The IFRS Adoption on Economic Integration of the GCC Union Currency

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Introduction

The adoption of the IFRS has become a normal accounting standard within the Gulf region as is the case across the globe. The rationale for adoption of the IFRS has been the need to create a standard accounting method to ensure that there is enhanced transparency and comparability of the financial information in the market (Beaver 2011). This means that decision makers within a capital market or economic bloc will have better information since application of the IFRS in a consistent and rigorous manner would create a better integrated economic market that is controlled by a single currency regime (Filip & Raffournier 2010). As a result, the integration will eventually result to an efficient funds allocation formula, reduced capital cost (meaning low interest rates), and increase flow in the foreign direct investments (FDI) (Ball & Brown 2006). In relation to the GCC member states, the positive outcome as a result of integration of the IFRS would result in expanding trading, increasing liquidity, and creating an environment for informational efficiency since single currency regime ensure stability and consistency as is the current case with four out of the six members of the GCC.

Research Problem Statement

The integration of the capital markets within the GCC has continued to face the challenge of varying reporting incentives, which is responsible for reporting and observation of the disclosure practices in economic integration of a single currency regime. At present, most of the reporting incentives are formulated at the member state level and not as the GCC policy, except for the four states that have embraced the single currency proposal (Blank 2011). The institutions responsible for formulation within each member state are often independent of each other, making the integration of accounting standards such a hard process (Filip & Raffournier 2010). Besides, these institutions rely on environment variables such as governance mechanisms, legal requirements, capital or market forces, negotiated ownership structures, and financial agreements (Callen et al. 2016). When all other factors are held constant, the above variables are responsible for creation of the current obstacles that are impeding compete and strategic achievement of the benefits of adopting IFRS to facilitate capital market integration within the GCC bloc. Therefore, this paper will establish the best mechanisms that can be applied by the GCC bloc to smoothen the integration of the capital markets into a single economic bloc through adoption of the IFRS to guarantee smooth transition into a single currency regime. Besides, the paper will explore the best strategies that can be used to integrate the GCC capital market without placing any of the member states in a worse-off situation to guarantee sustainable economic market interaction.

Purpose of the Research

This proposal will attempt to review the direct and indirect impact of the IRFS espousal on the complete incorporation of the GCC stock market as an economic policy to sustain the single currency proposal, with special interest in the insurance industry because the four markets have integrated the IFRS. The complete capital market incorporation is based on the assumption that assets within each market are not only equivalent but also has a connected return; irrespective of the market where each asset is actively transacted (Creswell 2009). This means that the incorporation of the stock market within the GCC bloc will be gauged through comparative analysis of the stock returns for each member state in order to create analogous cash flows in the form of FDIs (Blank 2011). In order to quantify the effect of adoption of the IFRS on the economic market integration within the GCC bloc, the paper will focus on the four capital markets out of the six states making up the Gulf Cooperation Council, that is, Saudi Arabia, Dubai, Abu Dhabi, and Qatar stock markets.

The study will apply the capital market returns for a period of seven year, which is from the year 2007 to the year 2014 as the underlying substitute for return index in each of the four states. Reflectively, the timeline under study is further separated into pre-acceptance of the IFRS (from the year 2007 to 2008) and post-acceptance of the IFRS (from the year 2009 up to the year 2014). In order to complete the analysis, correlation coefficients within the stock markets of Saudi Arabia, Dubai, Abu Dhabi, and Qatar will be performed for the pre-adoption and post-adoption periods. This will be followed by causal nexus will be investigated through the co-integration analysis to investigate possible existence of the unit root or ordinary least squares (Filip & Raffournier 2010). These tools will become critical in examining the relation that exists between the four capital markets in the pre-adoption and post-adoption of the IFRS.

Research Objective

The objective of this research paper is to establish the actual impact of IFRS adoption in facilitating the economic integration of the Saudi Arabia, Dubai, Abu Dhabi, and Qatar capital markets into the a single economic bloc under a single currency regime. The objectives are summarized below.

To establish the impact of IFRS in the economic integration of the capital markets making up the GCC bloc.
To review the ease of the economic integration of the capitals markets making up the GCC before and after the adoption of the IFRS into a single current regime.
To examine the possible reasons for the established impacts of the IFRS adoption in the economic integration of the capital markets that make up the GCC bloc.

Research Hypothesis

Null Hypothesis: Adoption of the IRFS has an impact on the economic integration of the Saudi Arabia, Dubai, Abu Dhabi, and Qatar capital markets into a single currency GCC bloc.
Alternative Hypothesis: Adoption of the IRFS has no impact on the economic integration of the Saudi Arabia, Dubai, Abu Dhabi, and Qatar capital markets into a single currency GCC bloc.

Significance of the Study

The study will establish the impact of adoption of the IFRS on the capital market integration within the single currency GCC bloc, which consists of Saudi Arabia, Dubai, Abu Dhabi, and Qatar capital markets. Specifically, the findings will reveal the degree of the economic integration as influenced by the IFRS adoption. The findings might assist in amplifying the market variables that may have a proactive control of the scope and function of the IFRS on the stock market incorporation within the GCC’s single currency economic bloc.

Research Gap

Apparently, there is no research that has been done on the impact of adoption of the IFRS on the capital market integration within the single currency GCC bloc. Thus, this research study will attempt to establish the relationship between IFRS adoption and economic integration of the GCC into a single current bloc.

Empirical and Theoretical Literature Review

The literature review will be divided into theoretical and empirical to capture the theories and past case studies that are related to the research topic. The theoretical perspective of the literature review will examines the theories that are related to international accounting standards application and how they affect capital market integration as part of the single currency economic bloc, with special focus on four out of six member states of the Gulf Cooperation Council. On the other hand, the empirical review will revolve around past case studies that have been carried out to explore the possible impacts of adoption of international accounting standards on capital market integration within a focus within the Saudi Arabia, Dubai, Abu Dhabi, and Qatar capital markets, which form the GCC bloc.

Sources and authenticity

The literature review will be based on past case study researches, financial journals, academic books, and online capital market websites. These sites are ideal for the research since they originate from reputable organizations and authors. The academic journals that will be integrated in the literature review will be selected from the Saudi Arabia, Dubai, Abu Dhabi, and Qatar capital markets, which form the GCC bloc. The sources to be used in the paper will be forty to capture as much secondary information about the research topic as possible.

Research approach

The research project will be carried out through qualitative approach to review secondary data obtained from the capital markets of states making up the GCC bloc. Reflectively, the use of qualitative research approach will be instrumental towards reviewing the IFRS adoption and capital market variables that might facilitate the integration of the GCC bloc. The rate of return will be computed as follows;

R_it = ln(P_it/ P_it-1)

Where,

R_it : Rate of return of country i’s stock index at t

P_it: Price of country i’s stock index at t

(Source: Ball & Brown 2006)

The Ordinary Least Squares method will be used because it can reveal long-term trends in the prices of equity within the four states of interest. The test will begin by running a correlation matrix for the period of interest. In the event of integration, high correlation will indicate a similar market trend.

Reference List

Ball, R & Brown, P 2006, “An empirical evaluation of accounting income numbers,” Journal of Accounting Research, vol. 6, no. 3, pp. 159-178.

Beaver L 2011, “Perspectives on recent capital market research,” Accounting Review, vol. 77, no. 5, pp. 453-474.

Blank, K 2011, Business statistics: For contemporary decision making, John Wiley & Sons, New Jersey.

Callen, T, Cherif, R, Hasanov, F & Hegazy, A 2016, Economic Diversification in the GCC: Past, present, and future. 2014. Web.

Creswell, J. W 2009, Research design: Qualitative, quantitative, and mixed methods approaches, Sage Publications, Thousand Oaks, CA.

Filip, A & Raffournier, B 2010, “The value relevance of earnings in a transition economy: The case of Romania,” The International Journal of Accounting vol. 45, no. 6, pp. 77-103.

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