Section 1: Introduction

Accounting deals with financial transactions, so every accounting work is based on reasoning.
Accounting Theories always try to explain with reason, the logic underlying a particular practice.
Generally Accepted Accounting Principles cannot be changed completely as they are widely and
universally accepted but they can be reformed and remodeled to suit the needs of any changed
Society or Economy. Accounting Theories point out to the scientific ways of thinking for the
solution of any real world accounting problem. There are different types of theories in different
branches of knowledge such as Positive Accounting Theory (PAT), Legitimacy Theory,
Stakeholder Theory and Institutional Theory.
In line with the global trend in enabling a common language for financial reporting process, the
Institute of Chartered Accountants of Sri Lanka has taken steps to adopt International Financial
Reporting Standards (IFRS) by issuing Sri Lanka Financial Reporting Standards (SLFRS) and
Sri Lanka Accounting Standards (LKAS) for annual financial periods beginning on or after 1
January 2012. Since IFRSs are a novelty to Sri Lankan business organizations, it impacts
directly to the financial reports which are made according to those standards. Out of several
IFRSs which are introduced to Sri Lanka, recognizing the impact on implementing new IFRS's
relating to Financial Instruments is analyzed clearly in our previous report and This research
analyses mainly the determinants of how Institutional Theory effect to the extent of the
compliance of new IFRS's relating to Financial Instruments (SLFRS 7)
This article is based on the Mini Research Project of the ACC 3322 Advanced Management
Accounting Course, which our group done under the topic of Effects Of Convergence To IFRS
On Sri Lankan Companies. Our research issue was what is the extent of the compliance of new
IFRS's relating to Financial Instruments (SLFRS 7)? This research is done basically to identify
whether the disclosures on financial Instruments are done according to the requirements of the
newly introduced IFRS. We collected data using a disclosure checklist based on the requirements
of IFRS 7 and we selected Banking Sector as our industry and out of 11 commercial banks from
Sri Lanka we selected 6 banks for our research (Commercial Bank of Ceylon PLC, Hatton
National Bank PLC, DFCC Bank, Sampath Bank PLC, NDB Bank PLC and Nation Trust Bank

PLC). Based on the findings we gathered from our research we come into conclusion that
according to sample we selected, most of banks comply with SLFRS 7 requirements.
The main purpose which is planned to accomplish during constructing of the report is to evaluate
the empirical findings of our mini research based on most suitable theory out of Positive
Accounting theory, Legitimacy Theory, Stakeholder Theory and Institutional Theory. First we
select a theory which is most suitable to our empirical findings. Then explain the key dimensions
of the selected theory and how those identified key dimensions are relate to the findings of our
mini research, finally come in a conclusion based on the evaluation.
By evaluating and considering the findings which we gathered from the mini research we select
Institutional Theory to interpret our research findings. Institutional theory has been applied
widely in different disciplines that include accounting standards harmonization and IFRS
adoption. The wide ranges of researches using the institutional theory perspectives across
different disciplines may support its integrity and usefulness to explore the IFRS convergence.
Institutional theory can provide explanations about organizational linkage with the environment,
social expectations and an organizations internal practices and characteristics. Institutional theory
has two main dimensions: isomorphism and decoupling. Isomorphism consists of coercive
factors, normative influences, and mimetic factors to explain this paradox of homogenization.
Coercive isomorphism emerges from asymmetric power relationships. Change is required by
formal and informal sources, such as government regulation or political pressure groups.
Mimetic isomorphism stems from a powerful phase brought on by a major event or incident. In
uncertain situations actors, under standard circumstances, copy the legitimatized practices from
other actors in the field. Third, normative isomorphism emerges upon the maturity of a certain
practices, and is associated with professionalization, where members of defines their methods of
work. Decoupling refers to the creation and maintenance of gaps between formal policies and
actual organizational practices.
To address this issue we mainly focus on which theory would be most applicable to the study of
the extent of the compliance of new IFRS's relating to Financial Instruments (SLFRS 7), What

are the key dimensions of selected theory, how do the key dimensions related to the finding of
most of the banks in Sri Lanka comply with SLFRS disclosures of financial instrument and what
are the conclusions that could be made based on this evaluation.
In this report we expect to look at the influence to our empirical findings of the mini research
specifically at the key influences of coercive, mimetic and normative isomorphism pressures
which have contributed to this widespread adoption impact applied on the disclosures of
compliance of new IFRS's relating to Financial Instruments-SLFRS 7.
In this report we expect to look at the influence to our empirical findings of the mini research
specifically at the key influences of coercive, mimetic and normative isomorphism applied on the
disclosures of compliance of new IFRS's relating to Financial Instruments-SLFRS 7.
In the background of the study we are going to explain the research issue which we conduct our
mini research, objectives of this report and a summary of the selected study of how Institutional
Theory effect to the extent of the compliance of new IFRS's relating to Financial Instruments
(SLFRS 7) . In the Selected theory section we are going to explain theory selected and the
suitability of the theme selected. We are going provide details about Institutional theory, why we
select that theory and how it applicable to our research empirical findings. In the section of
Evaluation of findings we are going to analyze and evaluate the findings of mini research in
terms of Institutional theory. Finally we are going to give a conclusion about our research
findings based on the Institutional theory.