Canada’s Mandatory Adoption of IFRS: Impact on Market-Based and Non-Market-Based Accounting Quality

• In Event: Potpourri I

Abstract

Canada adopted International Financial Reporting Standards (IFRS) in 2011. We empirically assess the impact and consequences of this mandatory change by examining whether the conversion to IFRS improved the quality of market-based and non-market-based accounting information for a comprehensive set of Canadian companies on the Toronto stock exchange. Our findings reveal that market-based accounting quality (i.e., value relevance) decreased for the larger firms that belong to the S&P/TSX composite index but increased for the remaining smaller firms on the TSX after IFRS adoption. These differences are primarily attributed to the weakening (strengthening) relationship of book value to stock price for the larger (smaller) firms, rather than of earnings to stock price. This suggests that the goal of IFRS to provide improvement to the balance sheet was only achieved for the smaller firms. Prior research on Canadian firms has only examined the S&P/TSX composite index firms. For the non-market-based accounting quality measures of earnings persistence, earnings smoothing, earnings discretion, and the frequency of small losses to profits, we generally find that accounting quality also improved for the smaller firms that trade on the Canadian TSX exchange, but not for the larger firms that are included within the S&P/TSX composite index. This study illustrates the need for standard setters to be aware of differences among firms within the same country, which could lead to variations in the effects of IFRS. Finally, given the similarities of the Canadian and U.S. economies and their legal enforcement, U.S. standard setters and regulators will find the results of this study useful in deciding whether to adopt IFRS.

Authors

• Karin Ann Petruska, Youngstown State University

• Gulraze Wakil, Lakehead University