We investigate factors associated with European firms’ IFRS adoption quality, using three proxies for adoption quality: early application of IAS 39, transparency of transition-year disclosure and rigor of initial application of IFRS in the income statement. In contrast to prior studies, we focus on the IFRS adoption quality in the restatement phase and explore its association with firms’ accrual quality before and after IFRS adoption. We hypothesize and find that better governed firms disclose more details concerning the impact of IFRS and apply the new standards in a more rigorous manner. However, governance quality is not uniformly associated with early adoption of IAS 39. Rather, better-governed firms use the adoption flexibility in a conservative fashion. If IAS 39 has a negative impact on equity book value, well-governed firms tend to adopt the standard early and vice versa. Our results suggest that political involvement in the implementation process of new accounting standards is undesirable. Firms are likely to use carve-out options opportunistically or in ways that are inconsistent with the IFRS Conceptual Framework.
