Adoption of International Financial Reporting Standards (IFRS) in Russia: Effect on the value relevance of financial reporting

Abstract

Since 1992 Russia has initiated an extensive reform of the accounting and financial reporting standards and has in recent years concentrated on harmonizing the Russian Accounting Standards (RAS) with International Financial Reporting Standards (IFRS). Although the reform is proceeding slower than expected a considerable number of Russian public listed companies applies both sets of standards simultaneously on a voluntary basis. Thus our study of 67 Russian public companies (reporting both under RAS and IFRS for four consecutive years) focuses on the effects of IFRS adoption on the value relevance of financial reporting in Russia. We address this objective by testing whether the IFRS accounting figures correlate more strongly with stock market values than the corresponding RAS figures. We find no evidence of increased value relevance of financial reporting to external users of financial information after adopting IFRS when comparing and evaluating the two regimes (RAS and IFRS) unconditionally. We explain such results by the notion of mock compliance which originates due to the institutional differences between the RAS and IFRS development environments. Thus we recommend potential investors and shareholders to base their investment decisions on the Russian market on the financial information prepared under local financial reporting standards.