CHAPTER I INTRODUCTION

Transcription

1 1.1.Introduction 1.2.Financial Reporting CHAPTER I INTRODUCTION 1.3.Qualities of Financial Reporting Information 1.4.Financial Reporting in Banking 1.5.Qualities of Financial Reporting in Banking 1.6.RBI Guideline of Financial Reporting 1.7.RBI Prudential Norms 1.8.Review of Literature Review of published articles Review of project and working papers Review of research theses Review of books 1.9. Research Gap Statement of the Problem Need for the Study Contribution of the Present Study Objectives of the Study Hypotheses for the Study Research Variables Definitions of variables Research Methodology Limitations of the Study Chapter Layout 1

2 CHAPTER I INTRODUCTION 1.1.Introduction India s services sector has matured considerably during the last few years and has been globally recognized for its high growth and development. This sector has been growing at an annual growth rate of about 28% during the last 5 years. Services exports amounted to a meager US$ 8.9 billion in 1997 but over the year s services exports have grown substantially. There has been rapid growth in the services exports from the year The exports have grown up from US $ 19.1 billion to US $ 73 billion in 2006 and 112 billion in Presently services sector account for about 63% of India s GDP. Strong and consistent emphasis on self-reliance in its economic development programs over the years by the Government of India. Having enabled India to build up a huge and versatile cadre of professionals with expertise and skills across a vast and wide-ranging spectrum of disciplines like Health Care, Tourism, Education, Engineering, Communications, Transportation, Information Technology, Banking, Finance, Management and a host of others, a sizeable part of this workforce of professionals makes up the country s growing consultancy sector, which is offering its accumulated experience and expertise at home and abroad. Banking industry became one of the fastest growing sectors after the first phase economic reforms of 1991.The banking sector has played a vital role in the overall economic development of the country right from the time of nationalization. Due to globalization the Indian public sector banks have been facing keen competition from the private sector and foreign banks. As is well known survival of the fittest is the core theme in the global market today. Sustenance and growth of public sector banking is very much essential for balanced and effective economic development. Increased 2

3 competition has made this a challenging task. It is imperative that there is urgent need to strengthen the Indian banking sector. Financial reporting is the method that a firm uses to convey its financial stability to the marketers, investors and other stakeholders. The objective of financial reporting is to provide information on the changes in a firm s performance and financial position that can be used to make financial and operating decisions. In addition to being a management aide, analysts use this information to forecast the firm s ability to produce future earning and as a means to assess the firm s intrinsic value. Other stakeholders such as creditors, brokers, public, and government agencies will use financial statements as a way to evaluate the economic and competitive strength. Accounting and financial reporting evolved independently and often very differently in different countries. Practice, regulation and especially the mode of regulation differed and often varied greatly in these countries. Accounting, especially appropriate and relevant accounting, is a critical tool and an information source in any country's efforts towards economic growth and development (Kapaya, 2000). Initially, financial reporting was mainly confined to internal reporting. It provided company's owners with a vehicle to manage the company. Later on, in the early 1800s, private capital alone was insufficient to finance business activities. Capital was gathered from outside source the company and the owners delegated to managing the function to directors and provided them with the necessary authority to run the business activity. This resulted in the extension of accounting from internal financial reporting system to external financial reporting system. On the other hand, the structure of annual reports and financial reporting has changed dramatically in recent years. Today, annual reports are no longer restricted to 3

4 the financial statements, but encompass a broad array of additional matters that must also be disclosed. No longer focused on historic results, it now includes prospective elements, such as guidance on future revenue and earnings targets. Moreover, disclosure of a growing number of non-financial performance metrics is being required, together with an ever-increasing number of financial metrics. Today, financial position reporting has a direct influence on the manager's decisions and it is important for them. In fact, financial reports provide a picture of how the firm runs and can also be a way to monitor the business unit and its activities from the perspective of management and the board. External financial reporting should be able to present such a view to individuals, shareholders, creditors etc. The primary objective of financial reporting is to provide high-quality financial reporting information concerning economic entities, useful for economic decision making (FASB, 1979; IASB, 2008). In other words, providing high quality financial reporting information is important because it will positively influence capital providers and other stakeholders in making investment, credit and similar resource allocation decisions enhancing overall market efficiency (IASB, 2008). Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. There was no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, and later on came to the fully regulated by the government. The organized banking sector works within the financial system to provide loans accept deposits and provide other financial services to their customers. As it is known, the accuracy of the financial information increases the qualities in competition relevance, reliability, understandability and comparability. So, 4

5 stakeholders such as investors and creditors can make better decisions based on qualitative financial reporting information. 1.2.Financial Reporting The end product of accounting is financial reporting. Financial reporting is defined as "communication of published financial statements and related information by a business enterprise to third parties (external users) including shareholders, creditors, customers, governmental authorities and the public". It is the reporting of accounting information of an entity (individual, firm, company, government enterprise) to a user or group of users. Company's financial reporting is a total communication system involving the company as issuer (preparer); the investors and creditors as primary users, other external users; the accounting profession as measures and auditors and the company law regulatory or administrative authorities. Financial reporting is not an end in itself but is a means to certain objectives. The primary objective of financial reporting is to provide economic information to permit users of the information to make informed decisions. Users include both the management of a company (internal users) and others not involved in the daily operations of the business (external users). The external users usually do not have access to the detailed records of the business and don t have the benefit of daily involvement in the affairs of the company. They make their decisions based on financial statements prepared by management. According to the FASB, financial reporting should provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions (SFAC, 1978). The objective of financial reporting are to provide information about the financial position (balance sheet), performance (income statement), and change in financial 5

6 position (cash flow statement) of an entity. This information should be useful to a wide range of users for the purpose of making economic decisions. 1.3.Qualities of Financial Reporting Information As stated earlier, the objectives of financial reporting are concerned, in varying degree, with decision-making made by various users. However, there is a need to know that makes financial information useful for decision-making, i.e., what qualities or qualitative characteristics are needed to make the information useful and to help in achieving the purposes of financial reporting. Informational qualities or qualitative characteristics make information reported through financial reporting a desirable commodity and guide the selection of preferred accounting methods and policies from among available alternatives. It is those qualities that distinguish more useful accounting information from less useful information. For financial information to be useful, it must possess two fundamental qualitative characteristics relevance and faithful representation (reliability). The quality enhancing characteristics are comparability, verifiability, timeliness and understandability. These characteristics enhance the decision-usefulness of financial information reporting that is relevant and faithfully represented (IASB, 2008). Relevant financial information is capable of making a difference in the decisions made by users. Information may be capable of making a difference in a decision even if some users choose not to take advantage of it or are already aware of it from other sources. Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both (FRS, 2010). To be useful in financial reporting, information must be a faithful representation of the economic phenomena that it purports to represent. Faithful representation is 6

7 attained when the depiction of an economic phenomenon is complete, neutral, and free from material error. Financial information that faithfully represents an economic phenomenon depicts the economic substance of the underlying transaction, event or circumstances, which is not always the same as its legal form. Comparability is the quality of information that enables users to identify similarities in and differences between two sets of economic phenomena. Consistency refers to the use of the same accounting policies and procedures, either from period to period within an entity or in a single period across entities. Comparability is the goal; consistency is a means to an end that helps in achieving that goal. Understandability is the quality of information that enables users to comprehend its meaning. Understandability is enhanced when information is classified, characterized and presented clearly and concisely. Comparability can also enhance understandability. 1.4.Financial Reporting in Banking In years there was a slowdown in the balance sheet growth of Scheduled Commercial Banks (SCBs) with some slippages in their asset quality and profitability. Bank credit posted a lower growth of 16.6 percent in on a year-on-year basis but showed signs of recovery from October 2009 with the beginning of economic turnaround. Gross non-performing assets (NPAs) as a ratio to gross advances for SCBs, as a whole, increased from 2.25 per cent in to 2.39 percent in Notwithstanding some weakening of asset quality, the Capital to Risk Weighted Assets Ratio (CRAR) of Indian banks in terms of Basel II norms at 14.5 percent as at end March, 2010 was much higher than the regulatory prescription. However, the profitability of Indian banks as reflected by the Return on Assets (ROA) was lower at 1.05 percent in than 1.13 percent during the previous year. Notwithstanding 7

8 some knock-on effects of the global financial crisis, Indian banks withstood the shock and remained stable and sound in the post-crisis period. Indian banks now compare favorably with banks in the region on metrics such as growth, profitability and loan delinquency ratios. In general, banks have had a track record of innovation, growth and value creation. However, this process of banking development needs to be taken forward to serve the larger need of financial inclusion through expansion of banking services, given their low penetration as compared to other markets (RBI, 2010). 1.5.Qualities of Financial Reporting in Banking The users of the financial reporting need information about the financial position and performance of the bank in making economic decisions. They are interested in its liquidity and solvency and the risks related to the assets and liabilities recognized on its balance sheet and to it are off balance sheet items. In the interest of full and complete disclosure, some very useful information is better provided, or can only be provided, by notes to the financial statements. The use of notes and supplementary information provides the means to explain and document certain items, which are either presented in the financial statements or otherwise affect the financial position and performance of the reporting enterprise. Recently, a lot of attention has been paid to the issue of market discipline in the banking sector. Market discipline, however, works only if market participants have access to timely, relevant and reliable information, which enables them to assess banks activities and the risks inherent in these activities. 1.6.RBI Guideline of Financial Reporting The users of the financial statements need information about the financial position and performance of the bank in making economic decisions. They are interested in its liquidity and solvency and the risks related to the assets, liabilities recognized on its balance sheet, and to it's off balance sheet items. In the interest of full and complete 8

9 disclosure, some very useful information is better provided, or can only be provided, by notes to the financial statements. The use of notes and supplementary information provides the means to explain and document certain items, which are either presented in the financial statements or otherwise affect the financial position and performance of the reporting enterprise. The objective of RBI guideline for financial reporting is to provide a detailed guidance to banks in the matter of disclosures in the Notes to Accounts to the financial statements. Banks are encouraged to make more comprehensive disclosures than the minimum required under the circulars if they become significant and aid in the understanding of the financial position and performance of the bank. The disclosure listed is intended only to supplement, and not to replace, other disclosure requirements under relevant legislation or accounting and financial reporting standards. Where relevant, a bank should comply with such other disclosure requirements as applicable. Banks should disclose the accounting policies regarding key areas of operations at one place (under Schedule 17) along with notes to accounts in their financial statements. A suggestive list includes; Basis of Accounting, Transactions Involving Foreign Exchange, Investments Classification, Valuation, Advances and Provisions Thereon, Fixed Assets and Depreciation, Revenue Recognition, Employee Benefits, Provision for Taxation, Net Profit, etc. In order to encourage market discipline, Reserve Bank has over the years developed a set of disclosure requirements which allow the market participants to assess key pieces of information on Capital Adequacy, Risk Exposures, Risk Assessment processes and key business parameters which provide a consistent and understandable disclosure framework that enhances comparability. Banks are also required to comply 9

10 with the accounting standard No.1 (AS1) on disclosure of accounting policies issued by (ICAI). The enhanced disclosures have been achieved through revision of balance sheet and profit & loss account of banks and enlarging the scope of disclosures to be made in Notes to Accounts. In addition to the 16 detailed prescribed schedules to the balance sheet, banks are required to furnish the information in the Notes to Accounts : capital, investments, derivatives, asset quality, business ratios, asset liability management, exposures, and miscellaneous (RBI, 2011c). 1.7.RBI Prudential Norms The main elements of prudential norms are income recognition, assets classification, provisioning for loans and advances and capital adequacy. In keeping with latest practices at the international levels, commercial banks are not supposed to recognize their incomes from non-performing assets on an accrual basis and these are to be booked only when these are actually received. The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues substandard assets, doubtful assets and loss assets. The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking 10

11 a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. Capital acts as a buffer in times of crisis or poor performance by a bank. Sufficiency of capital also instills depositors' confidence. As such, adequacy of capital is one of the pre-conditions of licensing of a new bank as well as its continuance in business. 1.8.Review of Literature The researcher has carried out a review of literature relating to the financial management, financial reporting and general qualitative characteristics of financial reporting information and Accounting Standards at the national and international levels. An attempt was made to summarize the important studies such as research theses, books, articles, projects and working papers keeping in mind the relevance of the present study. Literature survey was used strong based to the research on qualitative characteristics of financial reporting information. Review of literature has been set in parts viz. Review of published articles Review of project and working papers Review of research thesis Review of books Review of published articles A number of articles relating to qualitative characteristics of financial reporting information have been published at the national and international levels in several journals. However, a few of the articles reviewed by the researcher have been listed below. 11

12 Stanga (1980) tested the level of perceived relevance and reliability of numerous items using different measurement bases. Findings showed that not only was there no trade-off between relevance and reliability, but that the two characteristics were actually positively correlated. Kahl and Belkaoui (1981) examined the overall extent of disclosure by 70 banks located in 18 countries. Their results indicated that the extent of disclosure was different among the countries examined, and that there was a positive relationship between size of the bank and the level of disclosure indicated. Mc and Stanga (1983) found that the two qualitative characteristics (relevance and reliability) are not independent of each other, that is, perceived relevance by users is dependent on the perceived level of reliability and participants did not perceive that a trade-off existed when the measurement basis was changed. Zeghal (1984) attempted to determine the effect of timeliness on the information content of interim and annual reports using Beaver s (1968) definitions of information relative stock return variability and relative volume of transactions. Results show that accounting reports with shorter delay have higher information content than those with longer delay. He also founds that the effect of delay on information content is higher in the case of interim rather than annual reports. Duncan and Moores (1988) researched the perceived relevance and reliability of current cost accounting, compared with historical cost accounting, and found that current cost accounting is both more relevant and more reliable. That is, no trade-off exists. Kennedy et al. (1995) examine the security of qualitative characteristic from viewpoint of preparers, auditors and users of financial information. The result of their 12

13 research showed that preparers and users of accounting information as compared to auditors give more emphasis on relevance. In relation of reliability there was no meaningful difference, although the auditors from subset of reliability had more tendencies on objectivity quality. Generally from auditors viewpoint, compared to relevance, reliability has much more importance. Basu (1997) presented a measure of conservatism using the approach of who regresses earnings on returns and allows the return coefficient to vary with the sign of the return to capture the differential timeliness with which earnings reflect good versus bad economic news (i.e. the asymmetrical timeliness of earnings in reflecting economic news).the estimated incremental coefficient on negative returns (incremental to the coefficient on positive returns), the Basu coefficient, his conservatism measure. He found that in Australia, there is a positive relation between the cost of debt contracting and accounting conservatism. This relationship is robust for controlling for other incentives for conservatism. He suggests that the preference of the IASB/FASB for neutral accounting is not necessarily substantiated, as conservatism is considered a costeffective contracting mechanism in a financial reporting environment that adopted the measurement perspective in an early stage. Haw and Wu (2000) examined the relation between firm performance and the timing of annual report released by listed Chinese firms for the period from the year 1994 to the year They found that good news firms release their annual reports earlier than bad news firms, and loss firms release their annual reports the latest. Ahmed (2003) examines the reports long delays in reporting to shareholders in three South Asian countries namely India, Pakistan and Bangladesh. He used a large sample of 558 company annual reports for the year comprising 115 reports 13

14 from Bangladesh, 226 reports from India and 217 reports from the Pakistan. He finds that the total lag between the financial year end and holding the annual general meeting is, on average, 220 days, 164 days and 179 days in Bangladesh, India and Pakistan, respectively. He came to conclude that, did not find any association between corporate characteristics and timely reporting. Leventis and Weetman (2004) argued that the decision of whether to report in a more timely fashion is akin to voluntary disclosure and apply general disclosure theories of Diamond (1996) to the issue of timeliness. They find that proprietary costs, information cost savings and the extent of favorable or unfavorable news disclosures contained in the information are all factors influencing reporting the reporting lag of Greek listed companies. Although corporate size was found to be statistically insignificant, whether or not the firm underwent a public issue of shares, change in profitability, industry concentration and the number of remarks in audit reports were found to be significant determinants of financial reporting timeliness. Hirst et al. (2004) investigated whether differences in the way in which commercial banks measure and report comprehensive income cause systematic variation in bank analysts investment risk assessments and valuation judgments. They found out that the valuation judgments of analysts distinguish between banks with different levels of risk only when fair value changes are measured completely (full fair value accounting) and included in a separate comprehensive income statement. Michael and Silvia (2006) observe that the tentative proposals feature an asset liability approach relying on measurement at fair values or at allocated consideration amounts. Based on conceptual, analytical, and empirical evidence, he come to concludes that the current proposals conflict with (i) qualitative characteristics of 14

15 information, (ii) objectives of financial reporting, and (iii) current and emerging regulatory framework. Main results show that the fair value approach yields more severe conflicts than the allocated consideration amount approach. The proposals ambivalently prefer relevance over reliability and can give rise to adverse incentives for investment decisions and earnings management. Jenice (2006) examined the usefulness (relevance and timeliness) of earnings announcements in two emerging markets, the Johannesburg Stock Exchange (JSE) and the Bolsa Mexicana de Valores Stock Exchange (BMV). A weighted least-squares regression is used to test the association of book values of earnings and equity with firm market value. He found that, on JSE and BMV, earnings and/or book value of equity are value relevant in explaining stock prices. He also found that this association is greater in 2000 as compared to 1998 on the BMV. Regarding timeliness, those found that earnings announcements are accompanied by unusually different returns on JSE, but not on BMV. Market infrastructure, specifically insider-trading rules, may explain BMV results. He suggested that accounting and market infrastructure interact and that such interaction is valuable input to the Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) in their deliberations regarding one set of accounting regulations for all countries. Daske and Günther (2006) point out that the quality of the financial statements of Austrian, German and Swiss firms which had already adopted internationally recognized standards (IFRS or U.S. GAAP). They provide evidence that disclosure quality increased significantly under IFRS in the three European countries and this result holds for firms which voluntarily adopted IFRS or U.S. GAAP as well as for firms which mandatorily adopted such standards in response to the requirements of specific stock market segments. 15

16 Nier and Baumann (2006) show that the banks that disclose more information are subject to more market discipline and have a greater incentive to limit their risk of default. They found that greater information disclosure led banks to hold larger capital buffers. Barth (2006) observes that the utilization of multiple measurements creates difficulty for analysis by financial statement users. It was noted that there was not one method that could be identified that would meet the objectives of financial reporting using the qualitative characteristics and cost constraints included in the conceptual framework. Cairns (2006) examined the extent to which International Financial Reporting Standards (IFRS) has moved toward full fair value accounting for the measurement of assets and liabilities. His findings included that fair value measurement was not used extensively in IFRS and was not being rapidly adopted in IFRS for the measurement of assets and liabilities. In addition, the requirements for fair value measurements that are included in the IFRS were for the most part required by United Kingdom Generally Accepted Accounting Principles prior to the adoption of IFRS. However, Cairns did conclude that more emphasis is currently being placed on the use of fair value to initially record transactions and to allocate transactions among identifiable components. Zyod and Rida (2006) looked aims to explain the importance of reports in decision making on the internal and external levels, to study the level of banks commitments to the disclosure of the obligatory accounting statements, to judge the disclosure according to standard No. 30 for banks and financial institutions and to explain the insufficiency and ineffectiveness of the current revealed financial statements and the necessity of preparing them according to the International Accounting Standard 16

17 no. 30. The accountants concluded that banks must be committed to prepare financial statements in accordance with the rules which International Accounting Standard No. 1 and 30 stated. They also concluded that it is necessary to apply International Accounting Standards issued by the International Accountant Committee when preparing bank financial statements because this brings on more credibility and reliability and allows the comparison between the banks activities and the countries that apply those standards. Waresul et al. (2006) examined whether timeliness of corporate financial reporting has improved in Bangladesh following the creation of the Securities and Exchange Commission (SEC) in 1993, the enactment of the Companies Act in 1994 and the amendment of the SEC Rules in Using more than 1200 firm-year observations over a period of 10 years, they find that regulatory changes have not improved timeliness in reporting, as measured by audit lag, issue lag and total lag. Although they find that large firms take shorter time to publish their annual reports compared with small firms, the lags, on average, have deteriorated significantly following the passage of legislation in Bangladesh. Landsman (2007) argued that based on the usefulness to investors of information measured using fair value was examined in a review of the existing literature by Landsman. He found that while fair value disclosures and measurements provide information to investors the information is affected by measurement error and the source of the estimates. Close (2007) observes that the motivation for the proposed changes in Accounting Standards and how the changes may impact the insurance industry. A brief history of accounting principles was provided with the author stating that the shift toward fair 17

18 value began in 1993 with the issuance of Statement of Financial Accounting Standards (SFAS) No. 115, accounting for certain investments in debt and equity securities. Close stated the belief that convergence will lead toward the use of fair value as a single measurement basis which could result in outcomes that range from more meaningful financial information for users to a reoccurrence of the stock market crash of Barth (2007) observes that using fair value measurement in financial reporting provides more useful information for making economic decisions including estimates of the Future in Today s Financial Statements (2006), Barth argues that it is not a question of if estimates of the future should be included in financial reporting but how to achieve this. Barth provides a discussion of how current financial reporting utilizes estimates of the future and how this may be expanded. Standard-Setting Measurement Issues and the Relevance on Research (Barth, 2007) provides an explanation of how the conceptual framework impacts measurement decisions. Barth explains that research can be helpful to standard setters since it provides information that has been rigorously developed, grounded in economic theory, and is free from bias. Both articles provide an explanation of how the use of fair value measurement meets the qualitative characteristics included in the conceptual framework. John and Joel (2007) point out that the conceptual framework offers an approach to understanding and managing reporting choices and their regulation. Qualitative characteristics of the underlying information, in terms of an unrelenting focus on relevance and reliability to the exclusion of particular interests or transaction motives, are a cornerstone of the framework. They argue that the focus on qualitative characteristics precludes a focus on first order economic fundamentals and, in the process, invites a static view of reporting standards, as opposed to one based on anticipation of their effect. 18

19 Ahmad (2007) examined whether there is an existing gap concerning the importance of accounting information qualitative characteristics from investors and external auditor's perspective as they represent the independent part responsible for the fairness of financial reports. He comes to the conclusion that there is an existing gap between the external auditors and investors in terms of the qualitative characteristics of accounting information. He also found that through analyzing this gap, we can find that auditors and investors agree about the importance of some characteristics, while they do not agree about the others which cause the gap. Prescott (2008) examines that whether the supervisory authorities should disclose more information about banks. He presents several models where the bank sends the same report to both regulators and the market; bank sends separate reports to the regulators and the market and the regulators do not share the information; the bank has the option to share the supervisory documents, such as CAMELS rating after receiving from the regulators and the supervisors have the technology to detect a false report. He concludes that the supervisory disclosure makes it harder for the regulator to collect the information. Mohammed (2008) investigated the extent of both mandatory and voluntary disclosure by listed banking companies in India. It also reports the results of the association between company-specific attributes and total disclosure, i.e., mandatory and voluntary, of the sample companies. A total of 184 items were selected of which 101 and 81 were mandatory and voluntary respectively. The study revealed that in disclosing mandatory items, the average score is 88, whilst the average score for voluntary disclosure is 25. The findings also indicate that size, profitability, board composition, and market discipline variables are significant, and other variables such as age, complexity of business and asset-in-place are insignificant in explaining the level 19

20 of disclosure. Results also indicate that Indian banks are very compliant with the rules regarding mandatory disclosure. In contrast, they are far behind in disclosing voluntary items. Daske et al. (2008) point out that the mandatory IFRS adoption results in increased capital market liquidity, but only in countries with strict enforcement regimes and institutional environments that provide strong reporting incentives. They conjecture that one reason for the increased liquidity is improved comparability; their analysis finds an insignificant effect. Nicolas and Christian (2009) examined the changes in market liquidity. They observe that higher transparency and lower information risk should increase market liquidity. They conclude that the more the regulations deviate from the former Generally Accepted Accounting Principles (GAAP), the greater the degree of complexity that countries will experience. The analysis of a worldwide sample finds that, owing to the introduction of IFRS, firms from countries with little deviation have significantly higher market liquidity. George (2010) examined the impact of the implementation of the International Financial Reporting Standards (IFRSs) on key financial measures of UK firms and the volatility effects of IFRS adoption. His findings show that IFRS implementation has favorably affected the financial performance (e.g. profitability and growth potential) of firms. Naseem and Nawab (2010) observed that the International Financial Reporting Standards (IFRS) by Indian corporate is going to be very challenging but at the same time it could be very rewarding. With the liberalization policies started yielding result and consequent changes in the perceptions of investors, markets and customers there is 20

21 an urgent urge, to converge towards global reporting platform to win the confidence of global investors. Convergence of standards will break the ice for convergence in other areas including auditing and help in efficient functioning of the economy because investors, creditors auditors and other rely on credible, transparent and comparable financial information. This will further ensure free flow of funds across globe because convergence will enhance the ability of investors to compare investments on global basis and lower the risk of errors of judgment. Christian (2010) examined the role of fair-value accounting in the financial crisis using descriptive data and empirical evidence. Based on their analysis, it is unlikely that fair-value accounting added to the severity of the 2008 financial crisis in a major way. While there may have been downward spirals or asset-fire sales in certain markets, we find little evidence that these effects are the result of fair-value accounting. His also find little support for claims that fair-value accounting leads to excessive write-downs of banks assets. If anything, empirical evidence to date points in the opposite direction, that is, towards over valuation of bank assets. Penas and Tumer (2010) found weak evidence of market discipline using data from Turkish banking market. Using the banks measures of financial fragility, they have studied the market s ability to monitor bank activities and found that the market reacted negatively to measures of financial fragility. They have also examined how market reacts to the quality and timeliness of the information disclosure and showed that improvements in disclosure requirements increase the in formativeness of accounting statements and audited statements with greater lags are not informative. Mary et al. (2010) examined the role financial reporting for fair values, asset securitizations, and derivatives played in the financial crisis. Because banks were at the 21

22 center of the financial crisis, this study focus in the discussion and analysis on the effects of financial reporting by banks and concluded that the fair value accounting played little or no role in the financial crisis. Also they concluded that because the objectives of bank regulation and financial reporting differ, changes in financial reporting needed to improve transparency of information provided to the capital markets likely will not be identical to changes in bank regulations needed to strengthen the stability of the banking sector. Although Accounting Standard setters and bank regulators should find a common ground, it is the responsibility of bank regulators, not Accounting Standard setters, to ensure the stability of the financial system. Gus et al. (2010) says that the regulators, academics, and researchers all emphasize the importance of comparability. They opine that an empirical construct of financial statement comparability is typically not specified. In addition, little evidence exists on the benefits of comparability to users. They study attempts to fill these gaps by developing a measure of financial statement comparability. Empirically, this measure is positively related to analyst following and forecast accuracy, and negatively related to analysts optimism and dispersion in earnings forecasts. They come to conclusion that financial statement comparability lowers the cost of acquiring information, and increases the overall quantity and quality of information available to analysts about the firm. Clare (2011) he made it clear in his article, the harmonization of Accounting Standards enhances the comparability of financial information across countries. First, he statistically defines and link comparability to firm value in a two-firm, sequential information release framework. he said the empirically test the prediction that a firm yet to announce earnings reacts more strongly to the earnings announcement of a foreign firm when both report under the same rather than different Accounting Standards. His 22

23 analysis of abnormal price and volume reactions for a global sample of firms supports this prediction. Next, in an attempt to control the effects of changes in reporting quality, he uses a difference-in-differences design around the mandatory introduction of International Financial Reporting Standards (IFRS). He fined that mandatory adopters experience a significant increase in market reactions to the release of earnings by voluntary adopters compared to pre-mandatory adoption. This increase is not observed for non-adopters over the same period. Taken together, his study shows that Accounting Standards harmonization facilitates transnational information transfer, and suggests comparability as a direct mechanism. Majed and Ghazi (2011) focused on the two characteristics of balance sheet including; reliability and relevance, as well as their relation to the decision making in Jordanian Electric Companies. A questionnaire has particularly been prepared for this purpose. They come to conclusion that degree of reliability and relevance of the financial position statement is high in Jordanian Electric Companies. Also reliability and relevance of the financial position information influence decision making. Hossein et al. (2011) examined the relationship between conservative accounting and earnings attributes, including persistence, predictability, value relevance and timeliness. In their study, the financial data between the years 2004 to 2008 of 145 listed companies in Tehran stock market have been accumulated. The results show the effectiveness of conservative accounting on the earnings attributes. Also the research results confirm direct relationship between conservative accounting and qualitative characteristics including persistence, predictability and value relevance; so that the relationship is statistically meaningful. Furthermore, there was not any observed meaningful relationship between conservative accounting and timeliness of profit. 23

24 Review of project and working papers A number of project reports and working papers have been published concerning qualitative characteristics of financial reporting information. However, a few of the project reports and working papers reviewed by the researcher have been listed below. Cordella and Yeyati (1998) sought to answer the question of optimal disclosure by developing a model of a monopolistic bank that receives funds from depositors and invests them in risky entrepreneurial projects. They have found that when the bank endogenously chooses the riskiness of its loan portfolio, disclosure reduces risk-taking incentives. However when risk is exogenously determined by the market, disclosing information regarding the bank s asset portfolio increases the probability of bank failure. Huang et al. (1999) observes that traditionally, data quality has only been described from the perspective of accuracy, while their research has found that the data quality should be defined as beyond accuracy and is identified as encompassing multiple dimensions. However, no standard data quality definition exists today. Chipalkatti (2002) examined the association between the nature and quality of annual report disclosures made by 17 Indian banks and market microstructure variables. He constructed a Bank Transparency Score (BTS) consisting of 90 items of information considering the recommendations of the Basel Committee and IAS 30. The study showed no significant association between the level of disclosure and percentage of shares held by the government, and the percentage of shares held by foreign shareholders respectively. The results also indicated that larger banks provide more transparent disclosure and there was no significant difference in the disclosure scores of banks across profitability levels, but banks with lower levels of leverage did have significantly higher disclosure scores. 24

25 Barth, Landsman and Lang (2005) based on a sample comprising 2,228 firm year observations for 387 firms adopting AIS over the period 1990 through 2004, investigated whether applying AIS is associated with less earnings management, more timely loss recognition, higher value relevance of accounting amounts and a lower cost of capital. They provide evidence that AIS firms exhibit an improvement in accounting quality and a reduction in a cost of capital with the application of AIS. Hague et al. (2006) undertook a project that was utilized to assist the FASB and the IASB in their consideration of measurement bases. The project focused on the objectives of measurement in financial accounting and researched alternative bases of measurement. Hague et al. found that there had been little attention provided to measurement accounting theory for over twenty years. The initial step of the project undertaken by Hague et al. was to identify bases of measurement for the initial recognition of assets and liabilities. The possible measurement bases that were identified were historical cost, current cost (reproduction cost and replacement cost), net realizable value, value in use, deprival value, and fair value. Yaw and Robert (2008) examined empirically the extent to which the frequency of interim financial reporting affects stock price volatility over the course of the fiscal year in four countries with different interim reporting regimes: the United States and Canada with quarterly reporting, and Great Britain and Australia with semi-annual interim reporting. It is hypothesized that, in the trade-off between timeliness and predictive value of the interim reports, semi-annual interim reporting will lead to lesser price volatility after accounting for other potential influences. Results found support this hypothesis, with price volatility much lower in Great Britain (and to a lesser extend Australia) than in the United States and Canada. They concluded that quarterly interim 25

26 financial reporting appears to induce greater capital market volatility than semi-annual reporting. Anwer et al. (2009) examined the evidence on the effects of the mandatory adoption of IFRS on several accounting quality metrics for a sample of over 1600 firms from 21 countries that mandated the use of IFRS in Their study compares these properties in a post-adoption period ( ) and a pre-adoption period ( ) relative to a benchmark sample of firms from 17 other countries that did not adopt IFRS in this post-adoption period. First, their findings robust evidence of an increase in income smoothing for the IFRS firms relative to the benchmark firms. Second, they found that the timeliness of good news recognition has increased while the timeliness of bad news recognition has decreased in the post-adoption period. Third, they found a decrease in the asymmetric timeliness of loss recognition in the post adoption period for the IFRS firms relative to the benchmark firms. These changes appear to be most pronounced in those countries that have historically exhibited higher quality accounting due to stronger shareholder protections. Overall, the results suggest that IFRS adoption has not resulted in an increase accounting quality. Beest and Boelens (2009) presented a measurement tool to assess the quality of financial reporting in terms of the underlying qualitative characteristics as defined in An Improved Conceptual Framework for Financial Reporting of the FASB and the IASB (2008). The operationalization of these qualitative characteristics results in a 21 item index. Their findings suggest that the measurement tool used in this study is a valid and reliable approach to assess the quality of financial reports. The measurement tool contributes to improving the quality assessment of financial reporting information, fulfilling a request from both the FASB and the IASB (2008) to make the qualitative characteristics. 26

27 De Franco et al. (2010) developed an output-based measure of comparability based on the earnings and stock returns relation, capturing the similarity with which the accounting systems of two firms translate a given firm s economic shock. Their study found that higher comparability lowers the cost of acquiring information and improves the overall information environment for US firms. Wu and Zhang (2010) examined the security of infer changes in financial reporting comparability through changes in the use of relative performance evaluation (ERP). They found a post-adoption increase in the use of ERP based on foreign peers accounting information, consistent with mandatory IFRS adoption enhances comparability for firms in continental Europe. Ferdy (2011) the examined differences in accounting quality between the two main accounting regimes, IFRS and US GAAP by measuring differences in qualitative characteristics between UK and US financial reports. More specifically, using a 33-item index based on the qualitative characteristics and a matched sample design, they assessed the quality differences between 71 UK annual reports and K US reports for His results showed that on average the total quality scores in the UK annual reports are higher than the scores in the US 10-K reports. The findings suggest that on average the UK annual reports relevance, faithful representation and understandability are higher than in the US 10-K reports. However, the comparability of US 10-K reports is higher than the comparability of UK annual reports Review of research thesis A number of scholars carried out research works on qualitative characteristics of financial reporting information such as fair value, relevance and reliability of financial 27