Liquiditiy and Financial Leverage Ratios:

Their Impact on Compliance with

International Financial Reporting
Standards (IFRS)

Ferrer, Rodiel C., Ferrer, Glenda J., Academy of Accounting and Financial
Studies Journal

INTRODUCTION

A recent and important trend in financial reporting and disclosure regulatio

n is the increasingly widespread adoption of uniform financial reporting sta
ndards by stock exchanges and accounting standards bodies from different
countries. These uniform standards are labeled International Financial Rep
orting Standards (IFRS) and their stated goal is to achieve global "harmoniz
ation" and "convergence" of financial reporting rules and regulations.

International Financial Reporting Standards (IFRS) are accounting rules is

sued by the International Accounting Standards Board (IASB). In contrast t
o local accounting rules (domestic GAAP) that differ across markets and co
untries, IFRS are a set of uniform rules that, in theory, apply in the same wa
y to all public companies in markets that adopt the standards. IFRS are prin
ciples-
based reporting standards that attempt to cover a broad range of economic
conditions, transactions, activities or events. Over 100 countries have recen
tly moved to IFRS reporting or decided to require the use of these standard
s in the near future, and even the U.S. is considering allowing U.S. firms to
prepare their financial statements in accordance with IFRS.
While the overall impact of IFRS is still to be determined, promoters of IFR
S often argue that uniform global standards are obviously superior to dispar
ate, and in many cases competing, standards across markets. However, the
optimality of a single set of mandated global financial reporting rules, let al
one the specific uniform rules contained in the current IFRS, is not obvious
(e.g., Dye and Sunder, 2001). While mandatory uniform rules and regulatio
ns may provide aggregate economic benefits, the individual and aggregate c
osts of uniform global regulations on firms, investors, and other stakeholde
rs are often not recognized nor discussed. In particular, IFRS draw heavily
on the current financial reporting regulations of countries and markets that
are geared toward outside capital providers. Moreover, these advanced cou
ntries have institutional infrastructures that complement the type of reporti
ng regulations that have developed in these markets. Therefore, it is far fro
m clear that IFRS will be superior or even effective in countries that have di
fferent capital-
market paradigms and lack the necessary institutional infrastructures to su
pport the effective application and enforcement of the uniform global stand
ards.

Despite the importance of corporate transparency as a recurring policy issu

e, there is (i) limited research on the costs and benefits of financial reportin
g and disclosure regulation, (ii) few attempts to systematically organize the
key economic principles of and empirical findings on this type of regulation
, and (iii) little guidance on important unanswered questions about the eco
nomic consequences of regulating financial reporting and corporate disclos
ure (Leuz, 2008).

This paper evaluates how the liquidity and leverage ratios exert significant e
ffect on the degree of compliance with International Financial Reporting St
andard disclosure as measured by Balance Sheet and Income Statement of
Publicly Listed Corporations.

CONCEPTUAL FRAMEWORK
Agency theory portrays the relationship of principal and agent. In agency re
lationship, principals (shareholders) hire agents (managers) to manage busi
ness operations and entrust to them the decision-
making authority. In corporations, a central problem exists concerning shar
eholders' interest: top management does not always act in the best interest
of shareholders. As a result, tension takes place between two parties since
managers first serve their interest: either in the manner of shirking, which i
s lack of attention for maximizing shareholders returns in the corporate gov
ernance context, or self opportunistic behavior, by accruing wealth meant f
or themselves instead for shareholders.

Information asymmetry occurs when managers have easy and better access
to information against shareholders (Lee and Choi, 2002).

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