Challenges for Implementation of Fair Value Accounting in Emerging Markets: Evidence from China*

This study examines an important but underresearched issue - unintended consequences of mandatory adoption of International Financial Reporting Standards (IFRS). Such unintended consequences are likely to occur in markets in which financial accounting plays a stronger contracting role than the information role and those in which the institutional environment is incompatible with IFRS. Using data from China's adoption of IFRS- based and fair value- oriented new accounting standards in 2007, we find empirical evidence on unintended consequences of fair value accounting (FVA) implementation. Specifically, we find that the new FVA for trading securities fails to generate the intended benefits of improved transparency, and worse, the new FVA for debt restructuring creates new opportunities for earnings management. Our results also show that such unintended consequences are more severe among firms with poorer corporate governance and those in provinces with weaker institutions.