There is great ambiguity on the true representation of the ‘’adoption’’ of International Financial Reporting Standards (IFRS). What constitutes the ‘’adoption’’ of IFRS? At what point can a country, company or entity claim to have adopted IFRS? What is the best measure for IFRS adoption?

International diffusion literature and transnational governance literature provides insights as to the point of departure of how global norms are translated into local laws. It suggests that laws, norms, ideas or global regulations when diffusing turn to be reshaped and edited as they are transformed into local practices. To be exact, actors translate ideas, recombine new, externally given elements and old locally given ones to form local laws. Scholars in this arena argue that, in this context, never can we suggest that passive adoption of global standards has taken place. Yet, in many other contexts, actors at both the local level and the transnational level have tended to refer to such process as ‘adoption’ as opposed to a reflection of the variant of the law, idea or norm so implemented. In many cases, only portions of the diffused law or standards are implemented. Nevertheless, actors often refer to such as adoption as opposed to a modification of the diffused law. At other times, different actors refer to the modification of the diffused law as the adaptation of the law. This ambiguity so created has led to mixed results when looking into the idea of International Financial Reporting Standards.

In the global accountancy arena there have been several calls for the world to embrace the idea of a single global high quality accounting standard- thus IFRS. These calls have been stronger following the recent financial crisis as the world continues to pursue globalization strategies and capital flows across borders became even more pronounced. In this direction, accounting standard setters have been working to design high quality accounting standards that is applicable by nearly every country irrespective of the unique economic and cultural conditions that confront these entirely diverse countries and continents. These standards promulgated by the International Accounting Standards Board (IASB) has however, been applied in different ways than that put forth by the global accounting standard setter (IASB). In this blog entry, it is my aim to try to provide some lines of reasoning on the true meaning of IFRS adoption. I do not claim that this is the first of such arguments. However, it is my claim that global standard setters, local actors responsible for the implementation of IFRSs have often referred to entirely different versions of IFRSs when referring to IFRS adoption. If indeed IFRSs were adopted, we should expect a single version of the standard in all the jurisdictions that claim to have adopted the standards.

What does IFRS adoption mean?

A starting point to answering this question is to refer to the standard setter’s definition of IFRS adoption. According to the International Accounting Standards Board (IASB), IFRS adoption refers to the state whereby a country, company, or institution replaces its accounting standards with those of IFRS and states categorically that their financial statements are in full compliance with IFRS as issued by the International Accounting Standards Board (IASB). It means de facto adoption or a word-for-word application of IFRS. It does not mean an application of significant portions of IFRS together with other national accounting standards. The use of IFRSs as bases for the preparation of national accounting standards does not also constitute IFRS adoption. An elimination of certain portions of the standards or alternative treatment of certain transactions in the standards equally does not amount to IFRS adoption.

In the just ended 29th session of the Intergovernmental Working Group Experts on International Accounting and Reporting (ISAR) of the United Nations conference in Geneva, I posed this question the chairman of the IFRS interpretations committee Wayn Upton. To Upton, at a certain point, countries will issue their own national accounting standards with only a change in the heading of the standards. For instance in the UK and Australia, they merely change IFRS 1 to mean FRS 1. Similarly, the Australian version of IFRSs has been the same wording and numbering as those of IFRS. IFRS1 is the same as AASB1, IFRS 2 is the same as AASB 2 and so on.

Nobes and Zeff (2010), give a definition of IFRS adoption to mean the full-scale voluntary use by a company of IFRS as issued by the IASB before such use become compulsory or mandatory in its jurisdiction. By this definition, two forms of IFRS adoption can be observed. First, a voluntary application of the IASBs standards without any alteration of the standards and second a mandatory adoption of IFRSs where legal provisions requires jurisdictions to apply IFRS as issued by the IASB to the latter.

Beyond these two types of IFRS adoption, other countries often use another form of adoption. This form of adoption reminds us of the due process through which International Accounting Standards are produced. The due process in setting International Accounting Standards is that, constituents identify areas in financial reporting that needs to be improved. Following this, the technical staff at the IASB develops a discussion paper that issued to the public for comments over a limited period. They then design the proposed standard into an Exposure Draft, which is showcased to the public for further comments and public hearings before a substantive IFRSs can be pronounced. Notable among countries that have adopted this due process are Australia, Canada and New Zealand. In this approach, adopting countries will first translate IFRS into their local standards following the due process of the IASB. Whether by content or by process, IFRS adoption refers to the complete replacement of IFRSs with any other standard a country might have.

Let us for a moment look at the terminology, which the IASB uses when referring the IFRS adoption. The board has on several occasions referred to different forms of IFRS applications yet in fact meaning IFRS ‘’adoption’’. In their recent annual report, they provide

Table 1:  IFRS Application in Some developed countries. Source: IFRS Foundation annual report 2011 pg. 3

Table 1: IFRS Application in Some developed countries. Source: IFRS Foundation annual report 2011 pg. 3

This list suggests that the IASB has in many instances contradicted themselves when they speak of IFRS adoption. Take China for example; can we say that they have adopted IFRSs? The answer is a no as the Chinese have their own national accounting standards. It is true that Chinese National Accounting Standards are now closer to IFRSs than ever before. However, in essence, China cannot claim to have adopted IFRS.

Take the European Union for another example to see if indeed they have adopted IFRS. On many occasions, the EU endorsement process of IFRSs has resulted in the deletion, alteration or non-application of certain IFRSs as issued by the IASB. Typical examples include the so-called IAS 39 carve outs during the financial crisis and was eliminated by the EU and the recent IFRS 8 on segment reporting which the EU has not yet endorsed. Apart from that, the work of Nobes (2011) indicate that nearly all European listed companies do not say in the auditor’s report that their financial statements are in full compliance with IFRS as issued by the IASB but that they are in full compliance with the version of IFRS as adopted by the EU.  Following this logic and extending the list to Canada, Australia and New Zealand it is clear that these countries cannot be classified as IFRS adopters as they have eliminated either some IFRS provisions or alternatives or have renamed the standards in accordance with their national GAAP.

Africa the model of IFRS Adoption?

The African continent has to a lesser extent welcome IFRSs with mix acceptance levels. This has largely been the case due to the variations that exists in the continent based on past colonial relationships. However, the case of IFRS adoption seems rather clear on the African front as opposed to the vast majority of developed countries that claim IFRS adoption. A look at the countries that have adopted IFRSs in Africa indicate that most countries indicate full compliance with the provisions of IFRS as issued be the IASB. As at the November 2012, 15 countries in Africa have adopted IFRSs. These countries include Ghana, Nigeria, Sierra Leon, South Africa, Kenya, Malawi, Tanzania, Botswana, Zambia, Lesotho, Mozambique, Uganda, Namibia, Swaziland and Zimbabwe.


Figure 1 IFRS Adoption Map in Africa. Data Source: PwC IFRS Map, IASB Annual Reports, IAS Plus. Countries labeled 1 represents adopting countries and countries labeled 0 are non-adopting countries. Last Accessed 18th December 2012

The adoption of IFRSs without any modification by many African countries is vilified by the institutional theory literature of DiMaggio and Powell`s work on institutional isomorphism. It suggests that, when faced with uncertainty and less clarity, countries or decision-making organizations bend towards what is already institutionalized in the organizational field. It presents us with the case where many less developed countries faced with resource limitations and unable to evaluate options of the costs and benefits of different accounting standards rely on the standards of the IASB and apply them without any modifications. Contrary to this view, countries that have the economic power to make such alternative comparisons of IFRS versus other accounting standards turn to choose several standards that then become their substantive standard. Take the Australia for an example. One would have thought that given their strong ties with the British Accounting culture, IFRS would be adopted to the extent of those issued by the IASB. Instead, we find modified versions of IFRSs in Australia.