The Impact of IFRS/SLFRS Adoption on the Earnings Management of Sri Lankan Firms

17 Pages Posted: 30 Oct 2015

See all articles by Kosgollage Anura Udayakumara

Kosgollage Anura Udayakumara

Rajarata University of Sri Lanka - Faculty of Management Studies

Prageeth Weerathunga

Rajarata University of Sri Lanka

Date Written: October 28, 2015

Abstract

The aim of this study is to examine the earnings management behavior of Sri Lankan firms following mandatory adoption of International Financial Reporting Standards (IFRS/SLFRS). Especially, this study investigates whether the mandatory adoption of IFRS/SLFRS in the Sri Lanka has resulted in deterring earnings management for Sri Lankan firms. Prior to the adoption of IFRS/SLFRS for financial years beginning 1 January 2012, Sri Lankan firms reported under Sri Lankan Accounting Standards (SLAS). Thus, this study predicted that the earnings management has decreased significantly after mandatory adoption of IFRS/SLFRS in 2012. The sample this study consists of 157 firms listed on the Colombo Stock Exchange and data were collected from financial years 2009/2010 to 2013/2014. This study uses five individual measures of earnings management relating to earnings smoothing and managing towards earnings targets. Firms are said to have reduced their earnings management if they display lower levels of earnings smoothing and less management towards earnings targets. Contrary to the prediction, the results of this study reveal that Sri Lankan firms exhibit higher level of earnings smoothing after mandatory adoption of IFRS/SLFRS and thereby indicative of higher level of earnings management. However, consistent with the prediction Sri Lankan firms display lower level earnings management in term of less managing towards earning targets. The level of earning management is one aspect of reporting quality of a firm. Therefore, lower level of earnings management is in turn reflecting better reporting quality. Thus, These findings suggest that there is room for further improvement in order to ensure that firms consistently apply the requirement of IFRS/SLFRS and make improvements in all aspects of reporting quality.

Keywords: Earnings Management, Mandatory Adoption, IFRS/SLFRS, Sri Lankan Firms

Suggested Citation

Udayakumara, Kosgollage Anura and Weerathunga, Prageeth, The Impact of IFRS/SLFRS Adoption on the Earnings Management of Sri Lankan Firms (October 28, 2015). Available at SSRN: https://ssrn.com/abstract=2682437 or http://dx.doi.org/10.2139/ssrn.2682437

Kosgollage Anura Udayakumara

Rajarata University of Sri Lanka - Faculty of Management Studies ( email )

Mihintale, 10300
Sri Lanka

Prageeth Weerathunga (Contact Author)

Rajarata University of Sri Lanka ( email )

Department of Accountancy and Finance
Faculty of Management Studies
Mihintale, North Central
Sri Lanka
+94775864269 (Phone)

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