese-endorsed IFRS, although the JFSA and the ASBJ have said it was only

temporary, sent an unmistakable signal that Japan would not adopt IFRS fully in the very

near future. It conflicted significantly with another parallel strategy to encourage the wider

use of IFRS in Japan.

Japanese respondents revealed that these two conflicting decisions were apparently

intended to placate the IFRS Foundation and others involved in international accounting

standard-setting as well as its corporations who are reluctant to adopt IFRS. To retain the

influence through Japanese seats in various IFRS standard-setting arenas such as the IFRS

Trustees and the IASB, Japan needed to be perceived as ‘moving forward’ towards IFRS

adoption. Moreover, as Japan became the chair of the IFRS Monitoring Board, it brought

more pressure to the country to promote the wider use of IFRS in Japan. ”

“If Japan doesn’t use IFRS, there’s a pressure. Many people say Japan you don’t

use IFRS why are you chairing the IFRS Monitoring Board? And Japan you are

not using IFRS why should I take your position as a trustee and [member of the]

IASB. […] and the politician thinks it is important for Japan to have a seat in the

international place […] so many people agreed that Japan should keep influencing

IFRS otherwise, basically, we are following what other countries think.”

(Anonymous respondent, IASB senior staff in Tokyo’s office, interview 29th July

2013.)

“I don’t know but it is often said that the FSA tried to play up to the IASB. As long

as the full adoption of IFRS was impractical, they had to render devoted service to

the IASB in order to keep their seat on the Monitoring Board of the IFRS

Foundation. It is not my own guess but a thing of which I have heard so much.”

(Anonymous respondent, accounting professor, interview 31st July 2013).


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This decision to provide more accounting standards options was commented on in an

article in the ICAEW magazine “Economia”70 as a messy compromise:

Japan has accounting standards to spare. Indeed, even as other countries simplify

their financial reporting, Japan’s internal debate over standards has led to the

proliferation of accounting options. Businesses already use Japanese GAAP and

can also voluntarily plump for either US standards or what may be called pure

International Financial Reporting Standards (IFRS), as issued by the international

standard-setter. But with debate raging over the use of full IFRS Japanese

companies will shortly be presented with yet another set of standards to opt for - a

kind of IFRS light, or, as locals have dubbed it, J-IFRS. One external observer

described the decision to economia as ‘a messy compromise’. (Economia, 7th

October 2013).

Nevertheless, the 2013 decision demonstrates the sensitivity and complexities

surrounding the adoption of IFRS in Japan. The path towards IFRS convergence in Japan

has never been isolated from other national and international events. Besides their national

event such as 2011 tsunami, Japan IFRS pathway was also highly influenced by decisions

made in Europe and the US. The next Table 19 summarises an important milestone of

IFRS convergence in Japan with the relevant international and national events.

Relevant international events

Japanese events

November 1996 “Big Bang” accounting

reform

October 2002 Norwalk Agreement IASB

and FASB

July 2001 the establishment of ASBJ

2005 Adoption of IFRS in Europe January 2005 ASBJ-IASB launched a joint

programme for convergence

April 2005 US SEC published a ‘roadmap’

aimed at elimination of the reconciliation

requirements for foreign registrants using

IFRS

June 2005 CESR advice: Japanese GAAP is

not equivalent to international standards

July 2006 BAC published “Towards

70 The article is available at: http://economia.icaew.com/business/october-2013/japan-opts-for-IFRS-almost,

accessed 5th August 2014

http://economia.icaew.com/business/october-2013/japan-opts-for-ifrs-almost


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International Convergence of Accounting

Standards”

November 2006 Establishment of Japan-EU

monitoring board

October 2006 ASBJ published the IFRS

convergence project plan

April 2007 Ikuo Nishikawa was appointed

as ASBJ chairman replacing Prof. Shizuki

Saito

November 2007 US SEC allows IFRS use

for foreign private issuers

August 2007 IASB-ASBJ Tokyo

Agreement signed

December 2007 CESR advice : Japanese

GAAP is equivalent to other international

standards

December 2007 ASBJ published the revised

project plan based on the Tokyo Agreement

August 2008: US SEC issued the roadmap

towards the required adoption of IFRS for

the US issuer.

January 2009: IFRS monitoring board was

established. The commissioner of JFSA

became the chair of the board.

June 2009 BAC published ‘Interim Report’

to allow IFRS for qualified companies in

2010 and a roadmap to make a decision in

2012 whether IFRS would be mandatory in

Japan.

December 2009, JFSA decided to prohibit

the use of US GAAP by March 2016.

2009-2012 US started to slow down its

IFRS convergence process. Please refer to

chapter nine for more detail on the US case

study.

March 2011, Earthquake and Tsunami in

Japan

June 2011 JFSA abandoned the IFRS

convergence pathway published in 2009.

US GAAP remains an option for US SEC

registrants until the unforeseeable future.

No target year when IFRS would be

mandatory

November 2012 the IASB opened a

regional office in Tokyo, Japan.

July 2012 : BAC published an interim paper

which summarised deliberations from June

2011-June 2012

June 2013 BAC published the “The Present

Policy on the Application of IFRS” : IFRS

became option for listed and non-listed in

Japan and the introduces ‘Japanese-

endorsed IFRS’.

Table 19. Japanese IFRS convergence timeline with relevant international events


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8.6 Discussion

Japan’s decision to embark on IFRS convergence in 2005 has been very much

influenced by the decision of the EU in adopting IFRS (van Mourik, 2007; Kaneko and

Tarca, 2008; Skinner, 2008; Uozumi, 2007). As the second largest capital market, Japan

is an important country for the IASB - without Japan on board, any set of international

accounting standards would find it difficult to earn the title ‘global’. Therefore, Japan’s

decision to allow IFRS as an option in 2010 was widely celebrated by IASB. This decision

was leveraged by the chairman of the IASB in numerous speeches to try to convince the

US to adopt IFRS:

“Japan now provides an option for domestic Japanese companies to prepare

financial statements in accordance with IFRS, while formally deciding next year

on mandatory adoption of IFRS. Japan has also signalled that it will eliminate the

option for the use of US GAAP in 2016.” (Speech by David Tweedie, addressing

the US Chamber of Commerce, 10th March 201171).

“IFRS are no longer just for Europe. In the last five years we have seen IFRS

adoption move at an astonishing pace. […] In Asia-Oceania, Australia, Hong

Kong, Korea, New Zealand and Singapore are also full adopters. Japan already

permits some companies to report using full IFRSs and will decide next year

whether to mandate a full transition to IFRSs.[…] Of course, the countries that

still have to make further and final steps towards full IFRS adoption are looking

very carefully at what is happening here in the United States. (Speech by Hans

Hoogervorst to the AICPA Conference, Washington 6th December 201172).

However, when in 2011, Japan decided to abandon its 2009 IFRS roadmap, the

decision was highly criticised by international IFRS supporters. Similarly, international

71 The full speech is available at: http://www.IFRS.org/news/announcements-and-

speeches/Pages/convergence-or-not-speech.aspx (accessed at 25th September 2015)

72 The full speech is available at : http://www.IFRS.org/Alerts/Conference/Pages/Hans-Hoogervorst-

AICPA-Conference-SEC-and-PCAOB.aspx (accessed at 25th September 2015)


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outcries were also documented against the US SEC’s lack of decision in 2012 (this will be

discussed in more detail in chapter nine). Japan clearly changed its commitment to adopt

IFRS fully in response to the decision of the US. Further, to avoid upsetting the supporters

of US GAAP in Japan, (especially Japanese dual-listed corporations) Japan chose to US

GAAP as an option. However, to be perceived by the international community as

supporting the goal of achieving one set of global standards, the JFSA allowed IFRS as an

option for non-listed companies in 2013.

The BAC decision in June 2013 to promote competition amongst standards in its

jurisdictions was applauded by the US. The remark by FASB Chairman73, Russel G.

Golden before the Keidanren and Financial Executives International clearly expressed

support for the action taken by Japan:

As we work toward developing more converged global standards, it is critically

important that we also maintain and improve the high-quality of our national

accounting standards, including Japanese GAAP and US GAAP. There are likely

to be occasions when preserving the integrity of our national business cultures

require us to maintain some differences in national accounting standards. These

views of the Keidanren and BAC are consistent with discussions we have had at

the FASB. I would go further, however, and tell you that I believe it is critically

important that Japan and the United States together take a leadership role in

advancing these principles throughout the world. By building a stronger

relationship among our standard-setting bodies, I believe we can make this vision

a reality. (Speech by Russel G. Golden, meeting in Tokyo, 16th October, 2013).

Japan’s pride in its own accounting standards and insecurity about being isolated from

the international community, has resulted in mixed decisions about IFRS adoption.

Japan’s recent decision to relax the requirements for companies in Japan has made IFRS

available both for listed and private companies. The decision emerged as a way to

maintain Japanese influence in the IFRS policy-making arena (similar reason was also

73 The full written remark is available at :

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocument

Page&cid=1176163511018, accessed 5th August 2014

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176163511018

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176163511018


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advocated by Canada). However, at the same time the fact that Japan decided to create a

Japanese version of IFRS indicates that Japan has had reservations on IFRS quality and

does not want to relinquish its right to modify IFRS when it is felt that Japanese

accounting methods are better ( e.g. goodwill amortisation).

8.6.1 Market competition as institutional work in IFRS convergence processes

As demonstrated in previous chapters, countries have been involved in various

institutional works to adopt IFRS. Some countries chose a legalistic mechanism where by

it was legally mandated for IFRS to be adopted. On the other hand, the countries without

strong legal support pursued lobbying mechanisms to convince various stakeholders and

reach consensus on the decision to adopt IFRS. The lobby mechanism took a longer time

for the decision to emerge relatively to the legalistic mechanism. Japan undertook a

different pathway to the institutionalisation of IFRS - on which was less coercive and

creating which essentially a competition among accounting standards in its jurisdiction.

This more competitive environment for accounting standards is ostensibly similar to

what has happened in Switzerland, where listed companies have options between IFRS,

Swiss GAAP and US GAAP. However, in contrast to Switzerland, Japanese officials on

various occasions enunciated that they supported the goal of one set of global accounting

standards 74. The authorities in Switzerland did not indicate any such support in its survey

to IFRS Foundation.75 Thus, the accounting standards competition in Switzerland serves a

different purpose. Switzerland allowed competition between standards in order to remain

neutral and not take side between IFRS and US GAAP, while Japan created competitions

to institutionalise IFRS in a country in a non-coercive way.

The environment where market participants can voluntarily choose accounting

standards has been advised by some scholars. (Kothari et al., 2010; Walker, 2010; Saito,

2008; Sunder, 2002). Kothari et al. (2010) envisioned a setting where the FASB and

74 For example in the article by Ikuo Nishikawa “A Decade of ASBJ”, 15th September 2011; Survey by

IFRS Foundation filled by ASBJ for IFRS jurisdiction profile and BAC Report 30 June 2009. 75 Based on the IASB survey filled by the standard setting body of Switzerland. The survey is available

at: http://www.IFRS.org/Use-around-the-world/Documents/Jurisdiction-profiles/Switzerland-IFRS-

Profile.pdf, accessed 6th August 2014.

http://www.ifrs.org/Use-around-the-world/Documents/Jurisdiction-profiles/Switzerland-IFRS-Profile.pdf

http://www.ifrs.org/Use-around-the-world/Documents/Jurisdiction-profiles/Switzerland-IFRS-Profile.pdf


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IASB compete on reputation as this could foster more innovation in accounting standards

development. The authors also suggested that in order to level the playing field under the

FASB-IASB competitive approach, European listed companies should be allowed to

choose FASB standards (Kothari et al., 2010). The idea of more than one set of global

accounting standards was also proposed by Walker (2010). He urged caution to imposing

one set of global accounting standards for all capitalism as he argued that there are

varieties of capitalism, and it is not obvious which variety is the best. The forced adoption

of one single set of accounting standards runs the risk of restricting other types of

capitalism (developing) and the world’s economy may be better served by alternative

forms of capitalism with accounting standards tailored to suit its need (Walker, 2010).

Further, when standard choice has existed, the evidence is not that supportive of the

dominant quality claim made for IFRS. In Switzerland for example, where the three

standards are permitted for listed companies, there has been a recent switch from users of

IFRS back to Swiss GAAP. From June 2008 to 2012, 24 listed companies in Switzerland

which switched from IFRS to Swiss GAAP. 4 companies switched in 2012 including the

famous watch producer Swatch in October 2012 (Fiechter et al., 2012). In Canada, 15% of

qualified companies (29) which have options to use Canadian GAAP, IFRS or US GAAP

chose US GAAP instead (Burnett and Jorgensen, 2013b).

Market competition as an IFRS convergence mechanism can be expected to take a

longer period for IFRS to be institutionalised in the country compared to legalistic

mechanisms. Eventually IFRS may well become the de facto standard when the majority

of market participants use IFRS over other standards. This could never be achieved if the

companies are not convinced that IFRS would bring economic benefit to them. The

decision for firms choosing an accounting standard may have different logics than when a

country makes a decision. As demonstrated in this study, the authorities of a country may

decide to adopt IFRS for political reasons, such as being part of the international

community. Firms, arguably, would have more economic considerations in choosing a

standard such as the transition cost. For example, research by Fiechter et al. (2012)

revealed that most of the Swiss companies which switched from IFRS to Swiss GAAP did

this due to the extreme or increasing complexity of IFRS and the high administrative costs

associated with reporting under IFRS.


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8.6.2 Key actors in IFRS convergence process in Japan.

The role of JFSA, BAC and ASBJ in the IFRS convergence were acknowledge by

most of respondents. Besides ASBJ, interviewees also identified JICPA as a strong

supporter of IFRS adoption in Japan. JICPA was quoted by a respondent as “too eager”

for the adoption of IFRS which “fed up” some Japanese companies76. Respondents also

commented that JICPA strong support to IFRS adoption may be influenced by the

economic motives as IFRS adoption would create opportunities for JICPA members to

offers IFRS consultancy to their clients.

“JICPA had been consistently advocating the adoption, full adoption of IFRS for the

benefit of their own businesses with no high minded view on it.” (Anonymous

respondent, accounting professor, interview 31st July 2013).

Similar to Brazil where the decision to adopt IFRS created a private standard-setter

which then undertook the responsibility of institutionalising IFRS, the decision to

harmonise with international standards also created a new standard-setter: the ASBJ. Often

dubbed as the Japanese version of the FASB, the new standard-setter then became the

‘technical voice’ of Japan in the international IFRS arena. The ASBJ also became the

gate-keeper, the endorser of each individual IFRS entering the country.

However, for a country with a strong governmental influence in accounting standard-

setting like Japan, relinquishing authority to an apparently private standard-setter was a

significant and unexpected move. Other governments, for example China, conveniently

kept their standard-setter inside the government while adopting IFRS. From interviews

with the respondents, the main reason for Japan to establish a private standard-setter was

the perception that a private standard-setter was deemed necessary to secure a seat for

Japan on the newly established IASB.

Back in 2000, when the nominating committee was established to select IASB

members, there was no one from Japan among its seven members77. Anxiety was raised

76 Interview with respondents No.50, an accounting professor, 30th July 2013 77 Seven members of nominating committee Camfferman, K. & Zeff, S. A. (2007) Financial Reporting

and Global Capital Markets: A History of the International Accounting Standards Committee, 1973-2000: A


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among Japanese stakeholders that the country was not going to have a representative on

the IASB and Japan would lose its international influence (Uozumi, 2007). Some

respondents remembered this period and commented that the pressure to be represented at

the IASB’s table was pivotal to shifting the standard-setter from the governmental domain

to the private domain. Japan eventually was represented in the IASB by Tatsumi Yamada

in 2001, followed by Takatsugu Ochi in 2011 until June 2016.

“In order to be a member, to support the IASB, each country must have a sort of

private standard-setter. IASB didn’t tell Japan anything. But the perception at

that time is that in order to be a member, in order to send a member from Japan

to the IASB board. And Japanese standard-setters must be from the private sector.

That was the perception at that time. That was the driver for the Japanese people

to create the ASBJ.” (Former IASB member from Japan interview 6th March

2013).

Japan established the new private standard-setter ASBJ; however the BAC has been

the standard-setter in Japan since 1952. It is the ASBJ’s initiation to work closer with

IASB in 2002 which resulted in the Tokyo Agreement of 2007 but behind-the-scenes

support from the BAC was imperative for the ASBJ to pursue the IFRS convergence

project. In most interviews, respondents acknowledged that the BAC was a very powerful

body in setting the strategic decision of Japanese accounting standards and that the ASBJ

implemented the decisions of BAC.

“We initiated the convergence project in 2004 2005 and there is no statement by

the BAC of the FSA. And we also initiated the Tokyo agreement. We had the Tokyo

agreement in 2007 and there is no explicit endorsement by the FSA [BAC of FSA].

However, we consulted with the BAC before and after the agreement. We

consulted with the BAC and they have informally endorsed to agree our position .”

(Interview with vice chairman of the ASBJ, 1st August 2013).

History of the International Accounting Standards Committee, 1973-2000. New York: Oxford University

Press.: Arthur Levitt (Chairman of US SEC), Michael Prada (Chairman of France’s COB), Howard Davies

(Chairman of UK FSA), Andrew Sheng (Chairman of the Hong Kong Securities and Future Commission),

James D. Wolfensohn (President of World Bank), James E. Copeland, Jr., (Chief of Executive of Deloitte),

Karl-Hermann Baumann (Deputy Chairman of Germany Accounting Standard Board)


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The 2013 decision to create J-IFRS was also proposed by the BAC in its interim report

which was then executed by the ASBJ. This is quite different from the case of Indonesia

and Canada where their respective private accounting standard-setters were the ones who

making strategic decisions with regard to IFRS adoption.

“The FSA is responsible for legislative changes, which include the adoption,

whether to require the application of IFRS and we are operating under the

legislative requirements. So, if the FSA suddenly abandons the Japanese

accounting standards, we have no responsibility for the development of the

Japanese Accounting Standards. If they say endorsement of IFRS isn’t necessary,

well we shouldn’t [be developing J-IFRS] but they themselves have to consult with

the key stakeholders which is the BAC.” (Vice chairman of ASBJ, interview 1st

August 2013).

The BAC is an advisory council working in a milieu where Japanese companies have

been working in collaboration with, instead of adversarial to, government policy-making.

For example one of the more vocal members of the BAC is Yukihiro Sato, senior

economic adviser at Mitsubishi Electrics. He is also the chairman of the Corporate Finance

Executive Committee of METI, and a councillor in the Japanese Financial Accounting

Standard Foundation (retired in 2013).

The influence of Japanese corporations in various advisory councils creates a unique

regulatory field compared to other countries. In Canada, big companies are involved in

decision-making through the comment letters to regulators. In Japan, corporations are

involved in the closed-door deliberations of various advisory committees. The Keidanren,

is also a very influential organisation with regard to IFRS convergence in Japan.

Keidanren policy statements are often issued at almost the same time as the JFSA policy

statements with strikingly similar conclusions.

8.7 Conclusion

This chapter has deliberated the case study of Japan where the path to institutionalising

IFRS in the country involved accounting standards competition or the market mechanism.


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In contrast with the legalistic mechanism discussed in chapter six, the market mechanism

is a method where IFRS was introduced to the country through the voluntarily adoption by

market participants. The listed companies in Japan have four options of accounting

standards: IFRS, Japanese GAAP, J-IFRS and also for eligible companies, US GAAP.

Most of the listed companies in other IFRS adopting jurisdictions do not have these

options as IFRS is mandated- such that in some countries IFRS is the only standard

available as the local standards ceased to exist upon the IFRS adoption.

The case study of Japan also demonstrated the actor’s effort to “create” a new belief

system of “one global accounting standard” in the regulatory field was not an easy task.

The IFRS supporters such as JICPA and ASBJ have been trying to institutionalise IFRS

and their efforts have been partially successful as Japan seems to move to a more IFRS

favourable way by allowing IFRS for non-listed companies. However in the same time,

the institutional work to disrupt the use of old accounting standards have been less

successful in Japan. The study of IFRS convergence in Japan offers a refined explanation

to the institutional work theory that in the case of institutional disruptive work failure, the

old institution may compete with the new one in the same field. This may create a

competing logic of accounting standards in the national regulatory field.

Relying on such a market mechanism arguably is a less coercive pathway to

institutionalising IFRS into the country. JFSA has clearly stated that this competitive

environment is only temporary in order to achieve one set of global accounting standards.

With the size of the capital market (as big as Japan or the US), any sudden decision may

bring an unintended impact on the world economy. Thus, although the market mechanism

may take a longer time, it could be a less risky transition. Over time, more companies may

decide to adopt IFRS and eventually it may become the de facto set of standards in Japan.

There will be also other possibility that the competition between Japanese GAAP, US

GAAP and IFRS in Japan remains and IFRS will not become the de facto set of standards.

The next chapter will discuss the case of the US which also has a similar pathway to

Japan. The way the US introduced IFRS to the country is to make it available for foreign

private issuers in 2007. However, in creating competition for accounting standards, an

advanced economy such as the US and Japan can expect to endure international criticism


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from IFRS supporters as such decision may bring a network effect for other countries to

follow their pathways. As demonstrated in this chapter, Japan received disappointing

comments from the international community following its decision in 2011 to abandon

their IFRS roadmap. One can expect the international disappointment to be louder in the

case of the US when it deserted its roadmap to adopt IFRS. After the US showed a clear

intention to retain their US GAAP, many people expect that the US will follow the

Japanese approach by allowing IFRS for their domestic companies in a very near future.

Chapter 9. One Set of Global Accounting Standards: Is IFRS Adoption the Only way?

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Chapter 9. One Set of Global Accounting Standards: Is IFRS Adoption

the Only Way? The Case of the US

“So, although we may never fully attain the goal of having a

single set of high-quality global accounting standards, I have

believed and continue to believe it is a goal worth pursuing.”

(Bob Herz (2013, pg.138))

9.1 Introduction

Compared to other countries in this study, the position of the US is unique with regard

to IFRS adoption. It is the country with the largest capital market in the world (WFE,

2013) and has a long tradition of accounting standard-setting. Its national accounting

standard-setter has strong technical competency with an annual budget comparable to the

IASB. At the time of writing, the US remains indecisive as to when and how they are

going to adopt IFRS for their domestic companies.

As exhibited in the previous empirical chapters, the main reasons for IFRS adoption

are not because it is a proven better accounting standard than US GAAP. For countries,

like Indonesia and the Philippines, which do not have much influence in IFRS-making and

governance arena, the internationality of IFRS and the recommendations from

international organisations have played an important part in the country adopting IFRS.

However for countries with stronger influence in IFRS-making and governance like

Canada and Japan, a significant reason for these countries adopting IFRS was the

opportunity to influence the process. This opportunity would not have been available if the

countries had adopted US GAAP, a set of standards developed to cater to US needs.

An analysis of the US is important in order to understand the IFRS adoption process as

any US decision creates a network effect on the rest of the world. The SEC played a

pivotal role in the creation of the IASB and took a leading role in encouraging IOSCO to

endorse the IASB’s core standards for cross-border listing (IFRS-Foundation, 2012). The

decision of the SEC in 2007 to allow the use of IFRS for foreign private issuers


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encouraged other countries to adopt IFRS. Thus, the movement away from IFRS by the

US in 2012 served to make the future possibility of one set of global accounting

convergence uncertain. International supporters of IFRS vocally showed their

disapointment with what they perceived as a ‘betrayal’ of the commitment to create one

set of global accounting standards.

This chapter aims to analyse the development of the US attitude towards IFRS for the

period 2000 to 2013. The US attitude towards the adoption of IFRS was receptive

between 2000 and 2005, and became more so from 2005 before it suddenly became

reluctant in 2009. Finally in 2012, the SEC refused to make any decision regarding IFRS

adoption and decided to maintain the status quo. This chapter analyses the rationale of the

shifting US position over 13 years and how the consequent effects on globalisation of

IFRS.

The case study of the US is the last of the six countries sampled in this study. As

discussed in the previous chapters, many US GAAP supporters, such as in Canada and

Indonesia, were silenced by IFRS supporters in the decision-making process. In other

countries such as Brazil and the Philippines, US GAAP supporters (if any) were evidently

not among the key decision-makers involved in the process. In Japan, certain due

objections to IFRS were taken into account in the decision-making process. The case of

the US is an important case as US GAAP is not only a long standing incumbent set of

standards but considerations and choices within the US over the relative status of US

GAAP and IFRS could be expected to have global repercussions given the global power

and standing of the US.

This chapter starts with the discussions surrounding the Norwalk agreement in 2002,

followed by the discussions which led to the US SEC decision in 2007 to lift the

reconciliation for foreign and private issuers. The major part of this chapter is the analysis

of the 2009-2011 period of what many respondents refer to as ‘the disappointment period’.

This is the period when international organisations perceived the US to be abandoning its

own commitment to the adoption of IFRS. On the other hand the US seemed to respond to

the international disappointment by publicly reiterating its commitment to the goal of one

set of global accounting standards, for example in numerous speeches by both the US SEC

and FASB chairmen. However, the way the US wants to achieve that goal, by keeping US


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GAAP as the IFRS competitor, may not be well understood by the other players in the

international IFRS arena.

9.2 2000-2005: The warm period

The US has always been an important global player in international accounting

standard-setting. The US SEC was intimately involved in shaping the structure of the

IASB which very much reflects the FASB model - an independent and technically

competent group of experts, rather than being a board of representatives as per the

European model (See Camfferman and Zeff, 2007p. 492). US GAAP essentially shaped

the early versions of IFRS (see Camfferman and Zeff, 2007 chapter 5) and until recently

the SEC believed that US GAAP was superior to all other alternatives, forcing all foreign

issuers listed on the US stock market to prepare their financial statements using US GAAP

or other accounting standards that were explicitly reconciled with US GAAP using Form

20-F.

For many years, US GAAP was considered an international high quality accounting

standard. US GAAP having been the major reference point used by many countries when

developing their local accounting standards (Radebaugh et al., 2006). Previous empirical

chapters have also demonstrated how US GAAP became a major reference point for all

sample countries in this study for developing their accounting standards. Although the

influence of US GAAP in the international arena has been diminishing over the years as

many capital markets prohibited the use of US GAAP, nevertheless some respondents still

perceived US GAAP as a global accounting standard.

“I still believe our standard is a high quality global standard.” (Current FASB

member, interview 19th September 2013).

“Yes it is still a global accounting standard, Canada and Japan still allow US

GAAP.” (Former IASB Member interview, 23rd September 2013).

US stakeholders generally hold a strong view that their accounting standards are high

quality. However the perceived quality of US GAAP was significantly impaired by the

Enron and other major corporate scandals in the early 2000s. These scandals, which


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abused various accounting loopholes, apparently shook the SEC’s and the FASB’s

confidence in US GAAP, leaving them wondering if it offered good protection for

investors. The US Congress questioned whether the rules-based GAAP promulgated by

the FASB and the SEC should be replaced by principles-based standards78. US GAAP was

under scrutiny by the US public according to the chairman of the Financial Accounting

Foundation (FAF) in its 2002 annual report:

In the wake of the widely reported corporate scandals of last year, the quality of

US financial reporting was put under the microscope of the nation’s leaders,

including the President and Congress – as well as the public and media… The

public’s interest in accounting issues soared in 2002 as newspaper headlines

blared, almost daily, about corporate financial misdeeds. As a result, investor

confidence suffered and cries for freedom were raised in many circles. (Manuel

Johnson, chairman of the FAF, 2002 FAF Annual Report, p.3).

With Europe’s decision to adopt IFRS by 2005, coupled with numerous corporate

scandals in the US and the appointment of Bob Herz, a former IASB part-time member, to

lead the FASB, it would have seemed logical to expect the US to build a closer

relationship with the IASB.

Looking at the world of accounting and financial reporting in 2002, there were

two sets of widely accepted standards in use across the world: International

Accounting Standards (formerly IAS now IFRS) and US GAAP. (…) So it made

sense that achieving a truly global set of accounting standards would require the

IASB and FASB to work together. Also the reporting scandals of 2001-02 led some

to question the long-held belief in this country that our standards were the best in

the world. (Herz,2013, p 67).

The first joint meeting between the IASB and FASB in September 2002 was an

important starting point for IFRS convergence efforts. The meeting between the two

boards at the FASB’s offices in Norwalk, Connecticut yielded an agreement for them to

work together to remove the differences between IFRS and US GAAP. The MoU was

78 The US Congress asked the SEC to undertake a study on the adoption by the United States financial

reporting system of a principles-based accounting system in the Sarbanes-Oxley Act of 2002. See section

108(d)(1) of the Public Accounting Reform and Investor Protection Act of 2002 (the Sarbanes-Oxley Act)


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issued in October 2002 to formally document their mutual commitment to work together

in developing high quality comparative accounting standards. In a joint FASB and IASB

press release79, both chairmen of the boards commented on the need for cooperation and

partnership.

Between 2002 and 2004, the two boards were undertaking projects aimed at removing

narrow differences between the two standards. These projects were called short-term

convergence projects, reflecting the belief that these were easy projects and could be

completed in a relatively short period of time. It turned out that the Boards underestimated

the delicacy of the issues concerned, as several of the projects proved to be more

complicated and less short-term than originally envisioned (Herz, 2013). In 2004, the two

boards agreed to undertake three major joint projects: business combinations, revenue

recognition and financial statement presentation. Again the two boards did not find these

joint projects to be easy. Accounting for business combinations for example, is still not

fully converged although the two relative standards are now much more closely aligned.

The joint project on revenue recognition was only completed in the second quarter of

2014. The project on the presentation of financial statements was put on hold in June 2010

as the boards worked towards completing other major joint projects.

The two board’s commitment was further strengthened in 2006 when the IASB and

FASB set a specific milestone to be achieved by 2008. Subsequently, a series of meetings

between the two boards took place regularly to discuss the convergence project and the

number of scheduled meetings increased after September 2009 in response to the G20 call

for the two boards to double their effort on the convergence project.

The September 2002 meeting was the first of what would be many joint public

meetings between the two boards. At first, the meetings were held twice a year for

two or three days at a time. Then in 2006, that was expanded to three times a year.

Since October 2009, the boards have been meeting jointly most months and

sometimes multiple times during a month, either in person or via teleconference.

(Herz, 2013, pg. 103).

79 News release of FASB on 29th October, 2002: FASB and IASB Agree to Work Together toward

Convergence of Global Accounting Standards. http://www.fasb.org/news/nr102902.shtml , accessed in 5th

May 2014.


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The tension on accounting technicalities between US GAAP and IFRS was highlighted

in the Canadian AcSB strategic report in 2006 which proposed Canada should become the

‘peace maker’ between the IASB and the FASB.

The AcSB will also encourage the IASB and the FASB to continue to work co-

operatively and reach common conclusions on issues. When necessary, the AcSB

will offer to play the role of ‘honest broker’ to resolve any tensions between the

IASB and the FASB. (AcSB Strategic Plan 2006-2011 p.18.).

Although as the two boards found enormous challenges in convergence at the technical

level, the tone at the top remained very supportive of achieving the goal of one set of

global accounting standards. The positive tone towards the adoption of IFRS in the US

being constantly reaffirmed by SEC Chairman Christopher Cox and FASB Chairman Bob

Herz. During this period, the world was optimistic that the two boards would overcome

their differences and achieve a common goal of one set of global accounting standards.

The warm attitude to IFRS adoption in the US has influenced other countries to be

more inclined to adopt IFRS. With Europe's decision to adopt IFRS in 2005 and the strong

support from the SEC for the convergence project, momentum increases to secure ‘one

global accounting standard’. For example an agreement was made between the ASBJ and

the IASB in 2005 for IFRS-Japanese GAAP convergence with a positive hope that the US

would eventually adopt IFRS80.

9.3 2005-2008: The golden period

The period from 2005 to 2008 was arguably a ‘golden’ period for IFRS and US

GAAP convergence. It was the period when the US signalled to the world that the

possibility of adopting IFRS in the near future could be a reality. It was not a coincidence

that this golden period took place when key decision-making positions in US standard-

setting were filled by pro-IFRS figures such as the SEC Chairman Christopher Cox, the

SEC Chief Accountant, Conrad Hewitt and FASB Chairman, Bob Herz.

80 Interview with ASBJ senior technical manager date 23 October 2012


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The expanding use of IFRS, coupled with the uneven playing field on issues being

discussed in Europe (US GAAP was allowed in European capital markets but IFRS was

not allowed in the US stock markets), has been both a challenge and an opportunity for the

SEC in fulfilling its mandate as well as its long-stated support for the development of a

single set of high-quality international accounting standards (Herz, 2013). Those

challenges and opportunities were addressed by the then SEC Chief Accountant Don

Nicolaisen in an article published in Northwestern University’s Journal of International

Law and Business (Nicolaisen, 2005). Bob Herz and Don’s successor, Conrad Hewitt

believe this article was the impetus for the SEC decision of 2007 to allow IFRS for foreign

private issuers in the US81.

The article became referred to as the SEC staff ‘roadmap’, however it did not provide

a plan or framework for IFRS adoption in the US or for completing the convergence

between US GAAP and IFRS. Rather, the article proposed a process and a set of

conditions and related activities for SEC staff to consider whether to recommend that the

SEC eliminated its reconciliation requirements for foreign registrants using IFRS. The

article provided a timeline and suggested that the SEC staff recommendation to eliminate

US GAAP reconciliation requirements for foreign filers using IFRS could come in 2009 or

sooner.

In November 2007, sooner than expected, the SEC removed the requirement for

foreign private issuers registered in the US to reconcile their financial reports with US

GAAP if their financial reports complied with IFRS as published by the IASB. Although

the decision to eliminate the reconciliation requirements had been anticipated for some

time, nevertheless the swiftness of the SEC decision was a surprise for many stakeholders,

and even for the IASB (See Zeff, 2012). Many interviewees stated that they had not

expected that the SEC would have made the decision so soon. Some were surprised at how

far the SEC went in its decision.

“There were some degrees of surprise. We always knew that they were drafting

about reconciliation, but we didn’t know about the timing that it would come out

very quickly.” (Current FASB member, interview 26th September 2013).

81 From the interview of both respondents.


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“The first objective of the core standard project of the old board working with

IOSCO was to get the SEC to remove the reconciliation requirement, not to make

the US adopt [IFRS]. But for people to be able to access the US market. The 2007

decision, it was earlier than we expected. We hoped that it would happen in 2008

or 2009.” (Former IASB member, interview 23rd September 2013).

“We weren’t surprised at the decision because they had built it up for a while. We

were not surprised when it happened; maybe we were surprised at how far they

went. We thought perhaps they were having a minimum number of

reconciliations.” (Member of AcSB Canada, interview 20th September 2013).

The unexpected timing of the 2007 decision, according to most of the respondents was

because it was close to the 2008 election. 82 Christopher Cox had been perceived as

someone who believed in a single global capital market and it was not certain that the

ruling Republican Party would win the 2008 election. If the Democratic Party won the

2008 US election, the chairman of the SEC would be replaced and the new chairman

might have different priorities that may not include IFRS adoption. Nevertheless the 2007

decision had a domino effect on other countries. Various countries, such as Korea, Japan,

Canada, and Indonesia made the decision to adopt IFRS shortly after this decision with the

significant of such being noticed by the SEC:

“In July, the SEC proposed to allow foreign private issuers to file using

International Financial Reporting Standards (IFRS), as promulgated by the

International Accounting Standards Board, without reconciling to US generally

accepted accounting principles (GAAP) as they are now required to do.... I would

note here that the International Accounting Standards Board and the Accounting

Standards Board of Japan announced in September that they have targeted 2011

to achieve convergence between Japanese GAAP and IFRS. That is a very

propitious development.” (SEC Commissioner, P. Atkins, speech to the American

Chamber of Commerce, Tokyo, Japan, 16th October 2007).

After the removal of the US GAAP reconciliation requirement, some respondents

stated that they may had now hoped that the US would eventually adopt IFRS for US

82 This was expressed by a former of IASB member and member of AcSB Canada.


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companies or even make it an option for US listed companies – and commented that the

US were clearly considering this:

“One year after the SEC made that decision; Paul (Paul Cherry- chairman of

AcSB, added) and I went to Washington to talk with the SEC chief accountant and

some other senior staff. So we had a little discussion partly about “So now you

have allowed foreign companies to use IFRS, would you ever do that for US

companies?” The chief accountant at that time was a gentleman named Conrad

Hewitt, he leaned across the table looked at me and said “there’s really no reason

why we shouldn’t or couldn’t allow US companies to adopt IFRS.” They clearly

had thought about it.” (Member of AcSB Canada, interview 20th September

2013).

The SEC decision of 2007 was a very positive signal from the US on working towards

one set of global accounting standards. Such momentum continued to build up with the

issuance of a Concept Release by the SEC in 2007 to explore the possibility of allowing

US issuers to use IFRS in their filings. Prior to this release, few had believed that the SEC

would ever go this far towards the possible use of IFRS by US companies. The peak of

IFRS momentum in the US happened on August 2008, and according to Zeff (2012) the

SEC with unanimous, enthusiastic support from all of its participating staff offices and

divisions, approved a rule proposal containing a new roadmap towards the required

adoption of IFRS by US issuers.

The SEC published its proposed roadmap of 2008 outlining key activities that needed

to be completed before it could decide whether IFRS should be adopted for US filers. The

SEC would therefore evaluate progress in 2011, and by then it would decide whether to

require mandatory use of IFRS as issued by the IASB as from the start of 2014. The

roadmap also sought feedback on whether or not the SEC should introduce staffer

mandatory adoption based on market capitalisation, with large accelerated filers required

to file using IFRS in 2014, accelerated filers in 2015 and non-accelerated filers in 2016.

The definitions of accelerated filer and large accelerated filer under the US Exchange Act

reference the size of an issuer based on its worldwide public float of its equity securities

(SEC, 2008). The coming of 2011, as the SEC decision-making deadline, influenced Japan

and Canada also to set that year as their target for full IFRS convergence/adoption.


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The SEC also proposed permitting a limited group of major US multinationals, which

fulfilled certain requirements, to adopt IFRS early, starting with 2009 calendar year-end

filings. The new roadmap received 204 comment letters which according to Bob Herz was

surprisingly low given the potential significance of what the SEC was proposing (Herz,

2013 pg. 122) The comment letters had a mixed response from US stakeholders.

Although commentators on the proposal generally expressed support for the goal

of a single set of high-quality globally accepted accounting standards, many

expressed concerns with various aspects of the proposed roadmap. (Herz (2013

pg. 122).

The 204 comment letters 83 came from various affiliations such as corporations,

academics, investors, accounting firms and regulators. An analysis of 163 comment letters

by Adhikari et al. (2014) revealed that 73% of respondents supported the general notion of

one set of global high quality standards, however most respondents preferred the

convergence process over adoption. Many respondents (24%) believed that the cost of

adoption of IFRS would be high at a time of great economic uncertainty (Adhikari et al.,

2014), especially since the US was in turmoil during the financial crisis of 2008.

The US SEC also organised roundtable meetings with stakeholders to discuss the

roadmap. Conrad Hewitt, SEC Chief Accountant at that time, during interview recalled

that there were three roundtable discussions on the 2008 roadmap, and that there was little

controversy when the SEC developed in proposals. He did not see any major impediments

to the US adopting IFRS in the next seven years, as suggested by the proposal.

“… We had over 200 comment letters. (...) in the meantime we also held three

roundtables with financial statement users, preparers, investors on proposal we

release to gather as much information as we can. There was very little controversy

when we developed the proposal. (…) there were not major problems.” (Conrad

Hewitt, interview 30th April 2014).

One of the respondents who also observed the roundtable discussions confirmed that

there was little controversy during the discussions.

83 All comment letters are available at http://www.sec.gov/comments/s7-27-08/s72708.shtml, accessed

13th August 2014

https://outlook.manchester.ac.uk/owa/redir.aspx?C=QShGpIsjwUyAljdPafwVqJ_ohjwc2dEIPqWhT3z_1gM3BmOEeTpLYG7FqA2WNyIRA2GI-Abn2Ko.&URL=http%3a%2f%2fwww.sec.gov%2fcomments%2fs7-27-08%2fs72708.shtml


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“The US will always find an objection to do something they don’t want to do. They

always find a bunch or reasons like, it’s not the right time. The SEC had a number

of roundtables. Leslie Seidman (former FASB chairman – added) and I were there

as observers. They had big companies, users, small companies. There wasn’t

anything raised as a big problem there that we hadn’t really thought about and

addressed.” (Former IASB member from Canada, interview 23rd September 2013).

While the comment letters may have suggested that US stakeholders were not too

enthusiastic in adopting IFRS, the tone of the top of US SEC officials continued to be

encouraging with respect to IFRS convergence. During this period, the SEC assessment of

IFRS as a set of high quality accounting standards was reiterated by SEC chairman and

commissioners at various public engagements:

“The convergence of international accounting standards — in pursuit of our

ultimate goal of the development of a single set of high-quality global accounting

standards — remains one of these key priorities.” (SEC Commissioner,

K.L.Casey, speech to the 35th AICPA conference, 10th December 2007).

“The rapidly increasing interest in IFRS in the United States, and the rapidly

increasing acceptance of IFRS in the rest of the world, also reflect a growing

consensus that these standards will in fact be able to deliver the high quality,

consistency, and global comparability that so many have advocated for so long.”

(SEC chairman Speech to the American Chamber of Commerce, 18th April 2008).

In summary, the period of 2005-2008 is the golden period when the likelihood of IFRS

adoption in the US seemed high. However while SEC leaders had successfully issued a

roadmap with regard to adopting IFRS, they did not have the chance to execute the

roadmap. The global financial crisis of 2008 and the change of administration brought a

significantly different impact to the appetite for adopting IFRS in the US as will be

discussed in the next section.


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9.4 2009-2012: The disappointment period

With the inauguration of US President, Barack Obama on January 2009, SEC

Chairman Christopher Cox and Chief Accountant Conrad Hewitt resigned to allow the

new administration to appoint new leaders. Barack Obama appointed Mary Schapiro as

the chairman of the SEC. During Christopher Cox's tenure as chairman, the likelihood of

IFRS adoption in the US was high, but this was to change than during Mary Schapiro's.

The period after the Cox era, according to one interviewee from Canada became known as

the ‘disappointment period’

“They (Cox’s regime – added) never had the opportunity to follow through, but

they certainly had thought about it (the adoption of IFRS – added). In some senses,

what happened since is a bit of a disappointment.” (Member of AcSB Canada,

interview 20th September 2013).

“Certainly under Chairman Cox’s regime there was a higher likelihood of the US

adopting IFRS then after it was Cox’s regime.” (FASB member, interview 26th

September 2013).

Mary Schapiro assumed her position as US SEC leader during the very challenging

period of the global financial crisis. The 2008 financial crisis has been considered as the

worst crisis since the Great Depression in 1930s (Jagannathan et al., 2013). Starting in

2007 with the defaults of subprime mortgages in the US, the financial crisis spread out to

Europe. The US was heavily blamed by the international community for mishandling its

capital market and starting the global financial crisis (Chua and Pang, 2012). Barack

Obama and Mary Schapiro needed to restore international confidence in ability to manage

its capital market. Many US respondents in the interview argued that the financial crisis at

that time made the SEC to view urgent matters, thus the IFRS convergence was not being

major priority.

With the appointment of Schapiro, US enthusiasm over IFRS adoption quickly started

to turn cold. On various occasions and in various public statements, Schapiro expressed

her reluctance to move to IFRS as illustrated below:


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“When it comes to international accounting standards, it’s critical that these

standards are converged in a way that does not kick off a race to the bottom.

American investors deserve and expect high standards of financial reporting,

transparency, and disclosure - along with a standard-setter that is free from

political interference and that has the resources to be a strong watchdog. At this

time, it is not apparent that the IASB meets those criteria, and I am not prepared to

delegate standard-setting or oversight responsibility to the IASB.” (SEC

Chairwoman Mary Schapiro’s letter to Sen.Carl Levin- quoted by Accounting

Today 27th January, 2009).

Schapiro’s January statement elicited many negative responses, especially from

Europe. FEE (The Fédération des Experts Comptables Européens) even suggested that the

IASB should walk away from its convergence strategy:

The Fédération des Experts Comptables Européens, which represents more than

500,000 accountants across Europe, said the International Accounting Standards

Board should cut its losses and walk away from its US -GAAP convergence

strategy. The statement adds to the growing concern regarding the IASB’s focus on

US adoption of global standards. There are mounting fears the negotiations are

distracting the board from its core task of maintaining international accounting

rules. FEE believes the IASB should change direction and instead ‘concentrate

exclusively on major improvements and simplifications in International Financial

Reporting Standards over the medium term’. ‘The point has been reached where

there are diminishing returns from further converging with US GAAP, in

particular now that more and more countries, including major economies such as

Japan and India, move towards direct adoption of full IFRS,’ the body said.84

(AccountancyAge, 23rd July 2009).

International pressure was evident at the first G20 summit in April 2009, where

individual members were urged to work towards one set of global accounting standards

(G20 Leaders’ Statement para 15). This, however, did not give enough push to the SEC.

Furthermore, U.S divergence from IFRS adoption became more apparent when the new

84 Mario Christodoulou, “FEE Calls for a Halt on Convergence Talks”, AccountancyAge, 23rd July

2009


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SEC chairman dismissed its 2008 roadmap and issued a revised commitment delaying it

until February 2010. The day before the US SEC met to approve the new 71-page

commitment statement, pressure came from across the Atlantic. The ICAEW, encouraged

the US to make a clear decision with regard to IFRS convergence:

Dr Nigel Sleigh-Johnson, head of the financial reporting faculty said the world

needs clarity over the US’s commitment to global standard. "More and more

countries are converging to IFRS, with major economies such as Canada and

Japan currently in the late stages of convergence,” he said. "Now is the time for

the SEC to show leadership to the world at a time of continued economic

uncertainty.”85(AccountancyAge, 23rd February 2010).

The SEC issued its Commission Statement in Support of Convergence and Global

Accounting Standards on 24th February 2010. The release reiterated the SEC’s long-

standing support for the development of a single set of high-quality global accounting

standards. It also stated that it now planned to make a decision in 2011 on whether, when,

and how to incorporate IFRS in to the US financial reporting system.

The SEC staff subsequently published various reports, including a May 2011 staff

paper which focused on exploring a possible method of IFRS incorporation. In May 2011,

the SEC’s Office of the Chief Accountant issued a paper in which it described one

possible IFRS adoption approach which it labelled ‘condorsement’. The word

‘condorsement’ resulted from combining the most common IFRS adoption approaches

used in other jurisdictions, namely convergence and endorsement. In November 2011, the

SEC released two reports on IFRS adoption. The first report compared US GAAP and

IFRS and a second report analysed IFRS in practice. On 5th December 2011, SEC Chief

Accountant, Jim Kroeker announced a delay in the anticipated US SEC decision on the

IFRS work plan for US markets.

The long expected staff final report in July 2012 represented a serious setback for

international organisations who were starting to be impatient for US commitment. FASB

85 Mario Christodoulou, “It's time for the US to show some leadership on convergence: ICAEW”,

AccountancyAge, 23rd February 2010


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members tried to reduce the expectation of IASB and other national standard-setters of the

likelihood that the SEC would make a clear decision in favour of IFRS convergence. In

the IFASS86 meeting in Kuala Lumpur, Malaysia on March 2012, Tom Leinsmeier (FASB

member) explained the unfavourable possible outcome of the anxiously awaited SEC staff

report. IASB Chairman Hans Hoogervorst expressed his deep disappointment at the

IFASS meeting. Many accounting standard-setters from other jurisdictions also expressed

their frustration towards the US at that meeting as stated in the IFASS report on the

meeting:

5.3 The IASB chairman expressed disappointment with Mr.Linsmeier’s

observations. He was discouraged by the delay in the SEC stating its intentions

regarding the incorporation of IFRSs into the US financial reporting system. In

addition, the uncertainty was affecting the IASB’s efforts to converge IFRSs with

US GAAP. Most jurisdictions in the world are committed to IFRSs and the IASB

will proceed at full speed with its work. He urged the SEC to make a decision one

way or the other. – (IFASS, 2012)

5.5 Representatives from France, Australia and the UK expressed frustration

at the lack of a decision from the US. The representative from France said there

was much diversity in financial reporting around the world and this needs to be

attended to. The representative from Australia said the uncertainty regarding the

lack of a US decision is creating greater pressure on jurisdictions not to be faithful

to IFRSs. The delay in a decision from the US could result in that country being

isolated from the rest of the world, which would suffer from the loss of US

standard‐setting talent. – (IFASS, 2012)

When the SEC finally issued its final staff report on July 2012, many parties expected

that it would give clear recommendations to the SEC commissioner on when and how

IFRS would be incorporated in US financial reporting system. The report was issued

several few weeks after it was finished, on the last day before SEC Chief Accountant Jim

86 IFASS or International Financial Accounting Standard setters used to be called NSS (National

Standard setters) is an informal group of various accounting standard setters which hold meetings twice a

year.


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Kroeker’s resignation took effect. Jim Kroeker's resignation combined with the release of

the final staff report raised speculation that the staff paper would not meet public

expectations.

The staff report was cautious in terms of assessment of IFRS as a high quality

accounting standard. Although the report acknowledged that the quality profile of IFRS as

a set of accounting standards had improved globally, the report still saw a wide gap

between US GAAP. The paragraph below illustrates some areas which needed to be

improved according to the SEC staff report:

The standards that are issued by the IASB are generally perceived to be high

quality by the global financial reporting community. However, there continue to be

areas that are underdeveloped (e.g., the accounting for extractive industries,

insurance, and rate-regulated industries). By comparison, US GAAP also contains

areas for which guidance is in need of continued development (e.g., push-down

accounting and government grants), but the perception among US constituents is

that the ‘gap’ in IFRS is greater. (IFRS-Foundation (2012, p.4))

Although the report complimented the governance of the IASB, it questioned the

independence of the IASB due to its funding sources especially its reliance on the funding

from the Big Four accounting firms. The report also expressed concern about the

timeliness of responses to widespread accounting issues by the IFRS Interpretations

Committee (IFRIC), and it suggested that the IFRS adoption would be costly for US

public companies. Lastly, the report concluded that IFRS did not receive wide enough

support from US stakeholders to be adopted.

… There appears to be relatively less support within the US financial reporting

community for the designation of the standards of the IASB as authoritative for use

by US issuers for domestic reporting purposes. (IFRS-Foundation (2012, p.4)

The July 2012 staff report caused more leaders of international organisations to

express their concerns at the US position. Steven Maijoor, the chairman of ESMA


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(European Securities and Market Authorities) expressed his disappointment in his

speech87 in London on 12 November 2012:

“Although fully understanding the domestic economic and political constraints of

the SEC, I am personally disappointed with the lack of ambition regarding IFRS

on the other side of the Atlantic. Patience has been a real virtue for us over the last

few years and there have been a number of efforts to facilitate the adoption of

IFRS in the United States. To name just two: the IASB/FASB memorandum of

understanding, and the monthly joint Board meetings. Some of the efforts to

facilitate US IFRS adoption were difficult topics for the IASB’s Constituents to

accept, especially in Europe, but they were willing to pay the price to get the US

on board. Today I cannot avoid the feeling that all these efforts do not seem to be

enough which suggests that it will never be enough. I believe many people feel as I

do, which is disappointment that there is no progress or clear sign of political will

to keep IFRS adoption high on the agenda in the US.“ (Steven Maijoor, speech to

PwC Meet the Experts conference, 12 November 2012, London.)

The IFRS Foundation and the IASB both expressed their concern and disappointment

that the SEC had deserted their ‘gentlemen’s agreement’. The Chairman of the IFRS

Foundation, Michel Prada88 mentioned the ‘G20 agreement’ to remind the SEC that it

should be honoured by member countries.

“We very much hope that the SEC will consider positively in the near future a

transition to global accounting standards, thus fulfilling the objective reaffirmed

by the G20 leaders in each of their meeting communiqués. (Michel Prada, Speech

before the 29th Conference, Geneva, 31st October 2012).

Hans Hoogervorst, chairman of the IASB offered his view over the US’s indecision at

the AICPA conference in December 2012, also referring to the G20 agreement.

After a decade of progress, after tireless and sometimes painful work by the boards

to bring about convergence between IFRS and US GAAP, after two years of

87 Full speech is available from this link http://www.esma.europa.eu/system/files/2012-731.pdf

(accessed 15th September 2014) 88 Full speech is available from this link http://unctad.org/meetings/en/Presentation/ciiisar29_3110M_

MichelPRADA.pdf (accessed 15th September 2014)


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analysis and report writing, many people around the world expect a clearer

perspective of this country’s intentions with IFRS. That is why we really need a

tangible sign of continued US commitment to a single set of global standards.

Merely striving for greater comparability between two standards will not do. We

tried that during the 1990s and it was a failure [re. IASC effort ]. In the absence of

a credible, tangible step on the part of the United States, international concern

could turn in to international scepticism. The G20 calls for global accounting

standards would start to ring increasingly hollow. We cannot allow that to

happen [emphasis added]. (Hans Hoogervorst’s speech to the AICPA

Conference, 4th December 2012, Washington D.C).

The secretary-general of IOSCO, David Wright expressed his view on the SEC

decision by being more cynical and tried stating that the world would keep moving on

towards one integrated capital market without the US:

“So the US has a unique opportunity now, perhaps with coalitions of the willing,

to help shape and lead a movement towards more effective global regulatory

institutions – a window that may last 5-10 years or so, but not more. After that, the

US’ relative share of global financial markets is set to decline significantly, and

naturally its influence as well.

I believe most of the world would be prepared to consider work on such a project –

and I believe, with or without the US – it will eventually happen like with the

International Financial Reporting Standards or IFRS. Isolationists will no doubt

plead what they always plead. They will argue, with their 19th century logic, that

the US will be better off alone, not sharing any sovereignty. Perhaps they will

continue to believe that in 15-20 years’ time the world will be composed of

disconnected, independent islands – the biggest of which can project its views on

others. But surely that is the past and a denial of globalization. To repeat, the new

emerging world will have very soon many big, interconnected capital markets.

There will be many more sharks in the pond with far more influence.” (David

Wright, speech to the Atlantic Council, Washington D.C, 10th December 2013).


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The ICAEW, firmly called on the IASB to stop its convergence efforts and to start to

concentrate on other countries which had committed to adopt IFRS:

The era of convergence between IFRS and US GAAP should be ended formally in

a matter of months, not years. Further amendments to proposed and existing IASB

requirements designed to harmonise standards with the US would not be justified

unless they represent a significant improvement in IFRS financial reporting. The

IASB should now focus its attention squarely on the needs of the 100 plus

jurisdictions that have officially adopted its standards, and on working to

encourage those countries that have moved their standards closer to IFRS –

notably China – to take the final steps towards full IFRS reporting. (The Future of

IFRS, ICAEW Report, p. 2)

Interviews with US respondents revealed that they understood the world’s

disappointment towards US indecision and were not surprised by their emotional nature.

“No. [I don’t blame them for being disappointed- added]. We have to look at this

historically. The US led all this effort. The US was intimately involved in the

creation of the design of the IASB. The US in the sense recognised at the start that

we couldn’t be the world standard-setter. Politically that makes no sense. A

country couldn’t make a standard for the world. We helped support the IASB at the

initial stage. We were the leaders, so having the US slowdown in this decision

making is a surprise.” (FASB Member, Interview 25th September 2013).

“I think it is a matter [of] where you are in the world whether people are

disappointed [or not]. In the US, many people are optimistic about the report

because, I think, as there is an idea of [a] different way to move towards a

common set of global accounting standards than the adoption of IFRS and what is

the continuing role of the FASB. And some people in the US said we should

collaborate and continue to converge with the IASB. Our standards are still

globally high quality.” (FASB Vice chairman, interview 19th September 2013).

All respondents from the US mentioned in the interview that they understand why

the response from the international ‘IFRS Club’ was negative as a positive decision

had been strongly anticipated in 2011. However, some respondents believe that


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international organisations had failed to appreciate the US perspective. Four US

respondents in interview stated that the US has not deserted its commitment to achieve

one set of global accounting standards, but stressed that the mandatory adoption of

IFRS was not the only way to achieve such a goal.

“But that is, that doesn’t mean we still don’t believe that we should enhance the

compliability of the reporting standards over the world and it could be if we would

keep up working and converging, not converting, but converging, that if we

narrowed differences even more, it might be a lot easier for the US to accept.

Because there still are serious major differences.” (FASB Member, interview 25th

September 2013).

Most international disappointment centred around what was perceived as a lack of

political will in the US to pursue its commitment. Although a lack of political will was not

denied by US respondents in the interview, they believed that there were many other

factors influencing the US’ reluctance to make a supportive decision. Table 20 lists some

reasons brought up by five US respondents:

1. Lack of political will Most respondents believed that the political will from

the SEC would be very influential in any future

decision

2. Insufficient demand from the

majority of US companies

Most respondents believed only a handful of US mega

corporations were in favour of IFRS. Most US

companies were comfortable with the current US

GAAP.

3. Insufficient demand from the

majority of US investors

One respondent (a former official of the SEC) was

surprised with the lack of demand for IFRS reporting

from US investors.

4. High compliance cost Most respondents believe that after the financial crisis

and the Sarbanes-Oxley Act, many US companies

were afraid of the high compliance cost in adopting

IFRS.

5. Sovereignty issue Losing control of standard-setting was stated by all

respondents as a critical of the factor, but two

respondents also believe that there would always be

some role for the FASB, for example, in developing

standards for private companies.


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6. IASB governance (funding

and independence)

Respondents doubted the sustainability of the IASB

and also its independence, especially from European

influence.

7. US preference for

competition between

accounting standards

This argument was offered by one prominent US

academic

Table 20. Reasons for the US not adopting IFRS based on US field interviews

In October 2012, the IFRS Foundation staff issued a report to the IFRS Trustees’

(known as the staff’s response report) to address many concerns of the SEC staff report.

The response report, 84-pages long, stated that most US concerns were not unique to the

US but represented common challenges for all jurisdictions in the IFRS adoption process.

While the size of the US economy relative to other jurisdictions presents significant

challenges in transition that are unique to the US, the experience of other countries

suggests that many of the challenges can be overcome with the appropriate political

will to make a commitment to the mission of a single set of global standards. (IFRS-

Foundation, 2012 p.19)

The response report also argued that most of the technical gaps between IFRS and US

GAAP were already included in the IFRS research project and the IASB’s future agenda.

In response to the SEC’s call to work closely with other national standard-setters, the

IFRS Foundation’s report highlighted the plan to establish ASAF (Accounting Standard

Advisory Forum) which would be a formal mechanism for the IASB to work more closely

with other national standard-setters and to end bilateral relationships such as the joint

project with the FASB and the regular meetings with the ASBJ.

The SEC staff report contained a lot of concerns about the IASB’s funding which

according to the US were only drawn from 30 governments and the IASB’s unsuccessful

efforts to secure funding from US governments. The IASB’s staff response report also

rebutted stating that the SEC had failed to note some other arrangements with countries

and the fact that EU funding comes from 27 member countries. According to the IASB’s

staff response, in total there are 69 countries proved funding to the IASB, directly or

indirectly (p.7). IASB’s staff went on the defensive highlighting the fact that the US is


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over represented on the IASB, with 20-25% of seats in the IFRS Foundation’s different

groups and committees occupied by US representatives, despite the amount of the US

financial contribution only accounting for 10% of the IFRS Foundation’s budget.

9.5 Beyond 2012: Will the US eventually adopt IFRS?

Since the IASB’s staff report was issued in October 2012, there has been little

movement on the issue of IFRS adoption in the US. The IASB staff report failed to make

any difference to the US SEC decision to allow or mandate US public companies to use

IFRS. Nevertheless, the FASB continues to have a special bilateral relationship with the

IASB. Notwithstanding the amount of funding by the US government to the IFRS

Foundation and lack of a commitment to adopt IFRS, the US retains its seat on both the

IASB and ASAF, an important advisory forum recently created by the IASB to formalise

the relationship between the IASB and national standard-setters as well as regional

standard-setting organisations.

On various occasions SEC leaders and FASB members have stated their support for

one set of global accounting standards, however, the amount of commitment they have

provided for IFRS has clearly weakened since 2008. Even so, IFRS supporters remain

optimistic that the US will eventually adopt IFRS, as typified by IASB chairman in

numerous public statements:

“It is also important to note that the United States is committed to supporting

global accounting standards. It is SEC policy, it is US government policy, and it is

the policy of the G20, in which the United States is a key player. There are many

practical challenges facing the SEC in making the decision. I don‘t deny that they

are real; however, both I and my counterpart at FASB have made it clear that a

continued program of convergence by another name is not an acceptable way

forward. I do believe that the United States will ultimately come on board. Quite

simply, they need US and we need them.” (Hans Hoogervorst, speech at the Ernst

Young conference on IFRS, 23rd January 2012, Moscow).

Similar optimism however was not shared by some respondents from Canada and the

US who saw the future existence of US GAAP as a significant competitor to IFRS. The


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idea of US GAAP and IFRS co-existing has been proposed by accounting scholars for

quite some time and this might become a formal position of the US as indicated in the

FASB chairman:

“I envision a long-term, global standard-setting environment in which the FASB,

the IASB, and other major capital market standard-setters co-exist and cooperate

with the stated goal of issuing converged standards, while also addressing the

specific needs of the capital markets for which they set standards.” (FASB

Chairman Russel Golden’s, speech to the FASB@40 Conference, New York City,

12th September 2013).

A concern that cooperation between these two standard-setters would cause a lower

quality of accounting standards had been expressed by the former SEC Chairman Mary

Schapiro and also her successor, Mary Jo White. In stressing the need for “different but

equally legitimate financial reporting standards”

“So throughout the SEC, we are cooperating with our foreign counterparts in

ways that unleash the fullest potential of our capital markets to drive economic

growth and create jobs – and to do so in a way that does not lower the bar or relax

the regulatory and oversight standards that protect investors and stabilize

markets.” (Mary Jo White, Speech before ICI General Meeting89, Washington D.C,

1st May 2013 p.5).

IFRS supporters have argued that the SEC would eventually allow IFRS, at least, as an

option for US listed companies, similar to Japan. This was mentioned by Conrad Hewitt

the former SEC chief accountant, during the interview, when noting that there is a demand

for IFRS from at least 30 top companies in the US which have international operations.

The optimism that the US will make IFRS an option for its listed companies was also

mentioned by other US respondents. One respondent for example, expressed that

providing IFRS as an option would help US companies to learn from each other. However

during interviews, current FASB members were not very excited about the idea of optional

IFRS for US listed companies.

89 The speech is available at : http://corpgov.law.harvard.edu/2013/05/10/regulation-in-a-global-

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“That is a challenging question. I am always sceptical about optional accounting in

general. Because you risk then companies moving, domestically, from one set of

standards to the other based on the analysis which makes them look better.” (Current

FASB member A , Interview 19th September 2013).

“When reconciliation was removed, then there was an idea of an option. But the

feedback that SEC received is: “No”. The SEC has reached the conclusion based on

evidence, that once an option is introduced it will be problematic. An option is not a

viable thing for the US. As soon as an option occurs then there will have to be

adoption. Eventually there has to be adoption.” (Current FASB member B, Interview

25th September 2013).

The SEC may need more time for their companies and investors to embrace IFRS. A

survey by ACCA in 2012 of 493 US-based investors revealed that 45% of respondents

would recommended that companies report under US GAAP and only 30% of respondents

would recommended IFRS. US investors also believed that IFRS disclosure has less

quality than US GAAP with 66% of respondents stating they would avoid companies with

IFRS, and 56% of respondents would put time and effort into reconciling the report

figures to US.GAAP. US investors believed that US companies are prepared for reporting

under IFRS, with only 16% of investors believing that US companies were prepared for

IFRS reporting. Interestingly, however, more than half of investors surveyed (57%)

believe that the SEC will come to require mandatory reporting under IFRS.

In conclusion, US SEC commitment toward IFRS adoption has continuously changed

over the last fifteen years. The golden period for IFRS sentiment in the US 2005-2008 was

influenced by the European IFRS adoption and the pro-IFRS leaders in key strategic

positions in the US regulatory field. The decisions by the US created network effects to

other countries and when the US abandoned their IFRS adoption pathway in 2012, it

received criticisms from the international IFRS supporters.

9.6 Discussion: What can we learned from the US case?

The US is unique compared to other case studies sampled here. The US is the world's

largest economy and its accounting standards are said to be far more complex than those


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of other countries. The country has a very large capital market and, in contrast, to Europe

which was seeking one set of accounting standards to make a fragmented European

market more efficient, the US has arguably less incentive to adopt IFRS. Especially

research findings suggest it is not clear if IFRS would improve the quality of financial

reporting compared to US GAAP (Leuz, 2003; Barth et al., 2012; Lin et al., 2012)

IFRS has been promoted internationally by its supporters as a global high-quality

standard which will reduce the cost of capital, increase the comparability of financial

reports and support global finance. However without another standard to compare it to, it

is arguably very difficult to validate the IASB’s claim that IFRS is a high quality set of

accounting standards. For some, the US is arguably one of the few countries which has the

competence and resources to challenge the quality of IFRS. Indeed the depth of debate

over the relative technical merits of IFRS was evident during the convergence project.

Over the years, as this chapter has demonstrated, the SEC’s opinion on IFRS quality

has appeared to change on a regular basis. During the golden period of IFRS convergence

in the US (2005-2008), the SEC chairman and commissioners reiterated that IFRS is high

quality standard. When the US decided to retreat between 2009 and 2012 from a clear path

towards IFRS adoption, it raised concerns over IFRS quality, supported by various

research findings suggesting that US GAAP financial reports were higher in quality than

those produced according to IFRS. The biggest economy in the world appeared to need

more time and more evidence that IFRS would improve the quality of financial reporting

for them.

The emotional response from the international community over the US indecision in

2011 could suggest that a ‘club-like mentality’, has dominated respective quality

arguments – with the international community’s disappointment being arguably more

visible then the technical counters to the SEC staff’s concerns of IFRS quality.

International organisations, especially in Europe, got close to label the US as a ‘traitor’ to

the club’s goal and its gentlemen’s agreement and commitment to achieve one set of

global accounting standards. In some of their comments, they ridiculed the US and urged

the IASB to ignore the US in the future process of IFRS-making without considering that

it would be a big disadvantage to lose the FASB’s talents and technical competence in

global standard setting. They dismissed the US explanation that achieving one set of


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global standards remains an important goal for the US, not through mandatory IFRS

adoption, but through a slower more natural process of incorporating IFRS into US

GAAP.

The sovereignty issue, that the US does not want to lose its control, was insinuated by

most US respondents. Interestingly, the issue of sovereignty was not discussed strongly by

respondents in other countries, but it is the major issue for the US even since the mid-

1990s as Michael Sutton, former SEC chief of accountant, before the American

Accounting Association annual conference pointed at nearly 20 years ago:

“The sovereignty of national standard-setters and regulators must be respected. It

is likely that the need for national tailoring of accounting and disclosure rules will

continue, and national capital markets must be free to decide the needs of their

investors.” (Sutton, SEC Chief of Accountants, Texas, 17th August1997).

It is not an easy decision for the FASB to relinquish some of its control in standard-

setting to the IASB as a current FASB member observed:

“Right now we have control over our standards. Do we want to move to influence?

Certainly it has less impact than control. Then you have to wonder do you have

significant influence. With the size of the US capital market, we would like to have

influence equal to our size” (Member of FASB, interview 19th September 2013).

The power to control accounting standard-setting arguably is harder to relinquish for

big economies with advanced capital markets such as Japan and the US , thus these two

countries have arguably more to consider formally in adopting IFRS. The stakes are

higher, and once they adopt IFRS there would be no point of return. For countries with

smaller sized capital markets such as Indonesia and Canada, the opportunity to participate

in the IFRS-making arena is an important attractive factor in the choice of IFRS over US

GAAP-and with less potential cost or risk of adoption.

As was discussed in chapter seven, being part of the international society is more

important than debating if US GAAP is superior in quality to IFRS. An opportunity to

influence the IASB through representatives in various committees of IFRS governance, no

matter how small the influence, is better than no influence at all – which would be the case


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in the US GAAP dominated governance system. In the case of the US, it does not have to

adopt IFRS to maintain influence, the size of the US capital market makes it too large to

be ignored by the rest of the world. It is very hard to envision IFRS as an international

standard without the involvement of the US. Moreover, it would be a big loss for the

international effort in global accounting standard-setting to lose FASB talent and technical

resources.

Despite the threat from the international community to ignore the US involvement in

the IFRS-making arena, the FASB sits with the 12 other standard-setters in the ASAF, a

new mechanism established by the IASB (in March 2013) to work more closely with other

national standard-setters following the end of the era of bilateral relationships (with Japan,

the US and other countries). Notably, South Korea and Brazil, for example, despite their

decisions to fully adopt IFRS in 2011 and 2010 respectively, did not win a place at the

ASAF table. The US did even with its non-commitment decision in 2012 regarding the

IFRS adoption.

9.7 Conclusion

The US case study, the last empirical chapter of this study, compliments the other

country case studies in previous chapters. The six countries sampled in this thesis were

grouped based on similarities of institutional arrangements and utilised mechanisms of

IFRS adoption. The countries were also sequenced from countries with minimal

international influence in the IFRS arena, such as the Philippines, to a country with great

influence, the U.S. The sequence of the countries also reflected the resources of national

standard setting bodies, from the country with the least resourced standard-setter, the

Philippines, to the country with the most resourced standard-setter, the US.

The US case demonstrates that despite the effort of pro-IFRS actors to institutionalise

IFRS in their jurisdictions, the outcome may not be easy to predict. The decision of IFRS

adoption can be reversed depending on the outcome of ongoing battle between various

actors pursuing different types of institutional work. By focusing on the adoption

processes and not necessarily on the outcomes of such institutional work, this study

provides a richer explanation of why a country chose different mechanisms of pursuing

the goal of ‘one set of global accounting standards’.


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The next chapter is a discussion chapter which provides an overall analysis and

assessment of the IFRS adoption process across the six sampled countries and what has

been learned regarding the decision-making processes of IFRS adoption activities

(institutional works), the national actors and the arguments. In particular, the chapter

focused on the characteristics and relationships between different forms of institutional

works, the encompassed activities of key agents/actors and the range of arguments utilized

in promoting and/or resisting case for IFRS adoption.

Chapter 10. The Institutional Work of IFRS Adoption

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Chapter 10. The Institutional Work of IFRS Adoption: Transforming

Accounting Regulatory Fields

10.1 Introduction

Studies of international accounting standardisation mostly discuss the political

interplay between various international actors (see Camfferman and Zeff, 2007; Botzem,

2012; Botzem and Quack, 2006) but rarely discuss the interactions between individual

countries and the international field or the interactions between national key actors in their

own regulatory field. We know very little about the actual processes of local reception and

mechanisms of diffusion (Djelic and Sahlin-Andersson, 2006). This thesis has tried to fill

the gap, by analysing the process of IFRS adoption in various jurisdictions where they

could have chosen a competing set of standards in the form of US GAAP, to enhance our

understanding of how IFRS has been diffused and institutionalised to become a set of

global standards.

Institutions are social structures that are characterised by a high degree of resilience

(Scott, 2008). However, it has also been argued that social structures are dynamic and

continually evolving and they are a matrix constituting the outcome of a process of social

interactions between actors (Giddens, 1984; Sewell Jr, 1992; Burns and Scapens, 2000).

The national regulatory fields as the institutions under study have gone through

institutional change in the process of contemplating IFRS. Instead of looking at the

adoption process as a linear chain of events, this thesis proposes to see the adoption

process as a dynamic continuous process between actors with varied interests performing

different forms of institutional work. This chapter analyses numerous competing factors

and collective influences during the four stages of IFRS adoption: Harmonisation,

Decision, Transition and Implementation.

This chapter aims to build a new analytical framework to study the IFRS adoption

process at the national field level. In framing the process of IFRS adoption, this thesis has

used the notion of institutional work (Lawrence et al., 2009; Lawrence and Suddaby,

2006) which is a recent development in the sphere of institutional theory. This chapter


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draws on the utilisation of institutional work to propose an analytical framework better

capable of identifying, understanding and appreciating the sensitivities and dynamics of

the adoption of a global set of standards in various national contexts.

Some literature on the IFRS adoption process has utilised the Dillard et al., (2004)

model, to analyse institutional change in three hierarchical levels of social systems of a

single country, for example, in case studies of Portugal (Guerreiro et al., 2015) and the

United Arab Emirates (Irvine, 2008). The Dillard et.al. (2004) model draws on Weber’s

(1968) notions of social context which proposed that the institutionalisation proceeds

occurs in a recursive manner through a social system with three hierarchical levels: the

economic and political level (global level), the organisational field level and the

organisational level. However, often the users of this model found evidence that the

coercive pressure from the economic and political level cascaded to the organisational

level but found very little evidence of the reverse pressure from the organisational level

upward to the economic and political level (e.g Irvine, 2008; Guerreiro et al., 2015).

Although the Dillard et.al (2004) model can be useful in the analysis of the social and

political context of the IFRS adoption process in individual countries, this model is not

that useful for cases comprising multiple fields, as is the case with this thesis. The Dillard

et.al (2004) model requires clear boundaries between each of the levels, while the analysis

of this thesis has demonstrated that the boundaries between the three levels are less

obvious in some sampled countries compared to the others. For example the accounting

standard-setters in Japan, Canada and the US are important actors in the IFRS global arena

and very much more influential than the standard setting bodies of the Philippines and

Indonesia. Any decision on IFRS adoption by the US FASB cannot be viewed in isolation

as a decision of an individual organisation as it clearly brings with it significant

consequences for the IFRS international arena. The segmented, and potentially rather

static nature of the Dillard et al model is accordingly not that helpful in

assessing/analysing the complex interactive between national, regional and global

regulatory fields – that as we have seen in this thesis are increasingly connected.

Regulatory fields are capable of being transformed when IFRS is adopted. National

regulatory fields consist of several actors such as the accounting standard-setter, the

capital market regulator, the accounting profession, and the preparers of financial reports.


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The framework proposed by this chapter explicitly acknowledges the interconnection

between national and international actors. As was discussed in the empirical chapters,

decisions by national actors were very much influenced by the persuasion and assistance

from international actors. The international influence over national actors has also been

highlighted in the existing literature on IFRS adoption in single country (Mir and

Rahaman, 2005; Tyrrall et al., 2007; Albu et al., 2011; Albu et al., 2013). However the

great value of studying IFRS in multiple countries is that it allows the observance of

similar institutional work across different fields in response to such international

influence, which may produce different institutional outcome.

The next section will explain the analytical framework of the IFRS adoption process

in more detail which will be followed by a discussion of three types of institutional work

involved in the process: disrupting, maintaining and creating work, where each type is

evolving in its form throughout the processual stages of IFRS adoption. The last section

will discuss the possible new battlefields beyond the IFRS implementation stage.

10.2 Theorising the IFRS adoption process: the dynamics of institutional work

Drawing on the empirics previously presented in this thesis, the main aim of this

chapter is to develop theorization of the IFRS adoption process at the national regulatory

field level by drawing from and refining the theory of institutional change and institutional

work (Lawrence et al., 2013; Lawrence and Suddaby, 2006; Lawrence et al., 2009). The

analytical framework presented in Figure 6 proposes an explanation for the process of

IFRS adoption at the national regulatory field level. It highlights the two-way connectivity

between the international and national regulatory fields. As being sampled throughout the

empirical chapters, the debate between actors at the national level (accounting standard-

setters) was highly influenced by the dynamic at the global level and vice versa.


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Harmonisation Decision Transition Implementation

Figure 6. The Institutionalisation of IFRS

Outcome

Institutional

Work.- (D) = disrupting work; (C) = creating work; (M) = maintaining work.

Stages

National Regulatory Field

New Battlefields

Confirming the decision

Decision to adopt

Refining the decision

Reversing the decision or creating new decision

Full adoption Revisited

Engaging with regional group standard setter

Implementation technical challenges

Undermining localism logic (D)

Image making (C)

Reconfiguring Belief System (C)

Disrupting full adoption (D)

Prohibiting old standard (D)

Creating competition logic (C)

Resisting new (maintaining old) Standard (M)

Reinvented old actors (M)

Maintaining full adoption (M)

International Regulatory Field


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The arrows at the top of the Figure 6 symbolise clear two-way connections between

the international and national regulatory fields, although the empirical findings of this

study indicate that such connections are less obvious across countries. Some institutions

are influential players in both national and international fields such as the US FASB while

other institutions are only influential at the national arena with weak influence in the

international regulatory field such as FRSC of the Philippines. Certain individuals often

plays pivotal role in both fields. For example, IASB members often lend their influence to

the national regulatory fields during the decision period. For example in the developing

sample countries of this study, IASB chairman came to the countries during the decision

period to promote the adoption of IFRS90. Some individuals have also been moving from

international field to the national spreading with them the ‘globalism’ logic to the national

fields. Former IASB member have also been appointed to chair the local national

standard-setters91 and vice versa; many key actors in the international arena are individuals

with previous strong influence for IFRS adoption in the national arena92.

This thesis argues that the adoption of IFRS is a process of transforming the national

accounting regulatory field through a series of developmental of processual stages (as

detailed in the top line of Figure 6). Some countries may have gone through the four

stages (harmonisation, decision, transition and implementation) in a relatively short period

of time such as the case of the Philippines, but another country like the US may never

reach the IFRS implementation stage as it has chosen a different pathway in supporting

the goal of achieving one global accounting standard. The middle layer indicates type of

institutional work undertaken by actors during different stages. The detail of each types of

institutional work will be discussed further in this chapter.

90 The visits of IASB members to various countries that were interested in adopting IFRS were

highlighted in IFRS Foundation annual reports, e.g at para.85 page 16 of 2005 Annual Report:

http://www.IFRS.org/About-us/IFRS-Foundation/Oversight /Annual-

reports/Documents/10_845_IASCF2005AnnualReports.pdf (Accessed 10th September 2015) 91 e.g. The case of Robert Herz (US FASB), Ikuo Nishikawa (ASBJ), and Patricia O’Malley (ASC

Canada) had experienced in serving IASC/IASB before their appointment to lead their national accounting

standard-setting body. 92 e.g the case of Amaro Gomez (Brazil), Paul Cherry (Canada), and Ahmadi Hadibroto (Indonesia)

who respectively became IASB Member, Chairman of the IFRS Advisory Council and IFAC council

member after their pivotal role for IFRS adoption decision in their respective countries.

http://www.ifrs.org/About-us/IFRS-Foundation/Oversight%20/Annual-reports/Documents/10_845_IASCF2005AnnualReports.pdf

http://www.ifrs.org/About-us/IFRS-Foundation/Oversight%20/Annual-reports/Documents/10_845_IASCF2005AnnualReports.pdf


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The framework argues that the regulatory field continues to change, even after IFRS

is implemented. Thus in understanding the model, although for writing clarity the model

suggests four sequential stages of IFRS adoption, the whole process is a dynamic where

the outcome may vary between countries depending on the strength of institutional

processes and whether it is possible for different stages to be revisited (as prior decisions

get overturned). As the figure suggested, after the decision to adopt IFRS, national actors

may refine the decision which may result the confirmation of the adoption such as the case

of Canada or reversing the initial decision such as the case of Japan.

The battle between actors with different interests continues even after the outcome has

been reached as illustrated in the box of New Battlefields. National actors may revisit the

plan of full IFRS adoption and switch to the convergence process as, for example, in the

case of Indonesia. After the IFRS implementation, some countries may also permit non

listed companies to opt out from IFRS and switch to IFRS for SME or local GAAP as in

exemplified by the case of the Philippine. The debate may also escalate beyond the

national field as the national standard-setters were engaged with other standard-setters in

their regions and established a regional group of standard-setters. This emergence of a

regional group of standard-setters such as AOSSG and their potential impact to the

international standard-setting will be discussed further in this chapter. The technical

accounting debate may also become stronger in the early years of IFRS implementation as

preparers start to realise that some standards would be too onerous to apply. The lobby

from the preparers may force the national standard-setters to delay some specific

accounting standards.

The concept of institutional work coined by Lawrence and Suddaby (2006) used in the

framework provides a conceptual umbrella to categorise the action of actors throughout

the stages. Lawrence and Suddaby (2006) offered new vocabularies categorising the

efforts exerted by organisations as well as individuals within the organisations into three

types: creating, maintaining and disrupting institutions which offered new tools for further

analysis. Institutional work theory captures both agency and structure and their

interrelations by focus on social action (Zilber, 2013). The notion of institutional work

highlights reflexive forms of actions that are aimed at intentionally affecting institutions

(Lawrence and Suddaby, 2006; Lawrence et al., 2009). While institutional work theory has


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been useful to categorise actions by actors affecting the institutions, the framework

illustrated in Figure 6 allows the observance of institutional work interconnection and

evolution over time.

Most of the existing literature on institutional change at field level focuses on single

institutional processes, for example, repair work as part of maintenance (Micelotta and

Washington, 2013) or creating work resulting in new professional space (Suddaby and

Viale, 2011; Covaleski et al., 2003). The use of institutional work theory encourages

researchers to develop more integrative models of institutional dynamics and identify the

impact of particular types of institutional work for a particular outcome. For example, the

2010 study by (Zietsma and Lawrence, 2010) explored institutional change and stability at

organisational field level, i.e the coastal forest industry in British Columbia. The authors

divided the evolution of the industry into four stages: institutional stability, institutional

conflict, institutional innovation and institutional restabilisation. Zietsma and Lawrence

(2010) associated certain types of institutional work with each of the stages, for example,

in the institutional stability stage, actors were involved in maintaining work, while

creating practices are linked to the institutional innovation stage.

Similar to other case studies on institutional change at industrial field level (Zietsma

and Lawrence, 2010; Zietsma and McKnight, 2009), this research also finds that multiple

types of institutional work (instead of one type) were exerted by various actors with

different interests. However, in contrast with Zietsma and Lawrence (2010), the analysis

of this study finds a less deterministic relationship between certain types of institutional

work with a particular stage in the field’s change. For example the creating work

discussed in this study, to promote IFRS in a field, does not necessarily lead to the IFRS

adoption (e.g the case of the US). Disrupting work, to eliminate old standards also does

not necessarily lead to the elimination of old standards (e.g. the case of Japan). Although

this study finds evidence of various types of maintaining work after IFRS is implemented

(continue its usage), it also finds that the maintaining effect or condition may be less

stable than suggested by such labelling as the disrupting and the creating work continues

to destabilise the field.

In essence, IFRS adoption represents a battlefield between those who want to fully

adopt IFRS and those who want to maintain the status quo. As such, the competition of


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ideas exists at every stage, albeit in some countries it is more visible than in others. The

process to reach the decision to adopt IFRS involves various forms of disrupting, creating

and maintaining institutional work. Actors can disrupt the old set of accounting standards

while simultaneously promoting IFRS. At the same time actors promoting IFRS, face

resistance from the actors aiming to preserve the status quo of maintaining the old belief

system which underpinned the ‘old’ set of accounting standards. The interaction between

disrupting and maintaining institutional work creates a tension in a field where both actors

try to persuade the other. In many cases, the tensions among different actors may compel

the standard-setter to amend their initial plan for example by switching from full adoption

to convergence as in the case of Indonesia (see p. 166).

As such, a key contribution of this thesis is to demonstrate that institutional work and

argues that certain types of institutional work are not necessarily linked to particular

institutional outcomes. Despite all national actors claiming to support one global

accounting standard, institutional outcomes vary across sample countries depending on the

mechanism of adoption and the power struggle between actors. Sometimes the actors

were very successful in attacking old institutions which resulted in the old standards

ceasing to exist. In other cases, the preserving work was stronger which made the

institutional disruptive work less successful. Due to the ongoing contestation in the fields

among actors with different interests, it is possible for a new consensus may cause

countries to revise their initial decision to fully adopt IFRS. Jurisdictions may choose to

adopt IFRS or not adopt it or instead allow it as one of the standards available for certain

types of companies.

The remaining sections of this chapter will discuss each type of institutional work and

how they have evolved into varied forms over different stages. The framework in Figure 6

suggests that new battlefields may emerge in a field during and after the implementation

stage, leading to the new transformations. The last section of the chapter will discuss the

example of new battlefields and some institutional consequences from the IFRS adoption

process beyond the implementation stage.


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10.3 Disrupting institutional work

Disrupting institutional involves attacking or undermining the current mechanisms

that lead members to comply with institutions (Lawrence and Suddaby, 2006). Figure 6

illustrates that disrupting institutional work is exerted at every stage of the adoption

process. Depending on the stage of adoption, disrupting work can take different forms. For

example, at an early stage when a country is deciding to adopt IFRS, the disrupting

institutional work involves attacking or undermining the belief system underlying of the

old set of accounting standards. At the later stage, when IFRS has been adopted, the

disrupting institutional work is transformed into questioning whether IFRS is fit for all

types of entities in the country.

Lawrence and Suddaby (2006) drew their theorising of disrupting institutional work

very much from Oliver (1992) notion of deinstitutionalisation which is a distinct process

and not necessarily relate to the creation of new institutions. Although it is easier to

assume that disrupting the old standard in the national regulatory field is through the

introduction of the new accounting standard, the analysis of this study argues two types of

institutional work are distinct although both can be on-going at the same time. The two

sub sections below will discuss how disruptive work may take different forms depending

on the stage of adoption.

10.3.1 Undermining the ‘localism’ logic of the old accounting standard

Prior to IFRS adoption, most of the countries sampled in this thesis developed their

own accounting standards which were highly referenced to US GAAP. The adoption of

IFRS was not only involved promoting the IASB’s set of standards, but also involved

convincing national stakeholders that adopting such a set of ‘international’ accounting

standards was better than developing existing ‘local’ accounting standards. The IFRS

supporters needed to disrupt the practice of developing local accounting standards. Some

countries chose to disrupt or demolish the old practice by issuing an accounting law and

stipulating that IFRS should be adopted. In other countries, pro-IFRS actors relied more


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on debate and persuasive lobbying to undermine the localism logic of national accounting

standard-setting.

Two of the sampled studies in this thesis, Brazil and the Philippines disrupted the

existing accounting standard by incorporating IFRS within their respective new

accounting law. The enactment of a law as disrupting work to the existing practice is

similar to the institutional work discussed by other scholars (Jones, 2001; Leblebici et al.,

1991). The enactment of a law in support of IFRS adoption, was an important institutional

work for countries with weak standard-setters such as the Philippines and Brazil. As was

discussed in chapter six, the law serves as fait accompli for all stakeholders and made the

IFRS adoption process less contested in these two countries.

It is interesting to note that the Philippines and Brazil took the same approach to

legitimise the decision to adopt IFRS despite the former being a common law country and

the later being a code law country. Traditionally, the legal system has been one of the

main reasons for accounting diversity mentioned by international accounting literature

(Doupnik and Perera, 2007; Radebaugh et al., 2006; Nobes, 1983). However, in most of

the countries such as in Indonesia and Canada, the decision to adopt IFRS did not have

strong legal support thus most of the actors relied more on negotiations, persuasions and

lobbying to undermine the assumptions and beliefs in the old accounting standard and

simultaneously promoted IFRS.

Before the adoption of IFRS the national regulatory fields were running under the

‘localism’ logic where the accounting standard should be created based on the interests of

national stakeholders. As was discussed in the empirical chapters, during the

harmonisation stage, most sample countries developed their own accounting standards

although they might also take IAS and US GAAP as their reference. The presumption was

that accounting standards should be unique, thus the pro-IFRS actors undermined this

basic assumption and argued accounting standards should be created at the international

level instead. Developing local accounting standards was labelled as ‘not modern’ and

against the globalisation. Concurrently the pro-IFRS actors introduce IFRS to their field as

a set of international standards endorsed by international bodies. The actions and type of


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arguments used by actors in introducing IFRS to the field will be discussed in more detail

at the section of ‘creating institutional work’.

Adopting IFRS was also suggested by actors as a more efficient way over creating

their own unique set of accounting standards. A common comment which came up from

respondents was ‘why do we have to reinvent the wheel’. Respondents also commented

that the due process of the IASB is very thorough resulting in possibly a better standard

than that produced by other standard-setter with limited resources. With such arguments

pro-IFRS actors tried to suggest that standard-setting is an expensive exercise which

countries may not have enough resources to carry it out well.

10.3.2 Disrupting the full adoption of IFRS

The IASB has always encouraged full adoption of IFRS which involves the adoption

of IFRS as identical word-for-word versions of the original without modifications or

exceptions (known as ‘carve outs93‘) applicable to all industries. This had been the aim of

most sampled countries when they decided to consider IFRS adoption. However, during

the transition period, the aim of full adoption was disrupted which made countries revising

their initial plan. In the extreme case of Japan, for example, the disruptive institutional

work performed by Japanese large corporations successfully lobbied the Japanese FSA to

completely abandon the IFRS adoption blueprint and continue with the status quo. In the

case of Indonesia, while full adoption was the initial aim, this was reduced to

‘convergence’, with Indonesian standards being converged with IFRS but not identical.

Right up until April 2015, Indonesia has continued to refuse to admit that they had fully

adopted IFRS in any survey issued by the IASB (see Pacter, 2015 for summary of the

survey).

During the transition stage of a country, the standard-setter as well as the preparers

started to examine each of the standards more closely. Some contradictions between newly

adopted standards and existing standards (or company’s law) were mostly identified

93 Full adoption without carve-outs had been advised in many public speaking enggements by the

former IASB chairman David Tweedie during his leadership period. See for example was address during the

World Congress of Accountants 2010 in Kuala Lumpur : http://www.theaccountant-online.com/news/wcoa-

carve-outs-will-blow-up-IFRS-tweedie


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during the transition period. Lobbying from preparers was intensified during this stage

asking for further considerations, which compelled the standard-setter to review their

commitment to full IFRS adoption. Lobbying efforts from some specific industries

resulted in adding on more transition years, as in the case of the insurance and rate

regulated industries in Canada. In other countries, the standard-setters might just dismiss

the preparer’s objection and carried on with their initial plan of full adoption, even though

this would result in an undesired impact for preparers. For example in Brazil a significant

amount of rate regulated assets which could not recognised under IFRS were written off in

2010 when the country applied IFRS for the first time (see p. 127). Canada experienced a

similar problem as Brazil and decided to delay the adoption year for rate regulated

companies while lobbying the IASB to issue a new standard, which subsequently resulted

in IFRS 14 Regulatory Deferral Accounts (see p. 152).

The year before the implementation stage was a critical issue and time period for the

standard-setter who had either to continue carrying on with the adoption plan or revise it.

This is the period when preparers usually realised that some standards would be onerous

to apply. Financial statements based on IFRS require comparative figure for the year prior

to adoption year which would force companies to apply IFRS one year before the target

year to produce such figures. Thus one year before the implementation year, the anxiety

increased among users. In various degrees, standard-setters were lobbied by preparers to

delay the adoption year. Such lobbying could result in stopping the full adoption plan as

was the case with Japan or just delaying several specific standards such as those relating to

financial instruments from the adoption process as was the case with Indonesia. Even for

the country which experienced a relatively smooth and fast transition like the Philippines,

a few days before the IFRS implementation date, an interviewee acknowledged some

anxiety among preparers who tried to lobby the regulator to delay the implementation

date.

As was discussed in the empirical chapters, much relief was provided during the

transition period to absorb the shock of companies adjusting their reporting systems from

one set of standards to the other. The most common way was to exclude the problematic

standard or industry at the implementation year (see

Table 21 below).


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Countries Transition Relief at the Implementation Year

Philippines IFRIC 15 Agreements for the Construction of Real Estate

deferred to 2012. And some other transition relief for IAS 19, IFRS 7

and IAS 39

Brazil Eliminated the revaluation model option for PPE and Intangible

assets. Pushed for the equity method to be used for separate financial

statement while IFRS only allows the fair value or cost model.

Canada Mandatory adoption of IFRS for investment companies and

segregated accounts of life insurance enterprises until 2014 and for

entities with rate-regulated activities until 2015

Indonesia IAS 41 Agriculture and IFRIC 15 were not adopted. IFRS 4

Insurance Contracts was deferred to 2013 to provide more time for

the transition process to insurance companies. Some non-IFRS

standards are still effective.

Table 21. Transition relief and ‘carve outs’ undertaken by sampled countries

Source: Various documents issued by the standard-setters.

The disruptive institutional work did not stop even after IFRS implementation. Some

countries after a few years of full IFRS adoption, changed their initial plan. For example,

the decision to require mandatory use of IFRS in 2005 for all entities in the Philippines,

including non-listed companies, created dissatisfaction among preparers which resulted in

the ‘IFRS for SMEs’ being ‘eagerly’ adopted in 200994. Other countries in Europe, such as

Croatia (Mošnja-Škare, 2010) and Malta (Alexander and Micallef, 2011), which adopted

IFRS in full also found it inapplicable for small and medium-sized companies, resulting in

their national accounting standards being allowed as an option for their SMEs.

10.3.3 Prohibiting the continued use of old standards.

Another disrupting work was identified during the transition stage in Japan and

Canada. US GAAP has been one of the options for qualified listed companies in Japan

94 Interview with the Executive Director of PICPA on 1st December 2012


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since 1976 (van Mourik, 2007) and in Canada since 200495. Upon the decision to adopt

IFRS, the market regulator tried to prohibit the use of US GAAP. Allowing more

standards in the capital markets would increase the supervisory cost of the regulator to

ensure the compliance. The decision to prohibit US GAAP in Japan by 2016 was issued

by JFSA in December 200996 while Canadian market regulator in 2008 issued a concept

paper that prohibiting the US GAAP use by 201397.

However, both regulators received a strong objection from the stakeholders, especially

from companies dual listed in the US market. These objection forced market regulators to

rescind their plan and continue to allow US GAAP as an option. The argument of US

GAAP supporters in maintaining US GAAP use in their jurisdictions will be discussed in

section 10.5.1 of this chapter. Until now US GAAP remains as an option in Japan and

Canada and the interview with senior officers of JFSA and CSA revealed that they did not

see any urgent need to overturn the decision in the near future.

10.4 Creating institutional work

As discussed in previous sections, disrupting institutional work has focused on

undermining the logic of old accounting standards. Simultaneously with such disrupting

work, pro-IFRS actors were engaged in an institutional creating work to assist with the

introduction of IFRS in their national regulatory field. Such creating institutional work

involved promoting IFRS as a high quality global standard and the reconfiguration of the

belief system from ‘localism’ logic to ‘globalism’.

During the decision stage of the process, the creating institutional work saw actors in

the sampled countries being heavily involved in advocacy activities or the mobilisation of

political and regulatory support through direct and deliberate techniques of social

persuasion. The case of Indonesia is one example of how a few key individuals promoted

95 Document of National Instruments 52-107. 96 Revised Cabinet Office Ordinances of JFSA can be downloaded at:

http://www.fsa.go.jp/en/news/2009/20091211-8.html (accessed 11th September 2015) 97 The concept paper no.52-402 is available from this link

http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20080215_52-402_cp-fin-rpt.jsp, accessed 9th September

2014.

http://www.fsa.go.jp/en/news/2009/20091211-8.html

http://www.osc.gov.on.ca/en/SecuritiesLaw_csa_20080215_52-402_cp-fin-rpt.jsp


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IFRS and mobilised political and regulatory support from the government for the

adoption.

The creation of the image of IFRS as a high quality accounting standard was a crucial

tool used by the IFRS supporters to convince doubtful actors in their field. High quality

has been an alleged characteristic of IFRS as a set of global accounting standards

promoted by the IASB to the rest of the world. Countries were persuaded to adopt IFRS

and abandon their local standards by the argument that IFRS would reduce the cost of

capital, improve transparency and comparability of the financial report, which then

facilitates international capital movement.

10.4.1 IFRS as a high quality accounting standard: Image-making processes

IFRS proponents implied that IFRS is a set of good quality standards as more and

more countries adopted it and more international bodies endorsed it. However, as was

discussed in the second chapter of this thesis the early adopters of IFRS such as the EU

had a leap of faith in adopting IFRS more for political reasons rather than for quality. The

EU decision then encouraged other early adopters to make similar decisions around the

same year (e.g. Australia, Hong Kong and the Philippines). As more countries adopted

IFRS it created a network effect (Ramanna and Sletten, 2009) which appealed to other

countries to adopt it as well. The high quality image which surrounds IFRS is enhanced as

more countries joining the ‘IFRS Club’ meaning more legitimacy for the standard’s claim

to good quality. IFRS became a catchword for modern trade and globalisation. This

created a momentum of adoption and late adopting countries were compelled to adopt

IFRS because the exclusion from the ‘IFRS Club’ would bring more disadvantages than

advantages. Figure 7 below illustrates the cycle in the making of an image of quality.


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Figure 7. The cycle of IFRS image-making

However, the concept of high quality international standard is more complicated than

the network benefit of the standard over the alternative. Most of the respondents in this

study affirmed that IFRS is good quality standard but struggled to explain what they

meant by ‘good quality’. During the interview, many respondents referred to the IASB’s

due process prior to setting a standard as the main contributor to the quality of IFRS. They

argued that the rigorous nature of the due process involved in developing IFRS (e.g.

technical research and many forms of stakeholder outreach) was a very important factor

contributing to the quality of IFRS. However, respondents found it difficult to repudiate

the fact that the FASB also follows a rigorous due process in developing US GAAP. For

example, one of the IFRS proponents admitted that the FASB’s due process may be better

than the IASB’s.

IFRS proponents in developed countries such as Canada and Japan wielded another

argument which tried to distinguish the FASB and IASB due process. The IASB’s is more

appealing for developed countries, as it allows them to get involved while the FASB

cannot entertain non-US needs. An opportunity to influence the IASB through the

representatives on various committees of IFRS governance, no matter how small the

The IASB makes claims that IFRS is a set of high quality global accounting

standards.

Early adopters, such as the Philippines and Europe,

adopt for reasons other than quality

Late adopters such as Canada, Brazil and Indonesia, see the

widespread adoption of IFRS as evidence of the high quality of

IFRS.

As more countries adopt, the image of high quality is

enhanced and IFRS becomes more international


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influence, is better than having no influence at all. Hence, even though respondents mostly

agreed that the IASB and FASB both have a rigorous due process, the IFRS proponents

tried to imply that these processes were inherently different and therefore the comparisons

were invalid. One has a due process involving stakeholders in one country and the other

has an international system of due process involving hundreds of countries. The

international due process provides the opportunity for stakeholders in several countries to

participate.

The IFRS proponents argued that it is a better option as it provides opportunities for

the adopting countries to influence the due process. This is an argument which is difficult

to rebut, as the FASB is required to develop accounting standards which cater to US

need(s) only and not those of the rest of the world. If adopting a set of international

standards is a better option than developing national specific standards, then IFRS should

be chosen instead of US GAAP as it provides more room for lobbying in its due process.

When the US bailed out from their IFRS convergence plan in 2012, the cycle started to

unravel. As was discussed in chapters eight and nine, the indecisiveness of the US about

IFRS adoption around 2011 and 2012, encouraged other countries to slow down their own

adoption processes (as in the case of Japan). Sovereignty as a reason for not adopting

IFRS is more of an overriding factor than an issue related to the quality of IFRS. Many

pro-IFRS respondents to this study argued that the US would eventually adopt IFRS in the

future, however, many respondents especially from the US and Japan were less

enthusiastic about this prospect.

These developments in the US have made the path towards a single set of global

standards become uncertain. This uncertainty has given countries such as Japan and China

the confidence to maintain their own national standards (Camfferman and Zeff, 2015

p.526-527) and other countries have reassessed their commitment to full IFRS adoption.

Indonesia for example, at the moment also maintained its ‘convergence’ strategy with

IFRS by avoiding full adoption and refusing to set a target year for full IFRS adoption.

Since 2012, the idea of a few different global accounting sets of standards with similar

quality continues to pose a threat to the IFRS ‘quality-making’ cycle.


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10.4.2 Reconfiguration of belief systems

The second group of forms of institutional work in creating institutions emphasises

actions in which the actor’s belief systems are reconfigured. Lawrence and Suddaby

(2006) has provided three forms as examples: Constructing identities, changing normative

associations and constructing normative networks. In the sampled countries, the belief

systems of the standard-setting bodies are often reconfigured. New standard-setters were

established with the new belief system of producing principles-based accounting

standards. In other examples, the head of an accounting standard-setting body who did not

support the belief system of ‘one global accounting standard’ was replaced by another

leader.

The actors institutionalised IFRS in their national regulatory field by promoting IFRS

attributes. Firstly, the IFRS proponents used the classic economic rhetoric involving the

benefits of IFRS adoption such as reducing the cost of capital and increasing

comparability. This economic rhetoric was widely used by international actors and also

national actors in persuading their opponents. Although, one may argue that any standard,

if it is applied consistently across countries may achieve those benefits as well, even if it is

US GAAP or Japanese GAAP. It is not clear why the country should adopt IFRS if other

standards would, arguably, achieve similar goals if it was to be applied globally. Thus, the

IFRS proponents needed other arguments to convince them it should be IFRS and not the

other international standards such as US GAAP.

Secondly, IFRS proponents used the popular argument that IFRS has been adopted by

more than one hundred countries, thus it is (becoming) a set of truly international

standards. This argument can be found in many documents and many speeches, by IASB

officials speaking in the sampled countries, or by the local actors. The proponents of IFRS

tried to use this argument to illustrate the ‘globalism’ of IFRS. Nevertheless, this argument

often neglected the fact that many jurisdictions have local IFRS modifications.

The IFRS proponents argued that the country was part of a global economic system,

and a member of international bodies which recommended the use of IFRS such as the

IFAC, the World Bank, IMF, G20 and IOSCO. Membership of those organisations


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included a requirement to adopt IFRS. Using this argument, pro-IFRS actors argued that

adoption was inevitable if the country wanted to remain as part of the global society.

Adopting IFRS was a better option than being alienated from the rest of the world.

Purporting to support the idea of one set of global standards could have been more

feasible for certain countries than full scale IFRS adoption. For example, the questions on

a 2013 IFRS Foundation survey investigating the use of IFRS around the world were very

revealing. Responses from 138 jurisdictions were received and the results were

subsequently published on the IFRS Foundation website98. It is interesting to note that the

first question to the survey was not whether the country had adopted IFRS but instead

whether the jurisdiction had made a public commitment in support of moving towards a

single set of high quality global accounting standards. A hundred and twenty-eight

jurisdictions including the US and Japan answered ‘yes’ to this question. From the

structure of the survey’s questions, it is very clear that the IFRS Foundation was seeking

confirmation from the national actors that they supported the ‘idea’ first before being

committed to IFRS. Even jurisdictions that are often mentioned as ‘non-IFRS adopters’99

such as the US, Japan, India and China, all answered ‘yes’ to that question. The responses

to this survey demonstrate that globalism logic wins over localism logic in the

international arena of accounting standard-setting.

The logic which governed the national regulatory fields was therefore transformed,

following IFRS adoption, from that of ‘localism’ to ‘globalism’. Actors in the field

changed the perspective of themselves from having mere local influence to being part of

something bigger -- the international society of IFRS. Often this ‘transformation’ was

communicated to the international bodies (mentioned above). Sampled countries made

efforts to communicate their adoption progress to the international bodies in order to be

acknowledged as good global citizens. The previous empirical chapters especially the case

study of Japan demonstrate that the decision to adopt IFRS was hugely influenced by the

EU assessment which found Japanese GAAP incompatible with IFRS and US GAAP.

Thus the ASBJ convergence project plan in 2006 and the Tokyo Agreement in 2007

98 All jurisdiction’s filled survey is available in : http://www.IFRS.org/Use-around-the-

world/Pages/Jurisdiction-profiles.aspx, accessed 12th November 2014

99 The four countries were mentioned in the IFRS Foundation chairman’s speech on November 2014 in

Tokyo as countries which are not yet required IFRS. The ful speech is available at

http://www.IFRS.org/Alerts/Conference/Documents/2014/Speech-Michel-Prada-Tokyo-November-2014.pdf

http://www.ifrs.org/Use-around-the-world/Pages/Jurisdiction-profiles.aspx

http://www.ifrs.org/Use-around-the-world/Pages/Jurisdiction-profiles.aspx


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served as an important negotiation tool for Japan to negotiate with the CESR. The IFRS

convergence plan in Indonesia was also used by the standard-setter to negotiate with the

World Bank assessor to improve the ROSC assessment of the slow IFRS convergence

process in Indonesia.

By adopting IFRS, the national standard-setters also reconfigured their role and

identity. The changing role of national standard-setters for example is reflected in the 2014

document of “A Model for National Standard-setters”100 issued by IFASS and IASB. The

document envisions the ideal form of national standard-setters which highlights the

qualitative characteristics of independence and technical competence. The document

prescribing an ideal model for National standard-setters implies that it is not enough for

the countries to adopt IFRS, but they should adopt the ideal due process and the

institutional arrangement of the standard-setter as well.

[…] The Model is written primarily for NSSs in jurisdictions that are committed to

the adoption of IFRS for publicly accountable entities (see para 1.9 below).

However, it is also intended to be useful for NSSs in jurisdictions that have not yet

committed to adopting IFRS or have standard-setting authority that extends to

entities that are not currently addressed by the IASB. Furthermore, it might be

useful for other bodies involved in the standard-setting process, such as bodies

that monitor, funds or oversee NSSs, or bodies that assess IFRS for adoption in

their jurisdiction for the purposes of making recommendations to the legislature.

(A Model of National Standard-setters”, para 1.4.).

The model proposed by the IASB highlights the importance of certain qualitative

characteristics of national standard-setters. These include independence, technical

competence, effectiveness, efficiency and their role as acting in the public interest. The

model also suggested that the national standard-setting bodies should have robust

transparent due process and an oversight body. The model fits very well with accounting

standard-setters in many developed countries such as the UK, US, Japan, Korea and the

IASB itself.

100 The genesis of this document came from a position paper by Australian Accounting Standard Board

in IFASS meeting in 2009.


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10.4.3 The creation of competition logic

As was discussed in the previous section, the disruptive work may fail to eliminate the

old institution from a regulatory field which then results in the old and new system

competing in the same field. An important institutional work observed in Japan in 2013

was the creation of market competition for accounting standards. Japan was under a lot of

pressure from the international community to show more commitment towards IFRS

adoption, especially after Masamichi Kono chaired the IFRS monitoring board in 2009.

Demonstrating their intention to support IFRS while agreeing to the requests of Japanese

GAAP and US GAAP users, Japan conceded IFRS for non-listed companies and

introduced Japanese international modified standards (JMIS). With this decision, Japan

created a level playing field for IFRS, JMIS, Japanese GAAP and US GAAP in their

market.

In 2007 the US created market competition for their foreign registrants by allowing

the use of IFRS. Foreign registrants in the US have the option to choose between IFRS,

US GAAP and their local GAAP with reconciliation to US GAAP. Some previous

research and also the findings of this study show that IFRS does not always win in the

competitive environment against US GAAP, nor against local GAAP. IFRS as an option

for US domestic issuers is not yet available, however many respondents from the US

argued that this is a high probability in the US in the future.

Although the idea of ‘few global accounting standards’ has been enunciated by many

accounting scholars (Sunder, 2002; Sunder, 2011; Walker, 2010; Saito, 2011), it seems to

have begun to penetrate through to the national standard-setters in US and Japan and has

only recently been reflected on their actions. For example a speech by FASB chairman in

Tokyo in 2013 clearly invited Japan to maintain its Japanese GAAP.

“As we work toward developing more converged global standards, it is

critically important that we also maintain and improve the high-quality of our

national accounting standards, including JGAAP and U.S. GAAP. There are likely

to be occasions when preserving the integrity of our national business cultures


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requires us to maintain some differences in national accounting standards.”

(Russel Golden in Tokyo, 16th October, 2013101).

This is an interesting development in IFRS diffusion and the idea of ‘few global

accounting’ standards instead of one may also cascade down to other national regulatory

fields. In the competitive environment, IFRS may win over local GAAP such as in the

case of Germany (Lin et al., 2012), but in other instances, it may lose ground as in the case

of Switzerland where companies switched back to local GAAP after they had applied

IFRS for several years (Fiechter et al., 2012). The case of Canada revealed that 15% more

dual-listed companies chose to use US GAAP instead of IFRS despite the fact that Canada

had fully adopted IFRS in 2011 (Burnett and Jorgensen, 2013a).

10.5 Maintaining institutional work

The previous sections have discussed the disrupting and creating institutional work

during the IFRS adoption process. This section will discuss ‘maintaining’ institutional

work which involves supporting, repairing or recreating the social mechanisms that ensure

compliance. Lawrence and Suddaby (2006) divided maintaining institutional work into

two groups: efforts to ensure adherence to rule systems and efforts to maintain institutions

which include reproducing existing norms and belief systems. Similar to previous

discussions of disrupting and creating work, this study also observed the transformation of

maintaining work during different stages. At the decision stage of the process, preservers

would resist IFRS but as the stages evolved, so did the form of maintaining work.

Disrupters trying to devalue the old standard encountered resistance from the

preservers who were defying the change and attempting to preserve the status quo. At the

decision stage, the opponents of IFRS might not necessarily have been in support of the

adoption of US GAAP, some of them were nationalists who believed that the country

needed to develop its own unique accounting standards or retain the status quo of

101 FASB Chairman Russel Golden addressed the meeting of Keidanren and Financial Executive

International in Japan, 16th October 2013. The full written speech is available at FASB website :

http://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175827754558&blobhead

er=application%2Fpdf&blobcol=urldata&blobtable=MungoBlobs


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harmonisation with international accounting standards (as opposed to the full adoption of

the IASB’s IFRS). However at the transition stage, the actors involved in maintaining

work were no longer the ‘nationalists’, but the dual-listed companies resisting the

elimination of US GAAP as an available option for the filing of their financial reports in

their home capital market.

Another type of maintaining work was also observed following IFRS implementation.

This maintaining work involved the actors establishing barriers to discourage further

institutional change in the new transformed regulatory fields by enhancing the norms of

the full adoption pathway. The following sub-sections will discuss different forms of

maintaining works by actors which evolved through the different stages of the adoption

process: namely, resisting IFRS, preserving US GAAP, replacing old actors, and

maintaining the full IFRS adoption.

10.5.1 Resisting new (and maintaining old) standard

The selection criteria of the sampled countries in this study were important to observe

resisting and maintaining work. By looking at the countries with a strong past connection

to US GAAP, this thesis has been able to provide deeper and broader explanations of

IFRS resistance. The two main reasons for resisting IFRS adoption are a sovereignty issue

and questions regarding the independence of the IASB.

As has been discussed in the empirical chapters, technical issues did not dominate the

arguments to adopt IFRS (see p. 140). The sovereignty issue was the main reason behind

the nationalists’ resistance to IFRS adoption. IFRS opponents tried to distinguish between

the two sets of standards and argued that adopting IFRS would mean that they would lose

control over their local standards which would cease to exist if the country adopted IFRS.

The nationalists in the sampled countries mainly argued that IFRS was an ‘alien’ set of

standards believing instead that accounting standards should be ‘indigenous’ and that two

categories could not co-exist in the same field. The sovereignty issues seemed to be much

stronger in the developed countries than in the developing. As was discussed in chapters

eight and nine, the respondents in Japan and the US were very proud of their local GAAP

and believed that their accounting standards were on par, if not better, than IFRS.


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In contemplating a choice between IFRS and US GAAP, the pro-IFRS actors sought

to discredit US GAAP to convince other actors that IFRS was a better choice. In Canada

where the debate between IFRS vs US GAAP was most ostensible, arguments centred

around US GAAP complexity, detailed nature and lack of international recognition as a

global standard. However these arguments were not strong enough to persuade other

actors to support the prohibition of US GAAP.

On many occasions, IFRS opponents also accused the IASB of lacking independence.

Here, for example, is an argument from Canada:

The AcSB should maintain its current strategy except in instances where the

existing Canadian standard is ‘better’ and the new standard may provide lower

quality information. It should be considered that in some instances, there are

political motivations underlying standards specific to a country or region, which

results in entities being required to adopt a sub-optimal standard. (Excerpt from

the summary of roundtable discussions in Canada July-October 2004, FRAS

Canada).

Maintaining institutional work had preserved US GAAP as an option in some

jurisdictions despite some disruptive work to prohibit US GAAP upon full IFRS adoption.

Although the standard-setters in few national regulatory fields may have been contented to

switch from US GAAP to IFRS completely, their market regulators were compelled by

users to continue allowing the use of US GAAP. After IFRS was adopted, the capital

market regulators wanted to reduce the regulatory competition in the fields by prohibiting

US GAAP in their jurisdictions. However in the two sampled countries of the study where

US GAAP was an option before IFRS adoption, it still remains as an option now despite

the efforts to prohibit US GAAP.

The two main arguments cited by US GAAP proponents were driven by efficiency

and market demand rhetoric. The efficiency rhetoric focused on the cost of compliance to

IFRS. Keeping the two systems was considered by preparers as inefficient, as the

companies still wanted to continue reporting under US GAAP for the US SEC filing. The


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market demand rhetoric focused on the perceptions among preparers of market needs. US

GAAP proponents argued that their financial reports would not be comparable with their

competitors if they were not using US GAAP. Using US GAAP was deemed necessary by

the market as their investors and clients are mostly in the US and more familiar with US

GAAP. If they were prohibited from using US GAAP in the local market, they would need

to keep two bookkeeping systems as they wanted to continue producing reports under US

GAAP.

The market demand rhetoric was also used by Japanese dual-listed companies. These

companies claimed that by using US GAAP, their financial reports would be more

comparable to their US competitors. Low market demand for IFRS was also enunciated

by respondents from the US which then discouraged the US SEC from executing their

roadmap in 2008 (Adhikari et al., 2014). The efficiency and market demand rhetoric

seemed to be effective as they became the game-changers in some countries retaining US

GAAP.

10.5.2 Maintaining the IFRS adoption decision: Reinventing the old actors

As was discussed in the previous empirical chapters, reaching the IFRS adoption

decision was an important milestone for the sampled countries. Previous section of

‘creating’ institutional work highlighted the actions of actors to introduce the belief

system of international accounting standard in to the field. After the IFRS adoption

decision was reached, the pro-IFRS actors need to maintain the decision by ensuring the

adoption process could be executed properly. This section aims to discuss the maintaining

institutional work by actors to sustain the decision of IFRS adoption.

The decision to adopt IFRS is often followed by the establishment of a new standard-

setter, replacing the accounting standard setting body, which would be responsible for

carrying out the adoption plan. For example, Brazil was compelled to create a new private

standard-setter to adopt IFRS. The Philippines reformed its accounting standards

committee into a formal board and Indonesia established an IFRS implementation team,

similar to an interpretations committee which deals with implementation issues. Other

countries outside this sample who established a new accounting standards board to support


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the decision to adopt IFRS include South Korea (Arnold, 2012) and South Africa (ACCA,

2010). While some countries created new standard-setting bodies, the Canadian standard-

setter decided to wind up some of its committees, including the Emerging Issues

Committee (EIC) which since its inception in 1988 was seeking a solution to various

emerging issues by looking at US GAAP.

National standard-setters need to reinvent themselves to remain relevant and maintain

their survival after surrendering their sovereignty to the IASB. They used to be the local

authority responsible for developing accounting standards to cater to the needs of domestic

companies, but upon the adoption of IFRS their role changed to being partners of the

IASB, disseminating new IFRS and collecting local implementation issues to be reported

back to the IASB. The new role of national standard-setters for example was discussed

between IASB and IFASS in during 2014 which then creates the document “A Model for

National Standard-setters”:102

This Model for National Standard-setters (NSSs) is designed to provide a basis

for a NSS to maximise its contribution to the quality of general purpose financial

reporting, particularly through participation in the development of high-quality

global accounting standards issued by the International Accounting Standards

Board (IASB) – (IASB, 2014 “A Model For National Standard-setters” para 1.1.

pg.1 )

The diffusion of IFRS not only encourages the creation of new standard-setting

bodies, but it also makes them more similar to one another. Historically, accounting rules

were promulgated by parliament or by accounting standard-setters with different

governance forms across countries. Some standard-setters are a council inside a

government bodies (e.g China Accounting Standard Committee inside the Ministry of

Finance), while in other countries the standard-setters are the council under the accountant

association. However, with the adoption of IFRS, some countries experienced reform in

their standard-setters from quasi-bureaucracy to the quasi-judicial with similar logic to the

IASB, an independent standard-setter with technical experts.

102 The document is available at: http://www.IFRS.org/The-organisation/Advisory-

bodies/Documents/A-Model-for-NSS-May-2014.pdf (accessed 26th September 2015)


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The appointment of pro-IFRS individuals to lead the new accounting standard-setters

is also pivotal in supporting IFRS adoption. The impact of individuals in strategic

positions should not be underestimated. The appointment of a pro-IFRS leader is another

example of important institutional work undertaken in some countries. This thesis finds in

some countries, that the golden era of IFRS took place when the leaders of important

organisations were pro-IFRS. The obvious example is the case of Japan where the first

ASBJ Chairman, Shuzuki Saito was replaced by Ikuo Nishikawa. Arguably, Nishikawa

who was the Japanese representative to the IASC from 1993 to 1998 is more pro-IFRS

than his predecessor. Under Nishikawa’s leadership, the relationship between the ASBJ

and the IASB significantly improved. The case of the US also has illustrated the pivotal

role of key individuals in changing the course of IFRS adoption in the country. The

golden period of IFRS in the US when the likelihood of IFRS adoption is very high, was

during the leadership of Robert Herz, the former member of IASC.

The case of Indonesia has also emphasised the importance of strong leadership in

executing the decision to adopt IFRS. The new leaders of the national standard-setter,

appointed six months after the re-announcement of IFRS convergence, was noted by most

Indonesian respondents as a very important support for the process of IFRS convergence.

The previous leader had been labelled by respondents as ‘too risk averter’ and ‘too slow’

and might contribute to the failure of meeting several IFRS target years.

In essence, maintaining the decision of IFRS adoption may involve creating a new

institution and appointing the pro-IFRS individuals to lead such new institution. One may

argue that such efforts of actors should be classified as ‘creating’ institutional work as it

involves creating new institution, however this ‘new actors’ (new standard-setters and new

leaderships) have been established under a very clear goal: to secure the success of IFRS

adoption by doing all the technical work necessary to adopt IFRS in to the legal-binding

local standard. With these new actors, the decisions to adopt IFRS were executed by,

arguably, a stronger and better resourced standard-setting body.

10.5.3 Maintaining full IFRS adoption


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While resisting IFRS and maintaining US GAAP were apparent during the decision

and transition stage, other maintaining work was observed at a later stage. Starting from

the first day of the IFRS reporting year, countries enter the implementation period. Unlike

the transition stage, by the time countries enter the implementation stage, they would have

spent too much on resources to withdraw from their commitment to adopt IFRS.

Countries which adopt IFRS are usually advised by the IASB103 to fully adopt the

whole standard without any modification. In doing so, the national accounting standard-

setter is required to relinquish its authoritative power to the IASB. Upon the adoption of

IFRS, actors tried, in certain cases, to maintain full IFRS adoption by avoiding making

amendments or creating new standards. Discrepancies with IFRS are only allowed if the

country has reduced the accounting options in the standard, -- e.g. Brazil only allows the

use of historical cost for the measurement of property plant and equipment while IFRS

also provides the revaluation model as an option.

In other countries such as the Philippines and Canada, the standard-setters tried to

discourage divergence from IFRS by streamlining their due-process and asking their

stakeholders to give comments to the IASB directly. For example, following IFRS

adoption in the Philippines, the board no longer issues their own exposure drafts and board

deliberations are much shorter104. Following the adoption of IFRS in Canada, for every

standard adopted105, the standard-setting board issued the IASB’s exposure draft (ED)

with a leading type of question to agree with the IASB and discourage divergence from

the IFRS standard. For example, the question in the excerpt below is from the AcSB ED

on leases in August 2013.

The proposed standard has been developed by the IASB for application by

entities around the world. Assuming the Exposure Draft proposals are approved

By the IASB, do you believe that there are aspects of the proposed standard that

make some or all of it inappropriate for Canadian entities, even though it is

appropriate for entities in the rest of the world? If so, please specify which aspects

103 Interview with respondents from Philippines for example explicitly said they were told by IASB that

IFRS should be adopted word by word without any alterations. 104 Based on the interview with technical staff of FRSC Philippines and FRSC former member. 105 Canadian respondents mentioned the purpose of that question on every ED issued is to discourage

Canadian stakeholders to disagree with IASB’s position.


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and what circumstances make the accounting requirements proposed in the

Exposure Draft inappropriate for Canadian entities. (Leases ED pg. 1, August

2013, AcSB of Canada).

In order to maintain full compliance with IFRS, national standard-setters have

refrained from making their own standards or interpretations. If they have specific needs

which are unaddressed by the IASB, national standard-setters try to influence the IASB to

revise the IFRS or lobby the IFRIC to issue interpretations. Examples are Indonesia’s

efforts to clarify the accounting for land and IAS 41 Agriculture or Canada’s in rate

regulated activities.

10.6 Beyond implementation: The new battlefields

Figure 6 shows that after IFRS is implemented, new battles may continue to emerge

in the national regulatory fields. The tensions between actors with different interest in

IFRS implementation continues and actors may employ different forms of institutional

work. During the IFRS implementation stage, this study observes that the debate among

actors in the fields became more technical rather than political. During the decision stage

most of the technical accounting issues were insignificant factors in decision-making and

non-technical accounting issues dominated the debate. However, as the country started to

apply IFRS, some complexities emerged. For example, IFRS accounting policy was not

matched with the accounting requirements stipulated by the country’s company law such

as in the case of equity accounting in Brazil or preparers started to realise some aspects of

particular standard would be onerous to apply like the case of IAS 41 Agriculture in

Indonesia. Tensions may be increased between national standard-setters, preparers and

also regulators to evaluate the commitment to full IFRS adoption.

The increase of technical debate may have encouraged national standard-setters to

have a wider discussion outside their own jurisdiction. In the past when each country

developing their own unique accounting standards, such international/regional discussion

arguably would be more difficult. IFRS has served as the common technical accounting

language across countries which makes such technical discussion more feasible. Thus a


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new ‘space’ has emerged to facilitate these cross-country technical discussions with

potentially significant implications.

10.6.1 The emergence of regional clubs: The new organisational field?

By adopting IFRS, a country also becomes a member of a larger community and

might need a bigger voice in order to influence the IASB. Adopting IFRS creates a

different logic as how the national regulatory fields operate. The actors in a national

regulatory field are able to consider if their need for a standard fits with other countries

and can be considered an international issue. Before the adoption of IFRS, the actors may

have only had to consider the needs of their national stakeholders. However, after

adoption they realised that if their local issues are not of interest to their counterparts

internationally, the IASB may not cater to their needs by issuing the relevant standard. The

logic which underpins the national regulatory field accordingly is transformed from ‘local’

to ‘global’. Thus in maintaining the status of a full adopter, the national standard-setter is

increasingly likely to be operating in an international or regional regulatory space to lobby

other countries and to push their issues at the international level.

To illustrate, regional groups such as the AOSSG, established in 2009, and GLASS,

established in 2011, have emerged as a new regional regulatory arena where national

standard-setters meet and discuss similar issues. The AOSSG, for example, established

various working groups and meets, formally, twice yearly. National standard-setters also

organise themselves to meet twice a year at the global forum called the International

Forum of Accounting Standard-setters (IFASS). IFASS serves as an international

regulatory arena where national standard-setting bodies come to meet voluntarily to

discuss their issues and if further joint efforts are needed to bring the issue to the IASB’s

attention, for example, through joint research or a joint discussion paper.

Interestingly these initiatives such as IFASS, AOSSG and GLASS did not emerge

from the IASB, but were instead bottom-up initiatives from the national standard-

setters106. The IASB has its own ‘international platform’ to provide opportunities for

106 For background of AOSSG see “AOSSG Strategic Plan 2015-2019” para.2.2

http://www.aossg.org/docs/About_Us/AOSSG_strategic_plan_March_2015.pdf (accessed 12th September

http://www.aossg.org/docs/About_Us/AOSSG_strategic_plan_March_2015.pdf


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national standard-setters to voice their concerns. IASB advisory forums include ASAF,

EEG and the annual WSS (World standard-setters conference). The decision to get

involved in regional and international standard-setter activities was one of the efforts to

maintain the existence of the national standard-setters. It could be argued that upon the

adoption of IFRS, national standard-setters are no longer essential as most of the due

process work in standard-setting would be undertaken by the IASB and the adopting

countries are discouraged from making any amendments to the standards. The UK FRC,

despite criticism from the UK and international constituents107 went forward to close the

UK Accounting Standards Board in 2012 (Jones, 2012). An ACCA report also suggested

the curtailment of the standard-setting budget at the national level upon IFRS adoption

(ACCA, 2010). Thus to remain relevant, national standard-setters need to reinvent their

role to become the advisers of the IASB and partners in IFRS research activity. The

regional groups of standard-setters can be seen as a new regulatory field system between

the global and the national. This new field has just emerged within the last decade and

may gain more influence in the future. More technical accounting debates may be

discussed at these regional meetings and as members of the groups build their IFRS

technical competency, their input could be more influential in the future.

10.7 Conclusion

This chapter elucidates that the IFRS adoption process is a continuous battlefield

between different forces and actors involved in institutional work that seeks to change

and/or resist change and transformation in national regulatory fields. This chapter

proposed an analytical framework using processual approach distinguished from the

current existing hierarchical model (Dillard, et. al 2004) widely used in analysing the

IFRS adoption process.

This chapter has proposed an analytical framework of IFRS adoption processes in the

national regulatory field, drawing on the institutional work theory (Lawrence and

2015) and the history of GLASS is available in this link: http://www.iasplus.com/en/resources/regional/glass

(accessed 12th September 2015) 107 The UK FRC received 72 responses from UK and international organisations, with many of the

response letters expressed concerns over the winding up of the ASB and ADB and restructuring it as

advisory council of FRC. All response letters are available at FRC website : https://www.frc.org.uk/Our-

Work/Publications/FRC-Board/Consultation-on-the-future-role-of-the-Financi/Consultation-responses.aspx

http://www.iasplus.com/en/resources/regional/glass


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Suddaby, 2006; Lawrence et al., 2009). The framework provides an integrative model of

institutional dynamics which show less deterministic links between one type of

institutional work to one particular institutional outcome. The extant literature on

institutional work has tended to examine single institutional processes (Hirsch and

Bermiss, 2009; Trank and Washington, 2009; Suddaby and Viale, 2011) or identify causal

relationships between an individual form of institutional work and its intended effects

(Zietsma and Lawrence, 2010). In contrast, the presented analysis of IFRS adoption has

observed the dynamics and interplay between three categories of institutional works

despite different institutional outcomes.

This chapter has provided a significant analytical tool to examine the adoption

processes associated with an international set of standards by considering the dynamics of

institutional work within national regulatory fields and the interconnected relationship

between international and global regulatory fields. It also highlighted the growing

emergence of the regional regulatory fields. This chapter has also argued that

transforming the logic from localism to globalism and creating the necessary institutional

infrastructure are supporting factors in the success of IFRS adoption. Such findings and

their overall contribution to knowledge and the implications for regulatory policy making

are considered in the next concluding chapter of the thesis.

Chapter 11. Overall Conclusions

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11.1 Overview of the study

Over the last 15 years, the inexorable and irreversible rise of IFRS as the set of global

accounting standards has been built on the premise that IFRS is high quality and therefore

results in economic and capital market benefits to adopting countries. Countries were

advised to adopt IFRS in full, without modifications, to gain maximum benefit.

Considering the importance of IFRS diffusion as a regulatory event, it is not surprising

that there is a burgeoning number of empirical studies about the intended and unintended

consequences of this global regulatory change (see Brüggemann et al., 2013 ; Tarca,

2012). However in most academic research, the IFRS adoption status of a country is a

mere statistic without any further detail or analysis of the different levels of IFRS

penetration. The countries which have adopted IFRS are often classified into different

categories based on their adoption status and researchers have overlooked the

transformation of national regulatory fields arising from the adoption process.

This thesis has explored that IFRS adoption processes across six countries where there

were evident grounds for anticipating that decisions about IFRS adoption would involve

consideration of the competing merits of US GAAP. The anticipation was that in countries

with capacity to consider in choosing between two sets of quality standards, debates over

adoption would have been dominated by quality considerations. However, instead this

thesis has revealed the highly politicised nature of IFRS adoption processes. By utilising

rich data from various reports, speeches, minutes of the meetings and 69 interviews with

key actors, this thesis aims to untangle the political process inside these six countries by

analysing who the actors were, their roles and the institutional work they were engaged in.

Although this thesis has focused on institutional change at the national field level, it

has also highlighted the varying degree of interactions between these national and global

regulatory fields. For example countries such as the US and Japan are very influential in

the global arena where every decision they made on IFRS could result in a significant

impact on other countries. Various national actors were also individuals with network

capital at the global level (e.g. partners of Big Four firms or former members of the


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IASB). Individuals involved in the accounting standard-setting often moved from national

accounting bodies to the international and vice versa.

This thesis has been focused more on the process of IFRS adoption and not on very

much the result such process. The fact that the institutional outcomes of the sampled

countries vary and that some of the sampled countries in this thesis have successfully

implemented IFRS while others have not, also served to highlight the value of the

different research pathway adopted in this study. Other existing IFRS adoption studies

have tended to take the institutional outcome (once IFRS was adopted) as their starting

point for the analysis (Mir and Rahaman, 2005; Artikis et al., 2010; Tyrrall et al., 2007;

Albu et al., 2011; Jaruga et al., 2007; Irvine, 2008). This study has focused on the

institutional work of the actors that led to such varied outcomes in the process, providing a

richer level of analysis beyond the ubiquitous isomorphistic explanations offered

elsewhere on IFRS adoption.

This final chapter aims to reflect on overall significance of the study and its

implications for subsequent research in this area. In subsequent sections, the chapter

summarises the primary research findings, assesses its implications, primary research

contribution, policy recommendations and agendas for future research.

11.2 Summary of main findings

This study aims to answer three research questions: (1) How did the decision to adopt

(or not to adopt) IFRS emerge in these 6 selected countries, which actors were involved in

the process and what factors both endogenous and exogenous, determined the decision?

(2) How prominent were arguments about the relative quality of IFRS vs. US GAAP (or

the local GAAP) in debates over IFRS adoption and did other issues have greater

prominence? (3) What can be gained from detailed investigation of the process of IFRS

adoption in individual countries in terms of: (3a) better explaining the processes through

which IFRS has become a global accounting standard; and (3b) improving our

understanding of institutional change and the dynamics of institutional work in the

regulatory field?


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The first question was addressed in the four empirical chapters of the thesis where the

story of IFRS adoption of each sample countries were discussed in detail. Sample

countries pursued different mechanisms in the process of IFRS adoption, however similar

stages were observed across countries namely harmonization, decision, transition and

implementation stages. This study has argued that the process of IFRS adoption is not a

static linear chain of events, but instead an ongoing engagement amidst continued

transformations in national regulatory fields. National actors with different interests,

influenced by international actors, were engaged in various types of institutional work in

transforming their national regulatory field. The continued battle between actors in the

four adoption stages made the outcome of the process less predictable.

Addressing the second question, this study found that the quality argument IFRS

versus US GAAP did not dominate the decision making process. National actors involved

in the decision making process recognised both IFRS and US GAAP as good quality

accounting standards, especially as both standards are the product of a rigorous due

process. Countries in the study adopted IFRS for several reasons other than quality such

as: (1) to comply with international bodies recommendations such as World Bank and G20

and (2) to maintain their influence in the IFRS making arena which requires commitment

to IFRS adoption. This study also documented that the quality of IFRS is not a major

reason for developed economies not adopting IFRS. The sovereignty issue is a more

dominant factor for the USA to retain their accounting standard-setting authority. Upon

the adoption of IFRS, some countries were compelled by the pressure of their stakeholders

to allow the use of US GAAP despite regulator desire to ban it. The pressure from the

users to retain US GAAP was dominated by efficiency and market demand rhetoric, not

by the quality argument.

Although specific technical accounting issues did not dominate the decision making

process, they occasionally became more significant at an implementation stage. Often

arguments between disrupters and preservers were political arguments rather than specific

quality comparisons of technical accounting standard issues. However, the technical

accounting issues became more apparent after IFRS was adopted and preparers began the

implementation process. The dissatisfaction among preparers over specific technical issues

encouraged national standard-setters to make requests for IFRS amendments. The failure


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of some of them to achieve desired amendments has threatened their sustainability and

compelled them to seek stronger alliances and form regional groups of standard-setters.

In answering Question 3a, this study offered another explanation to those advanced in

the existing literature of how IFRS has been diffused to become a global accounting

standard. Examining the argument more closely, as part of creating institutional work, the

national actors have enhanced the image-making cycle of IFRS as the global set of

accounting standards. This thesis has found that the concurrent successful diffusion of

‘globalism’ has underpinned the logic responsible for the rapidity of the diffusion process.

This study argues that it is not IFRS as a standard per se which was diffused, but the idea

of ‘one set of global accounting’ standards that has travelled and been adopted by the

countries. IFRS has been promoted by its makers and other international bodies as being

the reification of the idea of ‘one global accounting standard’. The extensive adoptions of

global standards, such as IFRS, is consistent with the world society perspective which

argues that we now operate in a global arena which then encourages the promotion of

global standards (Brunsson and Jacobsson, 2000; Drori et al., 2006b; Meyer, 2010; Djelic

and Sahlin-Andersson, 2006). This thesis has shown that decisions to adopt IFRS do not

necessarily have a rational consideration but do have a strong emotive aspect attached to

them. By adopting the IFRS, countries exposed different aspirations with regard to their

position in the global IFRS community. Countries may have decided to adopt IFRS to be

portrayed as modern and recognised as members of the global regulatory club. However

some other countries may have chosen IFRS in an effort to exert (or maintain) their

influence at global level. When some influential countries rescinded their decision to

adopt IFRS, technical considerations do appear to have been overpowered by the emotion

of being let down as was demonstrated in the case of the US in chapter nine.

In answering Question 3b, this study offers a new insight of the behaviour of

institutional work in the field change. This study observed that different types of

institutional work do not occur autonomously but rather in an interconnected way. This is

a refined perspective on institutional work theory. Lawrence and Suddaby (2006) made

each category of institutional work (creating, disrupting and maintaining) theoretically

distinct but this thesis finds that they are empirically coterminous and often are

intertwined during the IFRS adoption process. The analytical framework proposed by this

thesis in chapter ten, drawing on institutional work theory, also suggests that institutional


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work is capable of evolving in form throughout the various stages of adoption. The

framework, developed to analyse the institutional change at the regulatory field level, will

be useful for other researchers to use in their analysis of different regulatory fields and

process of global standards adoption.

11.3 Implications of the study

This thesis has enhanced our understanding of the processes of institutional change

that have occurred in the pursuit of IFRS adoption. Such enhanced understanding in turn

has various research implications as discussed below.

This thesis has shown that the shifting logic of accounting standard-setting from

‘localism’ to ‘globalism’ brings institutional implications for national standard-setters. In

the process of IFRS adoption, national standard-setters are more likely to become private

independent bodies working with a judicial-technical expert logic rather than their

previous form as bureaucratic entities within a government agency. This is an interesting

phenomenon as other international standard diffusions (for example, the diffusion of

IPSAS or the GRI standard) have not necessarily created the diffusion of a particular

institutional arrangement for the rule maker at national level.

As the diffusion of the same global principles occur worldwide, the organisational

structures and processes become similar and more predictable (Meyer et al., 1997; Meyer

and Rowan, 1977; DiMaggio and Powell, 1983). The IFRS diffusion has encouraged a

global diffusion of organisational structures and standard-setting processes. Accounting

standard-setters around the globe become much more similar in their form and due process

after IFRS is diffused. For example, in the sampled countries, upon the decision to adopt

IFRS, Japan and Brazil created a new private standard-setter with a similar governance

structure to the IASB. As the national standard-setters changed their structure to mimic

‘global’ standard-setters, this thesis also found that their role was also transformed. After

the adoption of IFRS, national standard-setters suddenly felt the need to become part of

international organisations. National standard-setters are usually not in a position to create

their own standards after IFRS adoption, thus they needed to create allies to scale up their

local issues into ‘international’ issues in order for these to be taken up by the IASB as part

of their agenda. This has also resulted in the creation of regional accounting standard-


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setters such as the AOSSG, and GLASS. This regionalisation of accounting standard-

setters is a new bottom-up initiative by national standard-setters to amplify their influence

on IFRS standard-setting. National accounting standard-setters, especially those with

weaker influence over the IASB appeared to be benefiting from joining these groups to

escalate their local issues to the international IFRS arena.

As was discussed in chapter ten, the emergence of regional groups of standard-setters

was also a case of maintaining institutional work in keeping the national standard-setters

relevant. Upon the adoption of IFRS, much of their role in standard-setting was taken over

by the IASB, thus they needed to reinvent themselves to survive by becoming advisers and

partners of the IASB. Otherwise they faced the threat of being wound up as their role was

perceived to be diminishing. As argued by Camfferman and Zeff (2015), one of the

reasons behind the winding up of the UK Accounting Standard Board (ASB) was the lack

of a need for a national standard-setter as UK GAAP moved closer to IFRS (p.542). The

standard-setter in Germany (DRSC) also faced imminent collapse in 2010 when the

committee was confronted with the inability to secure funding from the preparer’s

community. The view among preparers in Germany was that the DRSC had failed in

representing German companies’ views to the IASB (Camfferman and Zeff, 2015).

The regionalisation of accounting standard-setters is a new phenomenon with

unknown implications for future IFRS development. At the moment these regional groups

supported the IASB in its research and outreach activities regarding new exposure drafts

or standards. The involvement of these new actors in the IFRS-making arena improves the

input legitimacy of the standards produced (Botzem and Dobusch, 2012). The initiatives

to create regional and international alliances have come from national standard-setters,

through their involvement in IFRS-making, as they are the rule-takers of IFRS at the

international level; providing significant weight to the input legitimacy of IFRS.

However in the future, the role of these regional groups is difficult to determine as

they may also pose a threat to the globalism logic of accounting standard-setting. The

regional groups serve as a platform for national standard-setters to discuss the accounting

challenges in their jurisdictions. These groups are able to identify the needs of the regions

they represent which are often not picked up by the IASB. In the future they may create

some implementation guidelines or even new standards. After the localism logic of


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accounting standard-setting is replaced by globalism logic, the ‘regionalism’ logic may

evolve in the future where accounting standards could be developed based on certain

economic/trading blocs. In the future, this regionalism logic may encourage the

development of a number of ‘global accounting standards’ which has been normatively

discussed by some accounting academics for some time (Walker, 2010; Sunder, 2002;

Sunder, 2011; Saito, 2011)

This study also offers new insights for non-accounting global standard-setting

activities. In terms of IFRS diffusion, the endorsement of international bodies is an

important element in the diffusion process; however for any standard to be successfully

diffused, the capacity of national actors to institutionalise global standards at national level

is utterly important. Being able to connect to the global regulatory outlook has been

important for IFRS, but it has not been sufficient just to claim that IFRS is the best set of

global standards, in addition, there is also a need to have the support from national actors

embedded in the globalism logic. International bodies promoting global standards such as

World Bank should identify who the actors are at national level and how they can build

strong cooperation with them. They need to be cautious of the network effects of decisions

for or against adoption. An adoption withdrawal from an influential adopter (as in the case

of the US in this study), may create a negative network effect discouraging other

prospective adopters.

11.4 Research contributions and policy recommendations

This thesis contributes to the study of globalisation and standardisation by revealing

the adoption process of global standards at the national regulatory level which is pivotal in

supporting the diffusion of such standards globally. Books discussing globalisation or

international regulation usually make visible reference to the success of IFRS diffusion

(see Djelic and Sahlin-Andersson, 2006; Drori et al., 2006b; Benston et al., 2006).

Standardisation is an active, time and resource-intensive process (Timmermans and

Epstein, 2010). The current literature on globalisation often argues that the power of state

actors has diminished as they have adopted international standards (Boli and Thomas,

1997; MÖrth, 2009). However, this thesis has shown the national regulatory fields remain

important for the consistent application of global standards. For example, a 2010 ICAEW

report on Audit Quality acknowledged national diversities in applying global auditing


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standards. Similar studies are also apparent in the application of IFRS (Nobes, 2013). As

part of globalisation studies, the story of IFRS has often neglected the significance of

national actors and the adoption process at the national level. Thus this thesis provides a

new analytical framework for the further study of the global standard adoption process.

This study also contributes to the development of institutional work theory. It has

focused more on the institutional work of actors rather than on the intended effects of the

work itself. For example, examples are provided of how the creating and disrupting work

of IFRS have been successful in many countries but not in others. A study focusing on the

work of actors instead of the outcome, such as this thesis, answers the call from Lawrence

et al. (2013) on this overlooked area in the growing institutional work literature.

Although this thesis has benefited from the use the institutional work theory, it also

highlighted the challenges of applying the theory. The definition of institutional work

proposed by Lawrence and Suddaby (2006) is ‘‘the purposive action of individuals and

organizations aimed at creating, maintaining and disrupting institutions’’ (p.215), which

implies that actions of actors need ‘purpose’ or ‘actor’s intention’ to satisfy the definition

of institutional work. Institutional work enables us to understand the purposive actions of

national actors in transforming the national fields, but there are other actions outside the

national fields which are detrimental and cannot be classified as institutional work. For

example, the decision by the US SEC to rescind its IFRS adoption pathway in 2011 was

pivotal for Japan to take similar decision, but in analysing the Japanese regulatory field

this action cannot be classified as institutional work. Action that can be considered as an

institutional work is the response of Japanese actors towards the US decision, but not the

action of the US SEC because the ‘intention’ of such decision was only for the US

jurisdictions. As was reiterated in the interviews, respondents from the US emphasised

that any decision by US FASB and US SEC, especially in developing standards, only take

US interest in their considerations.

Zilber (2013) challenged the definition of institutional work by asking “if every such

act is ‘institutional work – what is unique about institutional work that distinguishes it

from all actions that do not qualify?” (pg.91). Central to the notion of institutional work

are the intentions of actors, but this thesis shows that the boundary of institutions is also

important in order to classify whether one action is an ‘institutional work’ or not. The


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action of the US SEC to allow IFRS for foreign issuers in 2007 was a significant

‘institutional work’ in the global arena as the intention of such decision (partly) was to

appease international pressure especially from Europe (Herz, 2013). It also encouraged

other institutional change in other countries resulting in the adoption of IFRS, but in

analysing the national regulatory field (e.g Japan), such decision can be challenging to

satisfy the definition institutional work as the US SEC may not have intended to influence

the decisions of other countries. The fact that this decision heavily influenced other

national actors to adopt IFRS may not be enough to be classified as “institutional work” as

US SEC were neither representing those jurisdictions nor intended to promote IFRS to

other countries. Thus the endogenous aspect of institutional work may preclude the

identification of exogenous events which can be central to the institutional change.

This thesis finds few types of actions can be classified either as creating or disrupting

institutional work, depending on whose perspective of the actors are used in presenting the

study. For example the ratification of company law in the Philippines and Brazil,

mandating the adoption of IFRS, can be seen as a disruption of the old accounting

practices as well as creating the new accounting standard at the same time. The efforts to

promote IFRS in Canada for example, can be seen as ‘creating’ institutional work from the

point of view of IFRS supporters but can be also classified as ‘disrupting’ institutional

work from the point of view of Canadian GAAP supporter. The action of US SEC in

2011-2012 to abandon its IFRS adoption pathway can be seen as ‘maintaining’ the

existence of US GAAP from the point of view of US GAAP supporter or can be seen as

‘disruptive’ effort of institutionalising IFRS from the point of view of IFRS supporter. In

studying a field with multifaceted actors pursuing different types of institutional work,

sometime the application of institutional work categories is not as straightforward as one

may be expected.

This study offers several policy recommendations. First, this study informs the IASB

on the process and the implications of IFRS diffusion. As more countries adopt and

improve their institutional competencies, their input in the IFRS policy-making process

will be more diverse compared to 10 years ago. As countries in emerging markets are

building up their IFRS technical competencies, the IASB may also encounter stronger

demands for new standards or amendments from more various types of capital markets.


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Creating the balance of inclusivity in due process and the independence of IASB could be

more challenging in the future.

Second, the observed shifting role of national standard-setters upon IFRS adoption

may encourage countries to strategically reposition their standard-setting institutions.

One may argue that if all the countries adopt the same standard, there is no need for

national accounting standard-setters in the future. The ACCA, for example, proposed that

a country should reduce the cost of their standard-setting as most of the due process has

been performed by the IASB and a country needs to reassess the role of their standard-

setter once the adoption process has been completed (ACCA, 2010). In contrast, this

research argues that the cost to maintain the existence of national standard-setters after

IFRS adoption is more likely to increase than decrease as international lobbying activities

may be increase. As the logic of national standard-setters evolved from localism to

globalism, they have been compelled to be part of regional or international players. The

cost associated with the increasing international activities of national standard-setters is

the inexorable price that they have to pay to stay relevant in the international standard-

setting arena. As national standard-setters are discouraged from changing IFRS in the

adoption process for their jurisdictions, they now need to form alliances with other

countries in order to push their issues to the international level so that the new standards

produced by the IASB as well as the existing ones address these technical accounting

challenges (through amendments or interpretations) which may have appeared specific to

those jurisdictions before the alliances were formed.

Lastly, this study provides an insight for other countries who are still thinking about

adopting IFRS. The UN has 193 member countries while the IFRS Foundation in their

survey of the use of IFRS claimed that 114 jurisdictions108 have adopted IFRS for their

listed companies, thus there are about 79 countries that are still at the early stages of the

decision-making process. The study offers lessons learned for prospective adopters by

providing different explanation of how the mechanisms of adoption can be varied

depending on the institutional arrangement and the power of actors in the field. For

example although this study suggests that the enactment of corporate law may support the

legitimacy of IFRS adoption, such a decision may also lead to a chaotic transition if the

108 http://www.IFRS.org/Use-around-the-world/Pages/Analysis-of-the-IFRS-jurisdictional-profiles.aspx,

accessed 10th November 2014.

http://www.ifrs.org/Use-around-the-world/Pages/Analysis-of-the-IFRS-jurisdictional-profiles.aspx


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law is enacted in a hurry. Prospective adopters of IFRS may also consider the readiness of

their infrastructure in their national regulatory field as this study suggests the IFRS

adoption may transformed the field with new logic and new actors. For example a country

may want to consider establishing a new multi-stakeholder standard-setter to do all the

necessary technical work of the IFRS adoption such as the case of Brazil and Japan in this

study.

11.5 Agenda for future research

The future of one global accounting standard is more uncertain than ten years ago

when Europe adopted IFRS for the first time. As was argued in chapter nine, the future of

IFRS as the ultimate global accounting standard received a serious setback when the US

abandoned their adoption plan in 2011. The hesitation to fully adopt IFRS without any

modification has spread to other countries such as Japan, India, and China (Camfferman

and Zeff, 2015 p.526-536). The battle between a ‘globalism’ logic of accounting standard-

setting against ‘localism’ or even the ‘regionalism’ logic is likely to continue at the

international level and transcends to the national level. Further study of IFRS diffusion

should therefore be informed by the possibility of an evolutionary logic in accounting

standard-setting. Regionalisation is certainly deserving of being a more central research

issue in the future.

The future study of the international standard-setting process should shift its focus

from the IASB as an institution to the interaction between the IASB and national standard-

setters and regional standard-setter groups. The IASB as a successful international private

body has been examined extensively (Camfferman and Zeff, 2007; Bengtsson, 2011;

Georgiou, 2010; Larson and Kenny, 2011; Richardson and Eberlein, 2011; Zeff, 2012;

Sanada, 2013). However, this study demonstrates that IFRS policy-making is not only

happening in the IASB boardroom in London, but also as a collegial activity incorporating

the input of various national standard-setting bodies and regional groups.

At the moment, studies about IFRS diffusion are also too European centric (Botzem,

2012; Drori, 2008; Bengtsson, 2011) and have overlooked the increasing influence of

Asian countries such as China, Japan and Korea in the IFRS-making arena. China, Japan

and Korea are gaining more representation on various IFRS bodies such as the IASB, the


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ASAF, the IFRIC and the monitoring board. Less powerful Asian countries such as

Malaysia and Indonesia have also started to have a stronger voice in response to the IASB.

The AOSSG has become a respected advisor of the IASB. More studies on IFRS as part of

research on globalisation need to include the increasing influence of the Asian region.

Qualitative researchers can respond to the quantitative studies which have argued that

IFRS can only benefit countries with strong enforcement and market incentives (Ball et al.,

2003; Christensen et al., 2007). Studies on IFRS adoption should position the action as

part of a larger regulatory reform process. It would be interesting to conduct multiple case

studies of other regulatory reforms ( such as capital market and banking regulation) across

different jurisdictions to investigate if the successes (or the benefits) of IFRS adoption

were also enhanced by the broader context regulatory reform of the country. The larger

regulatory reform may also serve as another type of institutional change which can be

analysed using similar institutional work framework proposed by this thesis.

The study of the battlefields of the adoption process such as this one enable researcher

to examine the political debate and institutional change of the regulatory field. This study

has provided an analytical framework for other researchers to analyse their own

‘battlefields’. They can helpfully be organised and interrogated through the broader and, in

comparison to the existing institutional change literature, more refined conceptualisation

of institutional change processes presented in this thesis. Hopefully it will be a framework

that will better arm standard-setting researchers to understand the national, regional and

global regulatory-setting of the future.

References

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of 307

Appendix 1. Interview Log

No Day and Date Respondents’ position Respondent’s

Country of Origin

Interview

Duration

(hour:minutes)

1 Monday, 21st May 2012 IAI Executive Director since 1995-now Indonesia Not recorded.

About 00:40

2 Tuesday, 17th August 2012 Founder of SGV Philippine, 3rd President of IFAC 1982-

1985 Philippines

Not recorded.

About 00:15

Saturday, 16th February 2013 Second interview of respondent No.2 Philippines 4:21

3 Thursday, 6th September 2012

Member of Indonesian Accounting Standard Board 1974-

1984. Heavily involved in the decision moving from Dutch

Accounting to US GAAP in 1973

Indonesia 1:06

Wednesday, 2nd January 2013 Second interview respondent No.3 Indonesia 1:06

4 Tuesday, 11th September 2012, Current member of IAI National Council Board (2010-2014),

re-elected in 2014 to become council member until 2018 Indonesia 0:45

5 Wednesday, 12thSept 2012 Member of Indonesian Accounting Standard Board from

1990 - 1994 and also 2001-2010. Indonesia 1:14

of 307

6 Thursday, 20th September 2012 Chairman of the Indonesian Institute of Accountants 2001-

2010. Chairman of AFA in 2007. IFAC Board 2011-2014. Indonesia 1:08

Monday, 15th October 2012 Follow Up Interview respondent No 6 Indonesia 1:09

Monday. 3rd December 2012 Third interview respondent No.6 Indonesia 0:44

7 Friday, 28th September 2012 Vice President of World Bank 1990-2001 Netherlands 0:20

8 Tuesday, 9th October 2012 Member of Indonesian Accounting Standard Board 2002-

2006. Indonesia 0:57

9 Tuesday, 23rd October 2012 Senior Technical Manager of ASBJ during the interview,

member of ASBJ since July 2013-now Japan 0:54

Friday, 26th October 2012 Follow Up Interview respondent No 9 Japan 0:49

10 Friday 26th October 2012 Chairman of DSAK 2009-2014 Indonesia 1:34

11 Thursday, 8th November 2012 Technical Manager of ASBJ Japan 0:47

12 Friday, 30th November 2012 Chairman of Auditing and Assurance Standard Council of

Philippines. Managing Partner PWC Philippines Philippines 0:20

13 Friday, 30th November 2012 Member of Board of Accountancy of Philippines 2002-2010 Philippines 1:02

of 307

14 Saturday, 1st December 2012 Professor of Accounting from De Lasalle University Philippines 0:44

15 Saturday, 1st December 2012 Executive Director PICPA Philippines 0:44

16 Monday, 3rd December 2012 Chairman of Indonesian Accounting Standard Board 1986-

1994 Indonesia 2:17

17 Sunday, 9th December 2012 Technical Director IAI 1996-2001. Board Member of

Indonesian Financial Accounting Standard Board 2006-2010 Indonesia 0:57

18 Monday, 10th December 2012 Technical Director IAI 2002 - 2009 Indonesia 0:53

19 Tuesday, 11th December 2012 Founder of Accounting Firm SGV Utomo in Indonesia in

1970s Indonesia 0:43

20 Thursday, 27th December 2012 Observer of accounting standard development, influential

academic, member of accounting board 1990-1992 Indonesia 0:38

21 Wednesday, 2nd January 2013 Chairman of Acccounting Academics Compartment of IAI

1992-2002 Indonesia 0:59

22 Thursday, 3rd January 2013 Research support volunteers for the board 1992-1994,

Member of accounting standard board 2007-2011 Indonesia 0:21

23 Friday, 4th January 2013


1992 and 2000-2002. She is also member of consultative

board

Indonesia 0:46

24 Monday, 7th January 2013


2006. Influential in changing the governance and structure of

DSAK.

Indonesia 1:32

of 307

25 Thursday, 10th January 2013

Member of Indonesian Accounting Standard Board since

2004 - 2012. Representing Capital Market Supervisory

Agency

Indonesia 1:06

26 Friday, 11th January 2013 Chairman of Indonesian Accounting Standard Board 2006-

2010. Indonesia 1:05

27 Friday, 1st February 2013 Member of Indonesian Accounting Standard Consultative

Board 1997-2002. Chairman of Indonesia SEC 2000-2005 Indonesia 0:57

28 Monday, 4th February 2013


1998. Member of working committee of the Board in 1993-

1994.

Indonesia 0:55

29 Thursday, 7th February 2013 Chairman of Indonesian SEC 1995-1998. Indonesia 1:10

30 Monday, 11th February 2013 Vice Chairman of FRSC 2004-2011 as the representative of

BOA Philippines 0:53

31 Monday, 11th February 11 2013 Chairman of Board of Accountancy Philippines 2001-2014 Philippines 1:00

32 Tuesday, 12th February 2013 Partner of SGV, Chairman of IFRS Standard Working group

for EY Asia Pacific Philippines 1:01

33 Tuesday, 12th February 2013 Partner of SGV, Technical advisor of FRSC, Secretariat of

FRSC Philippines 0:51

Thursday, 7th March 2013 Second Interview of Respondent No.33 Philippines 0:38

34 Thursday, 14th February 2013 Chief Accountant of Philippines SEC, Member of FRSC

2006-now Philippines 1:14

of 307

35 Friday, 15th February 2013

Chairman of ASC then FRSC for 28 years. The founding

father of ASC, President of CAPA, Managing partner of

SGV

Philippines 1:12

36 Saturday, 16th February 2013 Public Accountant (auditor) of small firm. Philippines 1:11

37 Tuesday, 5th March 2013 Member of Indonesian Accounting Standard Board 1984 -

1998 Indonesia 0:29

38 Wednesday, 6th March 2013 Member of IASC 1995-2001, Member of IASB 2001-2011 Japan 0:30

39 Thursday, 7th March 2013 Chairman of IASB since 2011 Netherlands 0:51

40 Thursday, 7th March 2013 Partner of SGV EY Manila Philippines 0:38

41 Monday, 29th July 2013 IASB Director for Asia Oceania-Japan office Japan 0:53

42 Tuesday, 30th July 2013 Deputy Director, Corporate Accounting and Disclosure

Division. JFSA Japan 1:12

43 Tuesday, 30th July 2013 Director for Enforcement of Corporate Disclosure, JFSA Japan 0:38

44 Wednesday, 32nd July 2013 Professor of Accounting at Waseda University Japan 1:08

45 Wednesday, 31st July 2013 First chairman of ASBJ 2001-2007 Japan 1:36

46 Thursday, 1st August 2013 Vice Chairman of ASBJ, 2013-2016. Previous Position

include Technical Director of ASBJ Japan 1:40

of 307

47 Sunday, 8th September 2013 Academic from Sao Paulo University, managerial staff in the

IFRS Foundation Brazil 1:40

48 Sunday, 8th September 2013 Accounting Professor from Kyushu University Japan 1:09

49 Thursday, 19th September 2013 Vice President of IBRACON and Member of CPC since

March 2013 Brazil 0:18

50 Thursday, 19th September 2013 Chief of Accountant US SEC 2009-2012, FASB Vice

Chairman 2013-2018 US 0:36

51 Friday, 20th September 2013 Technical Director of AcSB Canada (non voting member of

AcSB) 2004-2014, Staff of AcSB since 1990 Canada 1:45

52 Monday, 23rd September 2013 First chairperson of AcSB Canada 1999-2001, IASB member

2001-2007 Canada 0:46

53 Tuesday, 24th September 2013 AcSB member 2004-2012, AcSB Chairperson since July

2013 Canada 0:19

54 Thursday, 26th September 2013 Chief of Accountant US SEC 2009-2012, FASB Vice

Chairman since September 2013 US 1:05

55 Tuesday, 15th October 2013 Chairman of Japan Association of Financial Analyst,

Member of IFRS Advisory Council 2011-2014 Japan 0:47

56 Thursday, 21st October 2013 Director of CVM 1985-1989 and 2008-2009. Professor of

Accounting in the University of Sao Paulo. Brazil 1:34

57 Friday, 24th April 2014 Chairman of FASB 2002-2010 US 1:16

58 Wednesday, 30th April 2014 Chief of Accountant US SEC 2006-2009 US 1:15

of 307

59 Friday , 2nd May 2014 Professor of Accounting at the Yale School of Management US 0:57

60 Thursday, 10th July 2014

Accounting Standard Oversight Council of Canada 2014-

2017, Chairman of IFRS Advisory Council 2009-2013,

Chairman of AcSB 2001-2009, Canadian Representative in

IASC 1997-2001

Canada 01:19

61 Monday 13th July 2014 Financial Controller of one of Brazilian Company Brazil 2:38

62 Monday 13th July 2014 Head of Financial System Regulation Department, Central

Bank or Brazil 1992-2009, Member of IASB since 2009 Brazil 1:02

63 Thursday, 17th July 2014

Chief of Accountant, Ontatrio Securities Commission

Canada since 2008, Manager of Corporate Finance OSC

2003-2008

Canada 1:01

of 307

Items US Japan Canada Brazil Indonesia Philippines

IFRS Adoption Status

The highlighted is

excerpted from IASB

survey (June 2013)

except Philippines is

taken from

www.iasplus.com)

The SEC permits but

does not require its

foreign private issuers

to use IFRS as

issued by the IASB in

preparing the issuer’s

financial statements.

The SEC does not

permit its domestic

issuers to use IFRS in

preparing their

financial statements;

rather, it requires them

to use US GAAP

Voluntary application of

IFRS for consolidated

financial statements by

companies that meet

certain criteria has been

permitted since March

2010.

Canada adopted

IFRSs for most

‘publicly

accountable

enterprises’ for

financial years

beginning on or

after 1st

January2011.

Required for

consolidated

financial

statements of

banks and listed

companies from

31st December

2010 and for

individual

company

accounts

progressively

since January

2008

Indonesia’s stated

policy is to maintain

its national GAAP

and converge it

gradually with IFRSs

as much as possible.

Indonesia does not

have a plan or

timetable for full

adoption of IFRSs.

As of 1 January

2012, the local

standards applied in

Indonesia are based

on IFRSs that were

effective at 1 January

2009 with some

modifications.

IFRS has been

adopted to local

standards since

2005.

Which IFRS adopted

as of 20 May 2013

for domestic listed

companies?

Not applicable IFRS as designated by

the Japanese FSA

IFRS as published

by IASB

IFRS as

published by

IASB

IFRS as of 1 January

2009 with some

modification

IFRS as

published by

IASB

Appendix 2. Summary of IFRS adoption in sampled countries

http://www.iasplus.com/

of 307

When the decision

for full IFRS

adoption was made?

Not applicable 2005 (Tokyo Agreement) 2006 (AcSB

Strategic Plan)

2007 (New Law) 2008 (Grand

Launching IFRS

Convergence)

2004

(Accounting

Act)

Who made the

decision

Not applicable ASBJ / FSA / BAC

(Business Accounting

Council)

AcSB Informally: The

President,

Formally: The

Parliament

Accounting

Profession:

Indonesian Institute of

Accountants

BOA / FRSC

Harmonization

Period with

IFRS/IAS

Not applicable 2001 (the establishment

of ASBJ)

Always

harmonised with

IAS and US

GAAP since 1998

No evidence IAS was adopted in

big bang 1994 but no

continuous

harmonizing effort

and US GAAP remain

an important reference

IAS was adopted

gradually since

1996 (ROSC)

Involvement in

IASC/IASB/ IFRS

development

Involved. Always have

representatives in

IASC/IASB and other

IFRS Foundation

bodies.

Involved. Always have

representatives in

IASC/IASB and other

IFRS Foundation bodies

Very Involved.

Founding father of

IASC. Member of

G4+1.

Representative in

IFRS Trustee

from Brazil.

More involved

after 2010 in

regional standard

setting and also

member of

ASAF.

Involved in regional

standard setting

discussion start in

2009. Member of

IASB EEG Working

Group started in 2010.

Not involved

of 307

Institutional Arrangement of Accounting Standard Setting

Member of the Board

(as of 25 May 2014)

7 (full time) 13 (4 full time ) 12 (2 non -voting

members, Chair is

paid full time, the

rest are

volunteers)

12 members

(volunteers,

representatives

from 6 entities)

13 (all volunteers

from various

stakeholders)

15 (all

volunteers, one

chairman and 14

representative

from various

stakeholders)

Mechanism of the

Board

Quasi-Judicial Quasi-Judicial Quasi-Judicial Quasi-Legislative Quasi-Legislative Quasi-

Legislative

Technical Support of

the staff

More than 60 full time

staff

24 full time technical

staff

1 Director, 13

technical staff, 2

admin staff

Each of member

are supported by

their respective

organisation

7 (full time) 1 (part-time)

Funding of the Board Financial Accounting

Foundation

Financial Accounting

Standard Foundation

(FASF)

CICA Donations from

the founding

organisations

IAI PICPA

Oversight Board Financial Accounting

Foundation Board of

Trustees

Advisory Council within

FASF

AcSOC

(Accounting

Standard

Oversight

Council) inside

CICA

Not sure Consultative Board

insight IAI (DKSAK)

Board of

Accountancy

Other Information

Number of listed

company 2012

(World Bank)

4,102 3470 3876 353 442 268

of 307

Number of

companies listed in

US stock market

(2012)

4,102 22 336 26 2 1

of 307

The End of Thesis

IFRS VS US GAAP - Research Explorer

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