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December 26, 2020

Cost-benefit of improving disclosure quality under IFRS

There is an ongoing debate between standard setters, regulating bodies, investors, and issuers about the valuation, accounting and reporting of assets in corporate disclosures. This discussion is about quality, costs and benefits of financial disclosures.

A recent research study reveals new findings about the costs and benefits resulting from the adoption of the IFRS framework. The first finding is that increasing disclosure quality, measured by the level of disaggretaged information, significantly improves market liquidity. The second finding is that increasing disclosure quality has no effect on the cost of audit fees.

The findings suggest that a facilitation or reduction of disclosure items required by accounting standards would have no positive outcomes on the cost-benefit-equation. It would likely not result in significant cost savings for issuers related to audit fees, but have negative effects on disclosure quality and market liquidity.

The study “Economic Consequences of IFRS Adoption: The Role of Changes in Disclosure Quality” was conducted by researchers from Duke University, University of Houston and China Europe International Business School. It was published in Contemporary Accounting Research and can be read in full through this link.

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