The Impact Of Onvergence With International Financial Reporting Standards(IFRS)on Accounting Conservatism In China

The purpose of this study is to investigate the impact of convergence with IFRS on accounting conservatism in China.More specifically,the author considers the impact of convergence with IFRS on conditional and unconditional accounting conservatism within the financial and non-financial sectors in China separately.In the main test,the author captures conditional and unconditional accounting conservatism using the Basu(1997)model.In addition,C_Score,G_Score,and the negative accruals measures are used in the additional tests.The theoretical comparison between old and new Chinese accounting standards suggests that new Chinese accounting standards enhance the main mechanism of conditional conservatism that is the impairment of assets.On the other hand,the theoretical comparison suggests that fair value accounting is the most frequent practice in the negative impact of convergence with IFRS on the degree of unconditional conservatism.Therefore,the author predicts that convergence with IFRS in China enhances conditional conservatism and reduces unconditional conservatism.From a sample of 26,755(740)firm-year observations drawn from Chinese non-financial(financial)sector over the period from 1997 to 2017,the author documents,as predicted,an overall increase(decrease)in the degree of conditional(unconditional)conservatism after convergence with IFRS in both financial and non-financial sectors in China.More importantly,the findings shed more lights on the role of new Chinese standards on good news recognition.In this regard,the author predicts and finds a significant reduction in good news recognition after the 2006 reform,reflecting a significant increase in the level of conditional conservatism.In contrast,the recognition of good news is found to be significantly higher than bad news recognition under old Chinese GAAP,reflecting aggressive accounting numbers.The author concludes that convergence with IFRS in China enhances impairment of assets resulting in an increase in the level of conditional conservatism on the one hand,and increase the use of fair value accounting resulting in a reduction in the level of unconditional conservatism on the other hand.The current study covers many gaps related to the current literature on the economic consequences of convergence with IFRS on accounting conservatism.First,the current study enriches the literature concerning the relationship between IFRS and both types of accounting conservatism.Second,investigating the economic consequences of convergence with IFRS in China provides the existing literature useful sights concerning this topic from developing countries perspective.Third,the current study contributes to the literature by shedding more lights on the effect of convergence with IFRS,not the full adoption of IFRS,on accounting conservatism.Fourth,the present study extends the literature by including the financial sector in the investigation.In this regard,investigating this topic within the financial sector provides the accounting literature useful insights,and opens the door to expand investigation within financial sector concerning IFRS and accounting conservatism.This study is unique as it conducts a comprehensive investigation conserning the impact of convergence with IFRS on accounting conservatism in many dimensions.At the first place,the present study conducts a theoretical comparison between new Chinese accounting standards and old Chinese GAAP,from accounting conservatism perspective.Second,the current investigation includes both types of accounting conservatism,namely conditional conservatism and unconditional conservatism.Third,the present study takes into account the impact of convergence with IFRS on accounting conservatism within the financial sector,not only the non-financial sector.Finally,it covers a relatively more extended period,from 1997 to 2017.