Financial Reporting Quality of Licensed Financial Institutions in Sri Lanka: A Comparative Analysis Across Historical Cost and Fair Value Accounting Regimes

Abstract

This study aims to develop a comprehensive framework to measure the financial reporting quality (FRQ) of licensed financial institutions (LFIs) in Sri Lanka and assess the FRQ of the fair value accounting regime over the historical cost regime. This study uses a quantitative design based on positivism to assess the FRQ. The sample size comprised 44 LFIs where the historical cost and fair value accounting regimes were assessed considering annual reports published in 2011 and 2021 respectively. Structured content analysis is used to collect data to assign a quantitative or numeric value for each item to capture FRQ dimensions under the conceptual framework. A comprehensive set of FRQ indices were developed to assess FRQ and the indices were compared using a t-test across historical cost and fair value accounting regimes. The analysis reveals that the FRQ of LFIs in Sri Lanka has improved significantly in the fair value accounting regime over the historical cost regime. However, regulatory disclosure requirements adhering to the strengthened corporate governance regime were also effective during the transition period Therefore, the IFRS adoption may not be the sole contributing factor to the improved FRQ in the fair value accounting regime. Hence, future studies may focus on assessing FRQ considering fair value-based earnings management practices and extend the scope of FRQ to evolving financial technology which may play an important role in FRQ.

Received: 26 August 2024 | Revised: 7 November 2024 | Accepted: 24 December 2024

Conflicts of Interest 

The authors declare that they have no conflicts of interest to this work.

Data Availability Statement

The data that support this work are available upon reasonable request to the corresponding author.

Author Contribution Statement

S. G. Sisira Dharmasri Jayasekara: Conceptualization, Methodology, Software, Validation, Formal analysis, Investigation, Resources, Data curation, Writing – original draft, Writing – review & editing, Visualization, Project administration. K. L. Wasantha Perera: Conceptualization, Methodology, Validation, Resources, Data curation, Supervision. Roshan Ajward: Conceptualization, Methodology, Validation, Resources, Data curation, Supervision.