IFRS Convergence: Factors Driving Adoption and Benefits

ISSUES IN FINANCIALACCOUNTING

Answer 1 :
New Institutional Theory (NIS) is being used by the researchers in subjects such as business,
management, political science, and sociology and information technology. In a similar way, this
theory is now used in accounting field to have an understanding about various case studies
covering accounting, auditing and management accounting. Researchers use this as a tool to have
an understanding about the behavior of an entity, or a state or a nation for the worldwide
acceptance of global accounting standards (Albu & Alexander, 2014).
Coming to IFRS Convergence, institutionalization is a process of analyzing the level of
acceptance of global accounting standards by a nation for the aim of having harmonized
accounting standards internationally. Researchers use the tool of NIS for analyzing quality and
quantity. When a country decides to adopt IFRS standards and replace its previous accounting
standards, it looks forward for economic benefits in terms of declined cost of capital, increasing
of foreign investments, etc. However, studies say that IFRS adoption is more for having a
legalized institutional status than having economic benefits.
 The most important factor driving IFRS Convergence is increase in expansion of business
globally. We see a global need of investments and trading opportunities by multinational
companies since last years. Thus, for the sake of having investment opportunities by an
MNC in one's company, it is important for companies to have a consistency in the
accounting practices they apply to facilitate comparison purposes in terms of financial
performance and position (Chand, 2005)
 Another important factor for IFRS convergence is increasing of cross border transactions
in international banking transactions and equity securities due to which financial reports
are required to be prepared using global accounting standards for having a consistency in
reporting and in that way, such reports can be used and compared by stock brokers,
investors, researchers, business & financial analyst, shareholders and such other intended
users for making useful decisions.
 Another main driving factor is European Union (EU) which has set its goal to have a
business environment united on a global base and with a common market in Europe,
healthy competitions can be made with US market (He, Wong & Young, 2012).