Literature Review

The Adoption of IFRS: Case The Kingdom of Study Saudi Arabia

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December 10, 2016

Table of Contents
1. Background to IFRS adoption....................................................................................3
1.1 History and Developments of IFRS......................................................................3
1.2 Objectives and rational for IFRS adoption..........................................................4
1.3 IFRS advantages and disadvantages...................................................................7
1.3.1 Advantages.......................................................................................................8
1.3.2

Disadvantages...........................................................................................13

1.4 Empirical evidence from voluntary IFRS adoption...........................................14

1.4.1 Developed Countries.....................................................................................14
1.4.2 Developing Countries....................................................................................16
1.5 Empirical evidence from mandatory IFRS adoption........................................18
1.5.1 Developed Countries.....................................................................................18
1.5.2 Developing Countries....................................................................................19
1.6 The consequences of IFRS adoption.................................................................20
1.6.1 Information quality.........................................................................................20
1.6.2 Harmonization/Comparability.......................................................................21
1.6.3 Capital Allocation/Market Efficiency............................................................22
1.6.4 Economic Growth..........................................................................................23
1.6.5 Cost of Capital................................................................................................24

1.6.6 Earning Quality..............................................................................................25

2. Kingdom of Saudi Arabia Institutional Framework................................................26
2.1 The Accounting Environment of KSA................................................................26
2.2 Background on KSA Stock Market.....................................................................28
2.3 Benefits and Challenges of Adopting IFRS in KSA..........................................29
2.4 History of Accounting Standard Setting in KSA...............................................30
Bibliography...................................................................................................................32

1. Background to IFRS adoption

1.1 History and Developments of IFRS
International Financial Reporting Standards (IFRS) were previously known as
International

Accounting

Standards

(IAS).

International

Accounting

Standards

Committee (IASC) developed IAS that remains in effect during the period between 1973
and 2000. The purpose of issuing IAS was to improvise accounting practices and
develop a better understanding of the financial reporting for the companies around the
world. IASC was replaced by International Accounting Standard Board (IASB) on April 1,
2001 (Carson & Dowling, 2010). New international accounting standards were
developed by this board with a purpose to develop international financial reporting
standards. IFRS gained a lot of importance when the companies in the European Union
decided to adopt these standards for financial reporting and replaced Generally
Accepted Accounting Principles (GAAP) developed by the U.S.
The standards developed by IASB manifest the trends of globalization. The
purpose of the developing these standards is to comply with the international financial
reporting standards and presenting an image that is consistent with developed nations
and their multinational corporations. About 115 countries in the world have adopted
these standards and required implementation of IFRS by the companies operating in
the other countries. These countries also include some big countries like European
Union, Russia, Australia, South Korea, Japan, etc. IFRS is also accepted and
implemented by the American firms as well.

Trends suggest that the international trade has become globalized. Similar is the
case with the global financial markets and the businesses (Zakari, 2014). Auditing and
accounting systems based on traditional standards does not fulfill the need of customer
satisfaction. IFRS provides the solutions to many problems that remain unaddressed by
the previous accounting standards. International markets are important sources of
bringing diversification in the organization and this is the reason why IFRS has been
adopted as the recording of financial transactions and financial reporting. It is very
difficult to work in the new and emerging markets, and international accounting
standards are required avoid integration of international and national accounting
standards.
The basic reason behind adoption of IFRS is the fact that these standards
provide organizations with the opportunity to develop reporting standards as per
international reporting requirements. Additionally, the organizations have adopted these
standards to make investors believe that their investments are protected the rigorous
verification and financial regulation standards. The implementation of IFRS in modern
organizations requires a due process that is carried out through an international
consultation process.

1.2 Objectives and rational for IFRS adoption

The adapter The arrangement of IFRS gives a demonstrative examination to
research the effect of changes in the data environment on stock cost created. We
investigate the effect of structural and intentional IFRS arrangement on capital cost
produced by including firms from nations that have gotten IFRS and those from nations
that arrangement to get a handle on IFRS, yet beginning now permit associations to

utilize IFRS. If the social affair of IFRS prompts to a decreasing in the expenses of
securing data and creates straightforwardness, as its promoters battle, we ought to
watch the necessary change in stock cost being produced taking after IFRS
arrangement.
Then again, given that bookkeeping models allow supervisors unbelievable
watchfulness, the excellent conditions from IFRS may not by any extent of the creative
ability accomplish in light of conflicting execution and need crosswise over firms and
transversely over nations; stock cost produced may not affect this situation. The
arrangement of IFRS gives a particular test to look at the effect of changes in the data
environment on capital cost created.
I consider the impact of obligatory and contemplate IFRS assurance on the
capital value produced by including firms from nations that have gotten a handle on
IFRS. In case the decision of IFRS prompts to a lessening in the expenses of securing
data and broadens straightforwardness, as its patron's fight, we ought to watch the
earth-shattering change in stock cost being produced taking after IFRS gathering. Then
again, given that bookkeeping measures give chiefs essential watchfulness, the central
focuses from IFRS may less accomplish given different use and endorsement
transversely over firms and crosswise over nations; stock cost produced may not affect
this condition (Outa, 2016).
I look at our speculations utilizing a case of attempts from thirty countries. I
discover a declining configuration in stock price created after some time. To reduce
issues connected with the diving configuration in stock price being produced and to all

the more precisely gauge the effect of IFRS get-together, we estimate the change in
capital cost being created for every firm from the most recent year before task to the
hidden year of decision.
By our theories, we record that think IFRS adopters encounter an augmentation
in stock cost being created taking after IFRS gathering. Likewise, we report the
criticalness of endorsement on the eventual outcomes of IFRS portion. Obligatory
adopters in nations with better support encounter an augmentation in stock cost being
produced taking after IFRS division. The findings still hold after an assortment of
constraining tests, including elective measures for the capital value provided and IFRS
gathering.
Our overview adds to the writing in a couple of ways. I consolidate the composed
work the effect of IFRS assembling by looking at its effect on another necessary result
measure, the stock cost created. All the more inside and out, we in like way add to
individuals when all said in done dispute in the matter of whether the ideal conditions for
IFRS distribution accumulate more to consider or required adopters. Looking for think
and necessary adapters license us to loosen up the level of firms' dedication to
enhancements in straightforwardness and presentation (Leuz, n.d.).
That could affect the eventual outcome of IFRS decision apparently, intentional
designation of IFRS may drive by an alliance's commitment to building exposure. While
we see this, the possible thought about some of these check adopters as a necessary
piece of our intentional adopters would incline our outcomes against finding any impacts
of determined task on stock cost created. Also, we give additional confirmation on the

enormity of endorsement in picking the effects of required IFRS gathering. At last, we in

like way incorporate to the composed work stock cost produced. The consequently
expanded comparability of money related declarations may lessen the essential for
changes by monetary articulations engineered to utilize specific measures (Pascan,
2014).
This examination will reduce expenses and growth the speed at which data can
manage. This potential abatement in the cost of private data ought to reduce
progression and augmentation stock cost created, reliable with the guesses of
Grossman and others. What's more, if IFRS arrangement for without question enhances
the straightforwardness of money related verbalizations, this ought to additionally collect
firm-particular return grouping by lessening get by insiders, persisting with the guesses.
The potential purposes of enthusiasm from IFRS distribution will be capable just
on the off chance that they affect the resulting money related reporting quality; this will
to a far-reaching degree rely on upon firms' reporting partners and the method for the
particular and open essential. In light of this, we look at the effect of IFRS decision on
stock cost being produced addressing contrasts in firms' flashes by investigating
variations among deliberate and required connectors (Taboada, 2012).

1.3 IFRS advantages and disadvantages

As the corporate world has wound up being totally watchful, intensive and strict in its
exchange and money related tenets, a large measure of nations has begun now, move
from the Generally Accepted Accounting Principles (GAAP). That towards the
International Financial Reporting Standards (IFRS), of which essential bookkeeping

rules depict what data must uncover in budgetary elucidations and how exchanges must
see this decision. While this unitary blueprint of benchmarks has tended to and
elucidated many issues, it has besides made differing issues. Here are the plants and
checks of getting a handle on IFRS:
1.3.1 Advantages
Comparability
Affiliations utilizing near measures to get ready money related clarifications can
accomplish more unequivocally multifaceted nature and each other. This get is to an
impressive degree pleasing when looking that are organized in various nations, as they
may find some way, or another have intriguing systems and gauges in setting up these
reports. This more significant similarity has reinforced scholars to perceive better where
their attempts ought to go. The union to IFRS has improved the equivalence of
budgetary assertions in the EU. This examination has satisfied through having a
practically same reporting standard under an individual market, the EU.
Like all affiliations, setting up they congealed cash related declarations, have
been reporting old reporting standard have updated the similarity for scholars,
furthermore all assistants who consume the budgetary elucidations. There is another
reason that has supplementary to the overall achievement of the IFRS decision has
been a consequence of the move time traverse, as more than 8000 recorded
relationship in the EU got it around a relative time. In any case, there has been a
contention about the nonattendance of sufficiency and similarity of IFRS. The running
with is the contentions against the nonattendance of similitude and consistency of IFRS.

10

Furthermore, associations have gotten a handle on an approach, which

underestimated the developments from past national principles, which diminished the
measurements to look at the money related declarations over a diligence. The complete
conclusion has obligatory under IFRS because of the nonattendance of industry
relevant heading, which made opening and abnormalities in the IFRS reporting
measures. Moreover, this is another explanation for the nonappearance of closeness
and irregularity.
Also, are not sure that the IFRS is sufficient for the motivations driving passing
on their execution to the money related markets, as GAAP reporting measures had a
tendency to be more point by point which could give more requested data. Another
segment that displays the nonappearance of likeness and anomaly is by the IFRS
reporting gages are more baffled than the national bookkeeping measures, along these
lines, it might change into a technique for taking after the psyche boggling part,
regardless, does not impel the execution of the affiliations.
Global Comparisons
It expected that the solace and enhanced proportionality of IFRS might perform
in the medium-entire arrangement. So as to guarantee the likeness of money related
verbalizations, all affiliations ought to take after similar standards by getting a handle on
IFRS. Private and little and medium assessed, unconsolidated illuminations can be set
up under IFRS which moreover redesigns the similarity and consistency of money
related pronouncements. Additionally, the end, the decision of IFRS by all nations
around the globe gives astonishingly more expanded handiness and equivalence of
money related declarations.

11

Small Investors
The IFRS can help new and little analysis by improving reporting measures to
have quality and persuade the chance to be notably clearer, putting these dominant
fiscal voices in an equivalent position with face budgetary specialists, which was not
achievable in past ages. This post in like way incorporates a diminished danger for
these scholars when they exchange, as the masters will not be able to abuse in light of
the way that the strategy for budgetary assertions will be anything other than hard to be
valued by all.
Centralized Lenders
The original fragment is that IFRS guarantee more right, encouraging and
expansive money related illumination data that is pertinent to the political principles.
Moreover, the data gave with money related vocalizations engineered under IFRS has a
propensity to be more sensible for analysts as they can understand the monetary
illumination without the need of different causes which profits related specialists more
trained. That helps new or insignificant budgetary experts by making the reporting
benchmarks all the clearer, and better quality as it puts nothing and new analysts
correspondingly arranged with other ace players from it were unfathomable under the
past reporting rules.
This method lessens the hazard for new or little scholars while exchanging as
ace inspectors cannot abuse in light of the easy to comprehend nature of money related
articulations. As an aftereffect of synchronization and institutionalization of reporting
benchmarks under IFRS, the scholars do not have to bear for arranging and certifying
the budgetary illuminations to be able to understand them, from now on positioning of

12

the incidentals of experts. Along these lines, IFRS reduces the cost for cash related
specialists. Diminishing comprehensive complexities in reporting norms by applying
IFRS as it evacuated across over edge takeovers and acquisitions by money related
professionals.
Loss Recognition
Seeing the occurrence is one of the key segments of IFRS as it is the proper
position for the money related professionals, and what is more for the credit ace and
assorted accessories inside the affiliation. The broadened straightforwardness and
fiasco confirmation of IFRS customarily build the proficiency of contracting among
affiliations and their association, which likewise overhauls the corporate organization.
With broadened straightforwardness as guaranteed by IFRS. By then the proper
geniuses additionally advantage from IFRS as it makes it essential for the affiliations
see the episode in a blaze. This timelier hardship attestation of IFRS triggers the issues
as when the associations face cash related failures; it will know to the assistants of
other potential fiscal specialists. More Rapid episode favoring in like way draws in the
gathering audits its book estimations of inclinations and liabilities, advantage, regard.
Relevance
The new IFRS considers cash related constituent more than a real file. This
strategy helps the affiliations and special assistants to have the whole and sensible
perception of the gatherings' exchanges. The way IFRS replicates increments and
difficulties place IFRS in a more steady and reliable position than the GAAP to the
degree reporting gages. The accounting reports coordinated under IFRS has a
propensity to be more helpful as an aftereffect of its course of action and the uniformity,

13

and the level of disease quality showed up contrastingly in connection to GAAP that had
a tendency to be unequivocal. It is a clear fact that there are not any possibilities that
administrator can take control mere by making secured ways under the policies and
procedures of new IFRS that is why it includes shareholders planning as whole.
Standardization
The most decided part about the upsides of IFRS has been the systematization
of financial reporting which as time goes on overhauls the similarity of budgetary
announcements in huge money related markets. This position surveys as far as
possible, as this was one of the key segments concerning why the EU has been trying
to get a handle on only reporting benchmarks.
Consistency & Transparency
This variable can likewise say as one of the critical focal arguments of moving
over to IFRS as it makes the EU part nations to be reliable on macroeconomic
viewpoints, as well as also provide reliability on the reporting of budgets that will
definitely enhance the relationships between organizations and financial professionals
in the connecting countires.
Foreign Access
One of the necessary clarifications behind changing over from authoritatively
developed GAAP to new IFRS was for overhauling similarity when all said in done
budgetary markets, like this developing the highlight on analysts. Also, this has been for
the most part capable and in the few previous year statistics, most of the developed and
developing nations of the world are changing their national reporting standards to

14

internationally accepted standards i.e. IFRS. As an mammoth number of relationship in

Europe and other connecting countries over the world has begun now made a large setup for IFRS gathering, it likewise redesigns the link to get admittance to money related
markets by having the budgetary announcements organized under one reporting
guidelines.
Flexibility
Utilizing a rationality that depends on standards, rather than guidelines, this
arrangement of norms will have the objective of conferring at a reasonable valuation
with different approaches to achieve undertakings. This benefit would give a chance to
organizations the flexibility to receive IFRS to their particular circumstances, which will
bring about money related articulations that are even more effectively perused and
valuable (Mohr, n.d.).
1.3.2 Disadvantages
Cost
Whether vast or little, all organizations would feel the effect if a nation embraces
IFRS. Nevertheless, little groups would not have sufficient assets to actualize the
progressions that accompany it, also that they would need to prepare staff or contract
bookkeepers or specialists for help. They would just bear more money related weight
than their bigger partners would.
Manipulation
As organizations can just utilize the strategies that they wish, this would prompt
to monetary articulations demonstrate just craved outcomes, which can prompt to

15

benefit control. While this new arrangement of norms obliges changes to how the
standards ought to be connected to be legitimate, it is regularly feasible for
organizations to think of explanations behind rolling out such improvements. This loss
implies stricter rules ought to be actualized to guarantee all agencies will esteem their
announcements in a corresponding form.
Globally Unacceptable
Scrupulously, the United States has not yet received the IFRS, so as different
nations that keep holding out too. This disadvantage implies bookkeeping by foreign
organizations working in these countries are confronting challenges since they need to
plan money related proclamations are utilizing such an arrangement of norms and
another arrangement of the rule that is for the central part acknowledge in these nations
(Jordan, 2013).

1.4 Empirical evidence from voluntary IFRS adoption

1.4.1 Developed Countries
Firms recorded on European Stock trades have been required to utilize
International Financial Reporting Standards in their brought together records since
January 1, 2005, to agree to Regulation Act EC 1606/2002. Such move demonstrates a
critical accomplishment in general bookkeeping homes since European firms as of now
took after a mix of nation particular sound accounting decides that unexpectedly
impossibly separated from IFRS.
According to the European Union necessities, the Capital Market Board of Turkey
began; the move to IFRS handle for recorded firms in 2003 by issuing new financial

16

reporting models tried and true with IFRS to supplant the past money related reporting
benchmarks. Think the determinants of resolved IFRS assignment in a making business
division is staggering in light of the way that budgetary specializes in making markets
have incredibly restricted data open.
The another lighting up behind picking Turkey as the union of this review is that
the Turkish bookkeeping homes have taken after an undeniable road from a Continental
European structure to an Anglo-Saxon accounting framework. Hence, current Turkish
accounting environment shows parts of both these frameworks. Focus the determinants
of considering IFRS dispersion in a making business part is charming because traderelated bosses out making markets have amazingly required information available
(enyii, 2014).
The another illustration behind picking Turkey as the centralization of this audit is
that the Turkish accounting sharpens taken after a recorded street from a Continental
European structure to an Anglo-Saxon accounting system. Exploring the determinants
of resolute IFRS confirmation by registered Turkish firms in the midst of the move day
and age, we watch that firm size, general presentation, and being inspected by a Big
Four review firm are unequivocally related to the think IFRS division.
Our survey moved by a finding in the prior shaping reveals that affiliations that
unmistakably change from national accounting standards to general accounting
measures, for instance, IFRS, need to experience benefits by dispersion. Barth et al.
(2008), using an unfathomable case from twenty-one countries, nd that rms ardently
understanding IFRS general experience less preferred standpoint affiliation, all the all

17

the more pleasing event confirmation, and more fundamental regard relevance than do
put forth defense rms applying neighborhood accounting rules (Senyigit, 2014).
1.4.2 Developing Countries
They assume that countries with small antagonistic to power rights will most
likely understand IFRS for two reasons. In any case, countries with little undermining to
administrator rights may see the assignment of IFRS (a holding conduct) as a way to
deal with overseeing upgrade financial power validation. They will pledge themselves to
a reporting and accounting standard that outfits evidence with redesigned likeness and
fulfillment. 8 Second, since family oriented firms are more customary in a bad money
related expert certification countries, the centralization of family proprietorship and
rheostat cripples marginal shareholders' involvement against controlling shareholders.
Bearing in mind, the cost and length of real 'or designed to development and the
potential snag from family-oriented firms, countries with low against administrator
privileges may grasp IFRS as a way to deal with oversee redesign marginal
shareholders rights rather than change or make incapacitating to chief laws or
headings. The believability of the sales is a wellspring of verbal experience inside both
industry also, adept get-together. The most obvious civil argument concerns
genuineness of TFV. TFV is an accounting standard that stems from accounting
sharpen in the UK (HOLGER DASKE, 2008).
The motivation driving understanding TFV was to make accounting information
more regard huge and all the even more obliging in offering information to pick stock
expenses. Notwithstanding, there are distinctive different customers of cash related

18

verbalizations who have to a lesser degree a fervor for TFV. Governments ask for
evaluating information from affiliations; debtholders ask for information about
associations' ability to profit their commitment and laborer's affiliations oblige
information to deal with work contracts.
Forces of lighting up request from different contracting parties affect the result of
money related reports. We expect that countries that give high (poor) access to the
family capital markets for foreign cash related specialists are more (less) subject to
understand IFRS. The adjoining financial markets with high access for outside money
related managers should have a high rate of remote researcher proprietorship, also,
control. Outside assessors evaluate neighboring firms by looking unit budgetary reports
in a consistent way, degrees to those of distant mates. Since, the path toward isolating
cash related stories designed under different accounting, benchmarks eats up time and
money.
The family capital markets with cheap access to remote financial specialists are
had Furthermore, controlled by neighboring money related forces who have foreign,
isolated stocks. The magnitude to which the governing shareholders of firms are
resident in, for the most part, close capital markets perceive essential private control
benefits, their qualities to rejuvenate decisions of government to make the financial
markets open to outside examiners might be low. Consequently, locals are starting now
committed to making their capital markets more open for complete investigators will
most likely deliberately understand a uniform general accounting standard.

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1.5 Empirical evidence from mandatory IFRS adoption

1.5.1 Developed Countries
In the developed states, the essential parts of interest and separate all IFRS
adopters into three solicitations: required, new think, additionally, considers adopters.
We make a twofold marker variable, First-Time Mandatory, that goes up against the
estimation of one for money related years are completing on or after the adjoining IFRS
choice date (when in doubt December 31, 2005) for firms that don't report under IFRS
until it observes the chance to be particularly required.
This variable should get the typical capital-pitch impacts around the IFRS plan
businesses that are on an exceptionally fundamental level constrained to understand
IFRS. It is the managed variable of interest. We show isolate marker parts for firm-year
perceptions from firms that report under IFRS before the immediate change. These
terms get any incremental capital-propel impacts for legitimate on time and late consider
adopters once IFRS reporting required for all relationship in the economy.
The second step is to pick baser elements that catch the potential capital-declare
effects of the IFRS organize the delineated area. Zero Returns is the level of trading
days with zero all around requested stock returns out of all possible trading days in an
ensured year. Respect Impact is the yearly point of convergence of the illiquidity
measure. Add up to Exchanging Costs are a gauge of total round trek trade costs.
Offered Ask Spread is the annual concentration of dependable referred to spreads,
measured toward the end of each trading day as the differentiation between the offers
and ask cost limited by the midpoint.\

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The cost of capital growth for IFRS adopters concerning the benchmark firms
around the presentation of the charge (by 35 show centers) and this refinement is
genuinely enormous. Tobin's q maybe increments for both required IFRS adopters and
benchmark firms. However, the refinement in the detachments is not by any stretch of
the imagination enormous. Along these lines, the cost of capital that is, do not pass on
declare of principal capital-report benefits. One potential illumination is that both the
cost of capital and respect valuations are all the more unprotected against feeling
impacts (Anon., 2007).
1.5.2 Developing Countries
The developing countries chronicle an underlying negative relationship between
the choice of IFRS and researcher security. In specific, countries with frail shareholder
confirmation will presumably understand IFRS than are countries with strong
shareholder attestation. The exposures are clear with the view that countries with
delicate shareholder certification security themselves to overpowering accounting
measures looked for after to get to general money related experts and business
domains. Our trial examinations furthermore brace the see that countries giving better
access to their securities trades for far-reaching budgetary specialists are more
orchestrated to understand IFRS.
The confirmation of IFRS is likely observed as an approach to manage impel
introduction strategies and accounting structures, to redesign the blend of family
markets into world markets, and to like this breathe life into money related change. To
upgrade cash related reporting quality, the plan of IFRS by a country is an essential
walk. As a couple of countries around the world correct their approval and organization

21

groups to reinforce the presentation of IFRS, we recommend that our results likely
mirror the joint effects of these institutional changes and the IFRS charge.
Investigating this figure and the piece of countries' usage organizations, which
still shift stunningly across over IFRS countries, is a captivating street for future
research. Additionally, we demonstrate closeness impacts as a potential hotspot for the
capital-showcase impacts, yet cannot give quantifiable support to this elucidation.
Future research could examine this issue and the nearness of positive externalities in
more detail and furthermore, review whether IFRS are in conviction executed in ways
that upgrade worldwide relationships.
Also, I recommend that the market's doubt of money related outcomes of the
IFRS arrange furthermore that transitional effects around the primary gone through
gathering could accept a section in our results. For instance, we offer these results as
an elucidation that suits the cost of capital and Tobin's q comes to fruition with the
liquidity revelations. While it seems, by all accounts, to be possible that liquidity
mediators are less subject to desire and transitional effects, this issue warrants help
examination. Finally, we observe that our audit is limited to a for the most part short day
and age after the presentation of mandatory IFRS reporting. Like this, it remains to be
seen whether the effects upheld as time goes on (Ole-Kristian Hope, 2006).

1.6 The consequences of IFRS adoption

1.6.1 Information quality
This empirical study shows on IFRS adoption shows that there are empirical
evidences, which present a strong opinion that the adoption of IFRS has a plausible

22

effect on the quality of information. It is an implicit fact that whenever information

regarding companies financials disclosed in statements according to the guidance of
IFRS, always has a positive effect and considered as greater quality (significantly
relevance value, lesser level of outcome management) than information disclosed in
statements according to guidance of other local standards (Nulla, 2014). The empirical
evidences also have a strong opinion that there are some important factors that affect
the effect of IFRS adoption on the quality of information and these factors includes
characteristics of companies, characteristics of countries and the difference between
IFRS and other local standards (Lourenco & Castelo Branco, 2015). Different empirical
studies present that effect of IFRS adoption on information quality is also majorly
subject to those companies that have huge diffusion in capital and shares of the
companies are available for trade on the U.S based stock exchanges and stock
exchanges of other highly reconnaissance countries. There are also empirical
evidences, which show that the effect of IFRS adoption is huge in companies that are
less recurrently tracked up by predictors and on smaller companies with less visibility,
particularly when the analysis perspective analysts is attracting foreign investors.
1.6.2 Harmonization/Comparability
Before the inception of IFRS, it was considered as very difficult for the
professionals or accountants to better understand the financial reports. Most of the
countries were having adherence to their own local accounting standards and did not
place reliance on internationally accepted accounting standards. After the adoption of
IFRS, most of the organizations place reliance on internationally accepted accounting
standards that increased the transparency of their financial status, which made it easier

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for the analyst and other companies to compare their financial reports with other
companies (Zakari, 2014). The purpose of adoption of IFRS arose by the companies
because they have acknowledged the fact transactions between countries are
increasing and all countries use different accounting standards, which make it difficult
for them to understand each others accounting treatment. The empirical evidences
have presented a fact that may be there are increasing trend for comparability of
financial reports but disparities in reporting standards in different countries would reduce
that increasing trend. The empirical studies place reservations that consistent
implementation of the standards is necessary for the adoption of IFRS to increase
comparability hence, only adoption of IFRS is not sufficient. Companies need to make
the necessary changes to improve comparability after they adopt IFRS.
1.6.3 Capital Allocation/Market Efficiency
There are certain empirical evidences, which show adoption of IFRS has a
positive effect on the capital allocation. It is implicit that there is a positive effect when
IFRS adoption progresses functioning circumstances in the capital market, because it
pointers to lower cost of capital, lower synchronicity of actions, attraction of institutional
investors and foreign investors, including others. If any organization has practices to
document an increase in stock price informativeness for voluntary IFRS adopters, which
suggests that the benefits associated with IFRS adoption accrue more to those firms
that are more likely to have incentives to improve their reporting quality (Loureiro &
Taboada, 2012). Most of the benefits associated with IFRS adoption accrue to firms
from European Union countries, although there is evidence that the benefits extend
beyond EU countries for voluntary adopters. Finally, this review documents an increase

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in stock price in formativeness for compulsory adopters in countries with stronger public
implementation. The results are robust to substitute proxies for stock price
informativeness and voluntary IFRS adopters.
1.6.4 Economic Growth
In the recent years, the adoption of IFRS at the international level could become
one of the regular analysis and discussion in the field of accountancy, scholars,
investors and other financial based information. Many different research studies have
scrutinized the significances of IFRS adoption. After several years of empirical analysis,
some literature reviews on the subject were published by journals in the accounting field
(Latifah et al., 2012). The adoption of IFRS closely related to economic growth pattern
because if a nation has reliance over internationally accepted accounting standards it
would create streamline in the reporting by every company or organization. It will be
easier for the regulatory authorities of the country like Tax Department, exchange
commission and other governmental departments to control irregularity in reporting and
identify any fraud with the help of collective analysis. If every company in a country
follows the same standard rules of financial reporting as directed by the government
then it will be easier for the companies to compare themselves under the same currency
and under same reporting rules (Loureiro & Taboada, 2012). Some economists also
bring

together the

dissimilarity between

intended

and

unintended

economic

significances, depending on whether they are related to stated objectives of regulator..

They pressure that IFRS had a limited effect on financial reporting, due to a significant
non-compliance, perseverance the choice of national accounting standards, and
nonappearance of development concerning limpidity of outcomes and comparability

25

measurements. On the other hand, they detected strong evidence that mandatory IFRS
adoption brought macroeconomic benefits and benefits for the capital market. Hence,
overall discussion shows that the adoption of internationally accepted accounting
reporting standard i.e. IFRS by the organizations of country would identify the
misconceptions, fraudulent reporting, misstatements, frauds, and error that create
growth in the economy because for that purpose every follower will follow the rules to
avoid legal proceedings against it.
1.6.5 Cost of Capital
After the inception of IFRS, one of the most important advantages was said to be
the lower cost of equity capital. With IFRS, the quality of disclosures is higher, which
creates fewer information asymmetries, which is supposed to lower the cost of equity
capital. In previous literature, much investigation to find out whether this is true or
whether it is just something is said to lure firms into adopting IFRS (Epstein, 2009). That
regulator, accountants, and users of financial reports all agree that the cost of capital
will be lower for companies that adopt IFRS because IFRS is supposed to improve
transparency and create higher quality standards and information. Higher information
quality can lower the information asymmetries between managers and investors or it
can lower the estimation risk of future returns (Lourenco & Castelo Branco, 2015). This
increases the liquidity and lowers the rate of return. However, recent research has
shown that this is not always the case. Adopting IFRS does not necessarily lower the
cost of capital. It also depends on the interpretation of the standards and the
enforcement of the standards. There are two main principles that can determine
whether there is a relation between the adoption of IFRS and lower cost of capital for

26

the adopting companies. First, the quality of information must actually improve for
companies that adopt IFRS compared to local GAAP. Second, this higher quality
information must actually lower the cost of capital for adopting companies.
1.6.6 Earning Quality
It has been thoroughly researched by various researchers, like the research of
kirschenheiter and melumad demonstrated that the theoretical background of
accounting delineates earnings as the measure of values created by the firm.
However, the Statement of Financial Accounting Concept (SFAC) presents a concept
that financial reporting is majorly converging on information about the
performance of any organization, which is provided by measures of earnings and
its components. Furthermore, Statement of Financial Accounting Concept (SFAC)
interprets earnings quality based on the concept that how earnings quality would be
important for the readers of financial statement while performing decision-making
process (Kirschenheiter & Melumad, 2004). The earnings of the organization are used
to comply with various different objectives of the readers or users of financial
statements. Such objectives may include the quality of earnings describes the
performance of management to the readers, it also estimates the earnings power of
management, which can also create prediction over future earning of the organization
that would be useful for risk assessment process (Pascan, 2015). It has been noticed
that there is a great difference between previous research studies on the effects of IFRS
on the quality of earnings and academic literature, which provide the mixture of results
on the earnings quality and based on institutional and specific factors of the country.
Therefore, this research paper has objectives to provide evidence on the effects of

27

adoption of IFRS on the quality of earnings by considering at extraneous issuers in the

specific US context, since those are the first companies that are located in the US that
have been allowed to adopt IFRS. The results of research are to be applicable in a US
context is that

2. Kingdom of Saudi Arabia Institutional Framework

2.1 The Accounting Environment of KSA
Being the Islamic country or more precisely the home country of Islam, the
accounting regulatory department of Saudi Arabia has restricted the use of
internationally accepted accounting standards i.e. IFRS in the jurisdiction of Saudi
Arabia, because there is the system of Sharia implemented in the country. However,
different research studies on accounting system of Kingdom Sharia is not actually the
problem (barrier, limitation) for the adoption of IFRS in the country. The kingdom of
Saudi Arabia has been listed in some official and international reports for years because
of the major oil producer country in the world but it is the only country on the G20 list of
countries that does not permit or require the use of International Financial Reporting
Standards (IFRS) (AlMotairy & Stainbank, 2014). Accounting systems in Saudi Arabia
were established under the guidance and supervision of high professionals from the
developed countries. Even though in Saudi Arabia, the principle and structures of
accounting and other reporting procedures were predominantly constructed from the
applications of Western countries, the new accounting system has been restructured to
adapt the unique Saudi Arabian working environment. There are various factors in the
accounting environment of Kingdom that might explain how the new accounting system

28

emerges in the economy. This research study will primarily investigate that how the
three main factors that are the environment of the economy, policies of the tax system
and other international accounting standards and principles thoroughly affect accounting
and reporting systems in Saudi Arabia. As Saudi Arabia is a country that has many and
many natural resources, which include minerals, oil, and nature gas so that the
commodities of the natural resources have the mammoth impression on accounting
system in Saudi Arabia. According to the Organization of the Petroleum Exporting
Countries (OPEC), 18% of the world has demonstrated petroleum that was discovered
in Saudi Arabia. According to the statistics of 2013, the Kingdom of Saudi Arabia (KSA)
now ranks as the largest exporter of petroleum (Al-Beraidi & Rickards, 2003). Although
Saudi Arabia has the largest endless sand desert all around the world, the retributions
of oil and gas occupy most of its export revenues. For the reason that the national
revenue in Saudi Arabic depends on the export of petroleum, the revenue assessment
focuses on the annual production and the global price oscillation, which is different from
other developed countries like U.K. and U.S.A. However, currently this research study
throw light on the fact that regulatory department of Saudi Arabia for accounting and
reporting of financials required for insurance and banking companies to full conjunction
with IFRS, which is currently under consideration but it does not yet allow to listed
companies to maintain their records under the rules and regulations of IFRS.
The banking and insurance regulator in Saudi Arabia after the planning to adopt
IFRS requires from all insurance companies and banks of Saudi Arabia whose shares
are trading on the Saudi Stock Exchange, to made and publish the Annual financial
statement in accordance with the policies and procedures of International Financial

29

Reporting Standards IFRS. Whereas the authorized department further directed that all
other public listed, unlisted, and private companies must follow the instructions of
generally accepted accounting standards in the Kingdom of Saudi Arabia, which is
published by the Saudi Organization for Certified Public Accountants (SOCPA). The
SOCPA has approved the transition plan of IFRS that requires from listed organizations
to report their financial statements using national accounting standards that are closely
associated with complete IFRS. Whereas the department further directed that, other
unlisted organizations will be required to under IFRS for SMEs as adopted in the
Kingdom of Saudi Arabia.

2.2 Background on KSA Stock Market

In the previous few years, many different research studies presented empirical
evidence about the analysis of stock market of the Kingdom of Saudi Arabia and effects
of IFRS adoption on the situation of the stock market. As mentioned in the previous
sections, the benefits or advantages from the adoption of IFRS advances functioning
conditions in the capital market of Saudi Arabia, because it pointers to the lower cost of
capital, lower synchronicity of actions, attraction of institutional investors and foreign
investors, including others. Being the Islamic country, the stock of market of KSA was
also running under the rules and regulations of Sharia and still the stock market system
of the kingdom is running under Sharia (Baltaji & Hankir, 2015). However, different
research studies threw light over the benefits of IFRS adoption by the stock market
sector of KSA. Readers or a user of financial statements of any organization mainly
focuses towards the strength of stock status of the organization in the market (Epstein,
2009). The adoption of IFRS enhances the factual credibility of financial statements of

30

Saudi Arabian organizations for the intended users or readers. Under the rules and
regulations of IFRS, the performance of management would reveal to the public that
provides the understanding of authentic accounting and reporting system in the
organization. The appealing performance of management creates importance of
organization for the users that will ultimately enhance the stock position of organization
(Latifah et al., 2012). The impact of internationally accepted accounting standards i.e.
IFRS on the world stock position is clearly presented in the current world economic
situation thus the regulatory authority for the accounting and reporting of financial of
KSA should take radical steps for the implementation of IFRS in the country.

2.3 Benefits and Challenges of Adopting IFRS in KSA

According to the facts, the rules and regulations of running the business and
accounting standards in Saudi Arabia are not considerably predisposed by Sharia,
therefore, the IFRS adoption in accounting sector of the Kingdom of Saudi Arabia might
subsidize to accomplishing different important purpose of Zakat in the society. For
example, International Financial Reporting Standards (IFRSs) are concerned with use
fair value at historical cost, which means fundamentally that all items for the purposes of
Zakat should be maintained according to working of fair value (khan, 2016). These
outcomes put forward that the religious influence, predominantly in relation to Islam, can
be viewed, as a considerable ethnic impression on accounting systems in developed
and developing countries, which does not seem to influence the accounting system in
Saudi Arabia. The different economists have an overview that the accounting system
should fundamentally exist to attend the purposes of Zakat but this is not the case in
Saudi Arabia. As a result, the IFRS adoption in Saudi Arabia should not create a

31

problem in terms of the objectives of Zakat as a religious obligation. Moreover, IFRS

implementation may help make calculations of Zakat more accurate by using the
concept of fair value. The different research studies argue that the use of IFRSs in
Saudi Arabia may be significantly subjective to reservations among lease-based
organizations and the DZIT. Currently, different practicing professionals have an
overview that, in practical situation, finance leases are the primary grounds of the major
skirmish between Sharia and IFRSs. According to Sharia, the items that are classify as
receivables should be disclosed as assets (Al-Beraidi & Rickards, 2003). Moreover, for
long-term financial assets IFRS institute amortization at fixed rate, which is contrary to
Sharia law that only allows selling them and making a profit. However, under the rules
and regulations of Islam, this is not legitimate and the financial instrument should be
registered at the present value without the application a future discounted rate. This
research study is reliable with the studies of different Muslim scholars, who equate the
procedures of loan on interest at the time when new organizations incorporated to be
listed on the stock market of Saudi Arabia and then their stocks became presented to
the public. The scholars found that most organizations still had loans with interest;
therefore, they contend that making investment in these organizations does not act in
accordance with with Sharia and was, therefore, haram (Nurunnabi, 2015).

2.4 History of Accounting Standard Setting in KSA

The accounting standard setting in KSA was primarily controlled by or under the
supervision or guidance of certain rules and regulations of SAMA, IFRS, and SOCPA.
SAMA is the Saudi Arabian Monetary Agency that was established in 1952, which acts
as a banker to banks, issue currency, manages the monetary system, and supervises

32

finance and accounting companies. The principles of SAMA are envisioned to support
different organizations to enhance the frameworks of their corporate governance system
that will ultimately help board member and senior managers to oversee their workings.
That is why SAMA issued mandatory principles to all companies in the Saudi Arabia
maintain the practical structure of corporate governance right according to the
internationally recognized corporate governance.
The banking and insurance regulator in Saudi Arabia after the planning to adopt
IFRS requires from all insurance companies and banks of Saudi Arabia whose stocks
are trading on the Saudi Stock Exchange, to made and publish the Annual financial
statement in accordance with the policies and procedures of International Financial
Reporting Standards IFRS. Whereas the authorized department further directed that all
other public listed and unlisted and private companies must follow the instructions of
generally accepted accounting standards in the Kingdom of Saudi Arabia, which is
published by the Saudi Organization for Certified Public Accountants (SOCPA). The
SOCPA has sanctioned the transition plan of IFRS that requires from listed
organizations to report their financial statements using national accounting standards
that are closely associated with complete IFRS. Whereas the department further
directed that, other unlisted organizations will be prerequisite to under IFRS for SMEs
as adopted in the Kingdom of Saudi Arabia.

33

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