The International Journal of Accounting

Running head: ADOPTION OF IFRS: A CRITICAL REVIEW
Adoption of IFRS: A Critical Review
Name of the Student
Name of the University
Author’s Note

1ADOPTION OF IFRS: A CRITICAL REVIEW
Abstract
The adoption of International Financial Reporting Standards (IFRS) is a major
incident in financial reporting that has contributed towards the inception of a uniform
set of accounting standards for all the companies around the globe. Many countries
like Australia, Nigeria and others have already adopted the IFRS standards with the
aim to comply with the international accounting standards. This report undertakes
the analysis of different aspects of IFRS adoption in Australian and Nigeria. The
findings of the report states that the adoption of IFRS in Australia is more successful
as compares to the same in Nigeria because of the presence of major transitional
issues and challenges in Nigeria in IFRS adoption.

2ADOPTION OF IFRS: A CRITICAL REVIEW
Table of Contents
Introduction...................................................................................................................3
1. Relevance of PAT for Financial Reporting...............................................................3
2. Implementation of IFRSs in Australia and Nigeria...................................................4
i. Reasons for Adopting IFRS and the Time of Adoption..........................................4
ii. Transitional Issue Faced by Australia and Nigeria on Adopting IFRS..................4
iii. Challenges Faced by Reporting Entities on IFRS Adoption................................5
iv. Benefits of Adopting IFRS....................................................................................5
v. Similarities and Differences in the Adoption of IFRSs..........................................6
3. Success of the Adoption of IFRS Standards............................................................6
4. Recommendations....................................................................................................7
Conclusion....................................................................................................................7
References...................................................................................................................9

3ADOPTION OF IFRS: A CRITICAL REVIEW
Introduction
Financial reporting has major usefulness in the accounting profession and it
provides the business entities with the required financial regulation for carrying out
the required accounting works (Frias‐Aceituno et al. 2014). In Australia, the adoption
of IFRS is considered as a major aspect for the financial reporting of the country.
Apart from Australian, many other countries have adopted IFRS standards for the
purpose of financial reporting and Nigeria can be considered as one of those
countries. There are two objectives of this report. The first objective is to discuss
about the relevance of Positive Accounting Theory (PAT) for financial reporting with
the help of two example. The second objective is to shed light on different aspect of
IFRS adoption in two countries that are Australia and Nigeria. Based on the whole
discussion, certain recommendations are provided to the accounting bodies on
IFRS.
1. Relevance of PAT for Financial Reporting
The PAT attempts in making good prediction of the real world events and
translating them in accounting transactions. More specifically, the main concern of
PAT is the prediction of action like the selection of accounting policies by the
financial managers and how the financial managers will respond to the new
accounting standards. In the year 1978, Watts and Zimmerman developed a positive
theory related to the determination of the accounting standards (Ball 2013). They
inquired the factors that influence the attitude of the management on accounting
standards that include regulations, management compensation plan, political costs,
taxes and production of information. According to the argument of PAT, individuals
act with the aim to maximize their own utility and the management of the companies
involve in lobbying the accounting standards on the basis of their own self-interests.
This can be explained with an example. For instance, the organizational mangers
have the incentive of choosing accounting standards that help in reporting lower
earnings because of tax and regulatory and political systems. In this context, it needs
to be mentioned that the size of the firms is the most crucial factor that explains the
behaviour of the managers towards the standards of financial reporting. This can be
explained in this sense that the big corporations are most likely to be subjected to
the costs of government interference (Schroeder, Clark and Cathey 2019).
According to the consideration of the PAT, the primary role of accounting can
be seen in valuing the firms that indicates that efficiency perspective is favoured by
PAT that emphasizes on how different organizational managers choose accounting
methods that demonstrates a true representation of the performance of the firms.
This particular efficiency perspective of PAT can be explained through the
opportunistic perspective which states that the organizational managers are the
agents of the owners and they act towards fulfilling their self-interests (Christensen,
Nikolaev and Wittenberg‐Moerman 2016). For this reason, organizational managers
adopt the kind of accounting regulations and policies that allows them to benefit and
these managers consider that what is good for them is also good for the companies.
In this regard, the PAT has highlighted three key hypothesis that are bonus plan,
political cost and debt hypothesis which help in revealing the motive of the managers
in selecting one specific accounting method on another. For example, organisational
managers who have accounting inventive associated with the performance of the
company will have the tendency of manoeuvring accounting methods in such a

4ADOPTION OF IFRS: A CRITICAL REVIEW
manner that will reflect better accounting figures for showing better financial
performance of the companies (Tan 2013).
2. Implementation of IFRSs in Australia and Nigeria
i. Reasons for Adopting IFRS and the Time of Adoption
Australian adopted IFRS on 1st January 2005 and Nigeria adopted IFRS on 1st
January 2012. Both of these two countries had certain specific reasons behind the
adoption of IFRS and they are discussed below.
Australian – Modern economics like Australia largely depends on cross-border
transactions along with the free flow of international capital. In Australia, more than a
third of all financial transactions takes place across border and this is expected to
grow further. In Australia, the investors pursue investment opportunities and
diversification across the world while business organizations raise capital, involve in
transactions and have international business operations (ifrs.org 2019). In the past,
there were major issue in such cross-border financial activities since different
countries maintained their own sets of financial reporting standards. This largely
contributed to added costs and complexities along with major risks for the companies
in the preparation of financial statements. Moreover, investors and other users of
these statements faced major issue in making investment decisions (Bryce, Ali and
Mather 2015). These are the main reasons for Australia to adopt IFRS because
countries with IFRS have the same set of accounting standards.
Nigeria – The reasons for Nigeria to adopt IFRS are shown below:
o The country was facing major difficulties to compare the financial reports
globally with other countries.
o There were key difficulties in the consolidation process of financial statements
of a group of companies (Adetula and Owolabi 2014).
o Business entities of Nigeria had to incur large costs in order to prepare and
present the financial statements.
o There was high cost associated with accessing capital in the international
capital market.
o The users of the financial statements were unable in understanding them in
well manner.
o There was major fall in the inflow associated with the foreign direct investment
(FDI) in the country.
o Nigeria developed an unattractive and uncompetitive capital market in the
absence of quality financial information because of ineffective national
financial reporting standards (Abdul-Baki, Uthman and Sannia 2014).
ii. Transitional Issue Faced by Australia and Nigeria on Adopting IFRS
Facing transitional issues is common for the countries adopting IFRS. The
transitional issues faced by Australia and Nigeria are mentioned below.
Australia – It has been mentioned by the participants in IFRS adoption that the
transition process of IFRS was obstacle free and the main reason was the time
provided between make the AASB standards available for incorporating the IFRS
standards and the date of transition and the slow merging with the international
standards before the adoption (Morris et al. 2013). The common costs that
demanded to be incurred at the time of IFRS adoption are the cost to educate staffs,
training costs, costs associated with updating the information system and the cost of
additional audit work. It was seen that the transition to IFRS standards took less time
than the time would be required to adopt a new lease standard or revenue standard.

5ADOPTION OF IFRS: A CRITICAL REVIEW
Therefore, it is observable that Australia dis not face many transitional issues while
adopting IFRS (Redmayne and Laswad 2013).
Nigeria – Like Australia, adoption of IFRS in Nigeria was also not smooth as the
entities of the country had to face certain issues. Adopting IFRS in Nigeria became
difficult for certain time in the absence of qualified personnel with appropriate
convergence related knowledge (Baba 2013). This contributed towards less
comprehension associated on the complex accounting standards associated with the
adoption of IFRS. There was not sufficient accounting experts in Nigeria while
adopting the standards of IFRS and this created certain issues in the adoption
process. The adoption of IFRS standards requires changes in the accounting
information system and this particular aspect created certain issue in the IFRS
adoption process in Nigeria. However, the domestic accounting standard board of
the country was of major help in the whole adoption process which largely
contributed to the adoption (Odia and Ogiedu 2013).
iii. Challenges Faced by Reporting Entities on IFRS Adoption
There are certain challenges faced by both Australia and Nigeria upon the
adoption of IFRS. These are as follows.
Australia – The main challenge of the Australian Accounting Standards Board
(AASB) upon the adoption of IFRS is to move from a developer of domestic
standards to being a contributor to the international standards. In addition, the
adoption of IFRS has increased the responsibilities and works of the AASB to large
extent. Now, AASB is required to comment on all International Accounting Standards
Board (IASB) documents while encouraging the Australian constituents to so the
same (Houqe, Monem and Clarkson 2013). In addition, it is challenging for AASB to
participate in all international forums like NSS Group and the AOSSG. The
Australian companies and auditors were not accustomed with the different
applicatory technique of IFRS and this posed major challenge in the adoption of
IFRS standards. Australian GAAP (AGAAP) was based on principles while IFRS is
rule-based; and this difference required the use of extensive accounting judgment
that created major challenge in IFRS adoption (Mısırlıoğlu, Tucker and Yükseltürk
2013).
Nigeria – The challenges are different in case of Nigeria upon the adoption of IFRS.
Adopting IFRS is a costly matter that includes cost such as cost to train the
employees for understudying the IFRS standards, cost to acquire new accounting
package required for IFRS implementation, cost to discard the accounting packages
not suitable with IFRS standards and others (Demaki 2013). This is a major
challenge for Nigeria to adopt IFRS. Another major challenges is to train and
educate the employees and burdened the responsibility to prepare and present the
financial statements by complying with IFRS standards; this whole matter is not only
costly, but it takes large man hours. Another crucial challenge is the difference
between the IFRS standards and Nigeria’s local accounting standards that makes
the adoption process more complex (Modugu and Eboigbe 2017).
iv. Benefits of Adopting IFRS
There are some major benefits of the adoption of IFRS standards. These
benefits are discussed below:
o In the past, there were major challenges in the cross-border financial reporting
and accounting activities because of the maintenance of different set of
accounting standards by different international countries. This issue has been
addressed by the IFRS standards through the introduction of high quality and
internationally recognized set of accounting standards. Under IFRS

6ADOPTION OF IFRS: A CRITICAL REVIEW
standards, all the reporting entities are required to follow the same set of
accounting standards which helps in cross-border accounting transactions
and comparison of financial statements of foreign companies. This is a major
advantage of IFRS (ifrs.org 2019).
o The standards of IFRS bring transparency through the improvement in
international comparability along with the financial information quality. This
enables the investors and other market participants in making informed
economic decisions.
o The standards of IFRS leads to strengthen accountability through the
reduction of information gap between the capital providers and the people to
whom the money has been entrusted by them. The IFRS standards provide
all the required information that is needed to hold the management
accountable. In addition, the importance of IFRS standards can also be seen
to the regulators across the globe (ifrs.org 2019).
o The standards of IFRS make contribution towards the economic efficiency
through assisting the investors in the identification of risks and opportunities
across the globe that eventually contributes to the enhancement of allocation
of capital. In case of the businesses, the IFRS standards provide the
companies with a single and trusted accounting language that leads to the
reduction of cost of capital along with the reduction of the cost of international
reporting.
o In case of the multinational business organizations, the standards of IFRS
assist in fulfilling the disclosure requirement for stock exchange across the
world. These are the major benefits of the adoption of IFRS by the reporting
entities (Horton, Serafeim and Serafeim 2013).
v. Similarities and Differences in the Adoption of IFRSs
The above analysis on the adoption of IFRS standards by Australia and
Nigeria points out some similarities and difference between these two countries on
IFRS adoption. They are discussed below.
The intention of both these two countries to adopt a single set of accounting
standards is the main similarity between Australia and Nigeria. Both these two
countries wanted to have a single set of accounting standards so that it could
facilitate them in cross-border transaction and comparison of financial reports.
However, the presence of difference can be seen in case of transitional issues
while adopting IFRS. The above analysis indicates towards the aspect that Australia
did not face much transitional issues while adopting IFRS standards because of the
scope to slowly converge with the international standards. On the other hand,
Nigeria had to face certain major transitional issues in the absence of the required
personnel with adequate knowledge in international accounting standards along with
the absence of certain key facilities. The similarity is that both Australia and Nigeria
was able to overcome those issues by succefully adopting the standards of IFRS.
Differences can also be seen in case of the challenges faced by these two
countries in the adoption of IFRS standards. Australia faced major challenge to
integrate AGAAP with IFRS standards because the presence of fundamental
differences. On the other hand, Nigeria had to incur different types of high amount of
costs at the time to adopt the IFRS standards. All these factors contribute to the
difference.

7ADOPTION OF IFRS: A CRITICAL REVIEW
3. Success of the Adoption of IFRS Standards
Australia – The above discussion shows that the IFRS standards transition process
in Australia was smooth. Because of the collaboration between the IFRS standards
and AASB standards, majority portion of the listed entities of Australia have adopted
the standards of IFRS for the purpose of financial reporting (Baird and Schoch
2013). There has been enhancement in the value relevance of financial information
which contributes to the reduction of the occurrence of earnings management. Most
importantly, the adoption of IFRS standards have facilitated to cross-border
accounting transactions through improving comparability of financial statements of
foreign business entities under financial reporting practice. Therefore, on the overall
basis, it can be said that the adoption of IFRS standards in Australia has been
successful (Ramanna 2013).
Nigeria – The adopting IFRS standards in Nigeria is not as successful as Australia
because of the presence of some major transitional issues and other challenges
while adopting IFRS. IFRS transition in Nigeria was not as smooth as Australia due
to the issues like high amount of implementation costs, lack of aware as well as
expertise in the international accounting standards, insufficient technical capacity,
absence of the required level of awareness, lack of education and training programs
and others. Due to these reasons, most of the listed companies of Nigeria are far
behind in the IFRS implementation and adoption drive (Herbert et al. 2013).
4. Recommendations
Australia
1. The recommendation to AASB is to ensure conducting regular outreach and
consultation activities with the key stakeholders along with the educational
sessions with the aim to address the relevant topics associated with reporting
requirement under the IFRS standards. This will keep the IFRS standards
relevant to the recent changes in financial reporting.
2. AASB is suggested to monitor the standard setting activities undertaken by
other international accounting standard setters that includes IPSASB for both
the public sector and private sector. This will help the AASB in adjusting their
IFRS standards in accordance with the most relevant international financial
reporting standards.
Nigeria
1. It is recommended to the Nigerian Accounting Standard Board (NASB) to
review and monitor the adopted IFRS standards on periodic basis. The main
aim of doing this is to ensure the implemented financial reporting standards
with any international financial reporting changes.
2. The suggestion to NASB is to ensure the inclusion of educational sessions on
international accounting standards and training programs for the regulators
so that they can understand every aspect of IFRS standards in better
manner. This will increase the scope of using the IFRS standards in different
aspects of financial reporting.
Conclusion
It can be seen from the above analysis that one common reason for both
Australian and Nigeria to adopt IFRS standards is to more to a single set of
accounting standards in order to get assistance in cross-border transaction and the
comparison of financial reports. The above discussion also analyses the relevance of
PAT in financial reporting. According to the analysis, the transition to the IFRS

8ADOPTION OF IFRS: A CRITICAL REVIEW
standards was smooth for Australia while Nigeria had to face some major issue in
the transition of IFRS standards. Moreover, the business entities of both the
countries faced different types of challenges while adopting IFRS. For example, the
challenge for Australia was to tackle the fundamental differences between IFRS
standards and national standards, but the major challenge for Nigeria was the large
cost of adopting IFRS standards. In the presence of these reasons, the adoption of
IFRS standards has been more successful in Australian than Nigeria. Lastly, the
standard setting bodies of both the countries are required to take into consideration
the provided recommendations to make the adopted IFRS standards more relevant
to the present economy.

9ADOPTION OF IFRS: A CRITICAL REVIEW
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