ADOPTION OF INTERNATIONAL FINANCIAL REPORTING STANDARDS (IFRS) AND ITS EFFECT ON FINANCIAL TRANSPARENCY AND COMPARABILITY

Abstract

The globalization of capital markets has necessitated the harmonization of financial reporting standards, culminating in the widespread adoption of International Financial Reporting Standards (IFRS) across more than 140 jurisdictions. This review synthesizes the empirical archival literature examining whether mandatory IFRS adoption achieves its primary objectives of enhancing financial transparency and improving financial statement comparability. Drawing on agency theory and information asymmetry, and signaling frameworks, the paper systematically evaluates the consequences of IFRS adoption across multiple dimensions: accruals quality, earnings management, value relevance, timely loss recognition, comparability of financial information, and capital market outcomes. The review reveals that while IFRS adoption generally increases value relevance and cross-border comparability, the effects on reporting quality and contracting efficiency are heterogeneous and critically contingent upon institutional infrastructure, legal enforcement mechanisms, and firm-level reporting enticements. In strong enforcement environments, mandatory IFRS adoption generates significant capital market benefits including reduced cost of equity capital (26-150 basis points), enhanced market liquidity, and increased foreign institutional investment. However, in weak institutional settings, "label adoption" occurs with minimal improvements in actual reporting transparency. Furthermore, the principles-based nature of IFRS introduces managerial discretion that can facilitate substitution toward real earnings management and degrade debt contractibility due to fair-value volatility. The review highlights an important tension: while IFRS enhances equity market valuation relevance, it often reduces the reliability of accounting numbers for private debt contracting. This paper concludes that IFRS harmonization represents a necessary but insufficient condition for achieving global financial transparency, emphasizing that standard-setting success ultimately depends on complementary institutional reforms and governance mechanisms.