The Trade-off between Accounting Comparability and Representational Faithfulness with Mandatory IFRS Adoption

Abstract

In this paper, I examine the impact of the mandatory adoption of International Financial Reporting Standards (IFRS) on accounting comparability and representational faithfulness. I document empirically that both cross-country and within-country accounting comparability increase while representational faithfulness decreases with mandatory IFRS adoption. Inconsistent with my prediction, I find that the impact of IFRS adoption on within-country comparability is not conditional on the flexibility of the local accounting standards relative to IFRS. Moreover, the results suggest that while all firms experience decreases in representational faithfulness, firms with higher quality local accounting standards than IFRS experience fewer decreases in representational faithfulness than firms with lower quality local accounting standards than IFRS. Overall, my results provide evidence of a trade-off between improved cross-country accounting comparability and reduced representational faithfulness among all adopters of IFRS. The empirical evidence from this study shall be of interest to policy and accounting standard setters