Factors Influencing Accounting Policy Choices in South Asian Countries with Emphasis on IFRS Adoption

This research report examines the factors influencing the selection of accounting policy changes in South Asian countries with emphasis on IFRS adoption. The report provides recommendations for harmonizing accounting standards and examining all factors influencing accounting policy choices.

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Financial Accounting Theory

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Executive Summary
The present research report is undertaken to examine the factors that influences the
selection of accounting policy changes in South Asian countries emphasizing on the adoption of
IFRS. The critical analysis carried out in the research has identified the factors such as nature of
ownership, size, profitability and cultural factors that are influencing the accounting policy
choices among the South Asian countries. The recommendations that are developed on the basis
of overall research carried out in the report can be stated as follows:
 All the factors influencing the accounting policy choices in South Asian Countries need
to be examined in detail by the developers of the financial statements
 There is need for harmonizing the accounting standards within South Asian Countries for
strengthening their global competitive position

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Table of Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Research Methodology....................................................................................................................5
Financial Reporting and accounting policy.....................................................................................5
Factors that impact the choice of accounting policies in South Asian Countries............................7
Research Findings............................................................................................................................9
Conclusion.......................................................................................................................................9
Recommendations..........................................................................................................................10
References......................................................................................................................................11

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Introduction
The evolution of IFRS (International Financial Reporting Standards) developed by the
IASB (International Accounting Standard Board) has caused significant changes in financial
reporting requirements. The development of international accounting standards has caused the
changes in the term financial reporting to become general purpose financial reporting as its
primary purpose is to provide information to the stakeholders for making decisions. International
accounting standards helps reporting entities to produce financial report that can be useful in
making the economic decisions and allows investors to allocate the capital after analyzing the
entity performance in right manner (Ismail, 2017). The International Accounting Standard Board
(IASB) has issued conceptual framework of accounting that has mandated all countries around
the world to apply IFRS in form of their national accounting standards. Following this all
countries in South Asia have make use of IFRS to replace their original GAAP (Generally
Accepted Accounting Principles) (Kuzina, 2013).
The financial reporting requirement was initially governed by Country own GAAP and
after the implementation of IFRS by the IASB, the local GAAP has been replaced by current
IFRS. Some of South Asian countries have fully adopted the IFRS while some of them have
adopted convergence approach to implement the IFRS. IFRS has started gaining its importance
as generally accepted financial reporting accounting standards because of worldwide economic
standardization (Felski, 2015). The purpose of this report is to judge the impact of IFRS on the
South Asian Countries particularly in context to factors that influence the choice of accounting
policies. Accounting policies are chosen on the basis method applied for the recognition of the
various elements of financial statements. After the implementation of the IFRS in South Asian
Countries has drastic impact on the choice of accounting policies as there is no specific rules on
how to choose the accounting policies. This report will provide detailed discussion in form of
critical review regarding the implementation of IFRS has impacted the choice of accounting
policies in South Asian countries

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Research Methodology
Research aim
The main aim of this research report is to discuss the various factors that have impacted
the choice of accounting policies in South Asian Countries after the implementation of IFRS.
Research Method Applied
In this research study the purpose is evaluate the previous literature on the selected
research topic, so it has been decided to perform the critical review of the relevant literature that
will help to satisfy the research aim. The main sources of literatures are journal articles, books,
information on renowned websites of international accounting body and published report
(Greuning, Scott and Terblanche, 2011).
Financial Reporting and accounting policy
Day (2008) stated that the major objective of the financial reporting as stated by
the conceptual framework of accounting is to provide relevant and true financial information to
the present and potential investors, lenders and creditors for facilitating them in their decision-
making process. The business corporations disclose useful information to their external
stakeholders by developing general purpose financial statements such as income and balance
sheet. This is referred to as valuation role of financial reporting. In addition to this, there is also a
stewardship role of financial reporting as stated by the agency theory of accounting. The theory
has stated that there exists an agent-principal relation between the business managers to its
owners and other stakeholders (Bouckova, 2015).As such, financial reporting can be regarded as
a medium by which managers depicts their accountability to the business owners and
stakeholders by disclosing relevant facts and information related to the business performance
(Day, 2008).
The fact can be supported by the stakeholder theory of accounting. The theory has stated
that business managers need to act in the interest of stakeholders and adopts the policies and
methods leading to creating of maximum value for them. The presence of regulation on financial
reporting is essential to protect the investors from fraudulent practices that can lead to presenting

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manipulated financial information to them (Unegbu, 2014). Thus, the adoption of a uniform set
of accounting rules and policies is necessary for homogenization of accounting standards and
thus removing any discrepancies in the financial reporting process. The conceptual framework of
accounting has been established by the IASB for developing a consistent set of accounting
principles so that end-users can easily compare the financial information of entities across the
world. (Zehri, 2013).
Shima and Yang (2012 stated that the IASB has developed IFRS standards to be adopted
by the business entities worldwide for improving the quality of financial information. In this
context, the emerging economies such as South Asian countries are also emphasizing to adopt
either wholly or partly the IFRS. This will help in promoting integrity and transparency in the
business operations of these countries and thus protecting the interests of the stakeholders. The
compliance with IFRS will help the business entities operating within these countries to improve
the quality of financial information by presenting it as per the conceptual framework of
accounting principles and guidelines (Borhade, 2018). The conceptual accounting framework has
stated the fundamental and enhancing qualitative characteristics such as relevance, faithful
presentation, understandability, comparability, verifiability and timeliness to be present in the
financial reporting so that it meets the interest of end-users (Kashyap, 2016). As such, the
implementation of IFRS by the developing countries will facilitate IASB in meeting its goal for
developing a globally-set of accounting standards to improve the comparability among the
business performances at a global level. This will in turn lead to improving the market efficiency
as investors can easily compare the financial performance of business entities worldwide and can
take better investment decisions. This in turn will lead to improving the flow of capital in the
international markets and promote corporate growths and development (Schultz and Lopez,
2001). South Asian countries such as India, Pakistan and Bangladesh IFRS adoption is
influenced by the number of factors that impacts their accounting policy changes (Limijaya,
2017). In this context, the significant factors that are impacting the adoption of accounting
policies in South Asian countries complying with IFRS are discussed in the followings section.

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Factors that impact the choice of accounting policies in South Asian Countries
There are many factors that govern the choice of accounting policies in South Asian
Countries. The countries in South Asia are unique due to their different background, level of
development, financial reporting requirements, government regulations and agency relationships
that have a significant impact on their accounting policy choices (Weygandt, Kieso and Kimmel,
2010). The major authority responsible for development of accounting standards within South
Asian country is the Institute of Chartered Accountants. The institute in support of regulatory
bodies based on IFRS is responsible for governing the financial reporting process within South
Asian countries (Limijaya, 2017). Some of important factors that lead in difference in choice in
selection of accounting policies are discussed below:
Size of Firm
There has been great influence of the size of firms operating within South Asian countries
in context of selection of accounting policies (Yao, 2009). In South Asian countries there are
both medium size companies to large and multinational companies. The choice of accounting
policies is dependent upon the size of entity and accounting method applied by them. The large
firms tend to adopt the use of accounting policies that tends to depict their higher income as they
are in the scrutiny of general public. On the other hand, smaller firms are less politically visible
and are less risky (Limijaya, 2017). This causes the mangers to adopt the accounting policies that
increase the income as it does not seek public attention largely. The fact can be argued on te basis
of positive accounting theory as per which business mangers select the accounting policies on the
basis of prediction of real world events. Therefore, the impact of accounting policy on the
income realization of the companies is predicted before selection of an accounting choice as per
the theory (Kabir, 2017). Thus, it can be said that the extent of economic growth and
development in South Asian countries can be possible reason for the difference in selection of
accounting policies. Due to non-presence of uniformity in the selection of accounting policies
under IFRS, the developing countries are selecting the accounting policies that best suit to their
economic condition (Hla, 2015).
Profitability

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The selection of accounting method is also largely impacted by the incentive
compensation plan present within a business entity in South Asian countries. The firms in which
managers remuneration is linked with accounting earnings tend to select the accounting methods
that reporting higher earnings for deriving higher incentives (Bouckova, 2015). This can be
stated on the basis of agency theory which has stated that principal that are, business owners and
the agents, that are, shareholders tend to reduce agency costs by aligning their goals (Lin, 2017).
As such, business owners tend to adopt the use of incentive plans to reduce the agency costs and
attaining a consensus between their goals with that of managers of improved business
profitability. South Asian companies do not provide any information about their bonus plans in
the annual reports prepared and disclosed to the general users. As such, it can be said that the
member countries of South Asia are using the accounting policies that helps them to link the
accounting policy choices with the bonus provided to the managers (Epstein and Jermakowicz,
2008).
Nature of ownership of business and finance system
There are mainly three types of financing system that impacts choice of accounting
policies. These financial systems are capital market based system where prices are impacted by
the market condition, credit based system where resources are applied by the government and
credit based system where banks and financial institution governs the policies (Uddin and
Tsamenyi 2010), The companies choose only that finance system that considerably helps them in
choice of accounting policies. An entity that depends on external sources of finance has to
choose credit based financial market as they need funds to finance the business. So it becomes
necessary for the companies to select the accounting policies that govern their accounting profit
and help to report the maximum profit (Hla, 2015).
Cultural Factors
The adoption of accounting policies among South Asia countries is also
influenced by the cultural factors. There is a huge cultural difference between the developed
nations and developing countries of South Asia that influences the accounting system within
these countries. There is cultural difference based on the size or underdeveloped status among
the South Asian countries and in the developed nations (Shima and Yang, 2012). These countries

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often tend to adopt the use of an accounting system that is based on another country in the
context of influence of cultural factors. These cross-cultural-differences have a huge impact on
the skills and capabilities of the accounting professionals and thus leading to differences in the
judgments adopted during application of accounting standards (Tanaka, 2014). This is also
proving to causemajor differences among the financial reporting system adopted by the South
Asian countries and that followed by the developed nations (Limijaya, 2017).
Financial Leverage
The selection of accounting policies among the South Asian countries is also
largely dependent on the level of debt possessed by the business entities within these countries It
has been demonstrated that leveraged firms have higher incentives to adopt the use of accounting
methods that leads to reporting higher income. This is mainly done to avoid the debt constraints
that can restrict a manager to take develop future growth opportunities (Kashyap, 2016).
Research Findings
The overall analysis carried out in the research has identified and examined the factors
that are responsible for causing problems towards the adoption of IFRS among the South Asian
countries. The factors such as size of a firm, financial leverage, profitability, nature of ownership
and others discussed in the above section are responsible for creating issues among the South
Asian countries to comply with IFRS. IASB is emphasizing on the development of a globally
universally accepted accounting system by the adoption of IFRS worldwide to promote
comparability among the business performance worldwide. However, the identified factors
discussed in the research are causing major restrictions towards the development of a holistic
approach towards financial reporting on a global level. Therefore, it is required that IASB need
to be examining the issues and provides adequate support and guidance to such countries for
promoting the implementation of IFRS.
Conclusion
Adoption of IFRS has great impact on South Asian countries as they have to make a lot
of changes in the locally accepted accounting principles and to develop their own set of

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accounting standards. The accounting standards developed by the South Asian countries have
given choice of accounting policies as there is no uniformity in accounting policies in IFRS. So
there are many factors that govern the choice of accounting policies by the companies in South
Asian countries.
Recommendations
It has been recommended to the researchers to make further investigation on this topic so
that possible causes of difference in accounting policies can be studied in detail and measures
can be taken to avoid issues faced while adopting the accounting policies. The accounting
experts need to make a detailed analysis into the challenges that South Asian countries are facing
with the implementation of IFRS. This will help in developing effective solutions by the
international accounting bodies to successfully implement IFRS and promote homogenization of
accounting standards.

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