Impact of International Financial Reporting Standard adoption on key financial ratios

Although previous research has investigated the economic consequences of International Financial Reporting Standard (IFRS) adoption, there is little evidence on the impact of IFRS adoption on key financial ratios. To fill this gap, we examine this issue in a continental European country (Finland). Our results show that the adoption of IFRS changes the magnitude of the key accounting ratios. Moreover, we extend the literature by showing that the adoption of fair value accounting rules and stricter requirements on certain accounting issues are the reasons for the changes observed in accounting figures and financial ratios.     

Have IFRS Affected Earnings Management in the European Union?

There has recently been considerable discussion of those features of IFRS that are likely to help improve financial reporting in the European Union. However, certain issues may also have a negative impact on the quality of information. This paper focuses on the effect of IFRS on earnings management. Its main purpose is to examine whether the adoption of IFRS in the European Union has increased or decreased the scope for discretionary accounting practices by comparing discretionary accruals in the periods preceding and immediately after the regulatory change. Another objective is to determine which firms' features and country factors may explain the accounting discretion observed before and after IFRS. We consider a sample of non-financial firms listed on 11 EU stock markets. The results obtained show that earnings management has intensified since the adoption of IFRS in Europe, as discretionary accruals have increased in the period following implementation. The variables explaining accounting discretion are the same before and after IFRS (business size, leverage, investor protection and legal enforcement). These results suggest that variations in earnings management might be due to some room for manipulation under international standards when compared with local standards.     

Changes in the value relevance of goodwill accounting following the adoption of IFRS 3

This study examines the value relevance effects of changes in goodwill accounting in a European setting. International Financial Reporting Standard (IFRS) 3 replaced accounting rules that emphasized goodwill amortization over short useful lives which kept goodwill balances low. Goodwill accounting under IFRS 3 largely relies on manager fair value estimates of acquired business units. Using Swedish data, we show that goodwill amortizations were not value-relevant prior to the adoption of IFRS 3. However, impairments reported in addition to amortization were significantly related to stock returns during that period. In contrast, under the impairment-only regime prescribed by IFRS 3, impairments are no longer statistically related to stock returns.     

Effects of Adoption of International Financial Reporting Standards in Belgium: The Evidence from BEL-20 Companies

This study examines the adoption of International Financial Reporting Standards (IFRS) by BEL-20 companies in Belgium. The research analyses the application of IFRS in the consolidated financial statements of Belgian publicly traded companies. In Belgium, as in several other continental European countries, a close link exists between accounting and taxation. The study provides insight into IFRS implementation problems based on a survey sent to BEL-20 companies. The survey focused on the impact that IFRS conversion has on companies, their internal organization and accounting and finance strategy. The benefits and challenges of the adoption of IFRS are analysed, as well as the level of understanding and experience with IFRS, perception of the quality of IFRS, and the impact of adoption of IFRS on consolidated equity and net income. Principal differences between IFRS and Belgian generally accepted accounting principles (GAAP), having a major impact on the conversion to IFRS, are identified. This study should be important not only to the European Union (EU) countries but to countries which will join the EU in the future, and to other countries worldwide that are adopting IFRS.     

Extending the Classification of European Countries by their IFRS Practices: A Research Note

Abstract

This paper expands the IFRS accounting systems’ classification proposed by Nobes [(2011). IFRS practices and the persistence of accounting system classification. Abacus, 47(3), 267–283] to a broader set of European countries. The results suggest a classification distinguishing between four groups of European countries, and add to the evidence, reported by Kvaal and Nobes [(2010). International differences in IFRS policy choice. Accounting and Business Research, 40(2), 173–187] and Nobes (2011)., that pre-IFRS accounting differences influence the options adopted by firms. This study contributes to the literature suggesting that the widespread adoption of IFRS has not eliminated the differences between national accounting practices and that accounting systems classification did not lose its relevance.     

Accounting Policies in the Extractive Industry: A Global and a Turkish Perspective

This paper investigates the influence of accounting standards on financial reporting for companies in the extractive industry. In Turkey, listed firms have prepared their financial reports according to the International Accounting Standards and the International Financial Reporting Standards (IAS/IFRS) since 2005, as has the European Union. The aim of this study is to determine the degree of compliance with IFRS 6, comparing global and Turkish extractive entities. We find that the entities reporting in accordance with IFRS 6 in Turkey are more likely to fail to declare their accounting policies, whereas global companies are more likely to be compliant with IFRS 6.     

Financial reporting for sustainable development: Critical insights into IFRS implementation in the European Union

By adopting a political economy perspective to accounting, this paper provides an overall post-implementation assessment of International Financial Reporting Standards (IFRS) adoption relative to the European Union’s (EU’s) fundamental goal of sustainable development. The paper questions the consistency of the International Accounting Standards Board’s business view with the EU’s and provides some critical insights into the potential long-run effects of IFRS on the European economy and society. Therefore, it raises several doubts about unquestioned accounting standardization at a global level and makes some suggestions for future policymaking and research.     

Evolving Connections Between Tax and Financial Reporting in Italy

We analyze the evolution of the relationship between tax and financial reporting in Italy after the mandatory introduction of International Financial Reporting Standards (IFRS) in 2005. Italy represents an interesting case study among European countries, with domestic generally accepted accounting principles (GAAP) oriented towards creditor protection and characterized by a close connection of financial and tax accounting. Unusually, the adoption of IFRS is compulsory for the unconsolidated financial statements of listed companies, but the process of alignment of domestic GAAP to IFRS, that has affected some countries, has had little effect on Italy. Thus, two accounting systems, IFRS and Italian GAAP, are used for the preparation of unconsolidated financial statements by different categories of companies and, as a consequence, two different linkages between tax and financial reporting emerge. In order to assess the degree and the direction of the book-tax linkages we use the methodology developed by Lamb, Nobes and Roberts (1998. International variations in the connections between tax and financial reporting, Accounting and Business Research, 28(3), pp. 173–188). IFRS and tax reporting show a high degree of disconnection, while Italian GAAP, in line with the accounting tradition of most continental European countries, are closely related to tax rules. The analysis points out a rapidly evolving situation, with links between accounting systems and taxation becoming tighter, mainly because of the changes in tax law introduced during the last few years.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Italy

Abstract

We examine the recent changes that have affected the Italian accounting scenario after the adoption of the IFRS and the enactment of the European accounting system. In particular, we have focused our attention on the decision of the legislature to enlarge the mandatory adoption of IFRS to non-listed companies and to individual financial statements (FS). At the same time, we have observed the changes determined by the EU Directive 2013/34 on the Italian Civil Code and the FS legislation. Both set of changes are describing a process under which the Italian accounting rules are moving towards the international accounting standards and their framework, contents and methods. Therefore, the main differences among national rules and IFRS are grounded on the measurement rules and the role played by the historical cost principles and the strict and detailed regulation of the Balance sheet and Income statement formats.     

The impact of mandatory IFRS adoption on foreign mutual fund ownership: The role of comparability

Proponents of IFRS argue that mandating a uniform set of accounting standards improves financial statement comparability that in turn attracts greater cross-border investment. We test this assertion by examining changes in foreign mutual fund investment in firms following mandatory IFRS adoption in the European Union in 2005. We measure improved comparability as a credible increase in uniformity, defined as a large increase in the number of industry peers using the same accounting standards in countries with credible implementation. Consistent with this assertion, we find that foreign mutual fund ownership increases when mandatory IFRS adoption leads to improved comparability.     

IFRS implementation in the European Union and the survival of accounting families

This study examines eight IFRS implementation choices available to European Union (EU) and European Economic Area (EEA) member countries under the EU's 2002 IAS Regulation. Great disparities in IFRS implementation exist among the countries covered under the Regulation, including statistically significant differences in the IFRS elections for financial and non-financial firms. Using hierarchical cluster analysis, a classification of EU and EEA member countries according to similarities and differences in their IFRS implementation is developed, which identifies an IFRS antagonistic, an IFRS leaning, and an IFRS integrated group. These groupings may provide a springboard for future studies on effects of IFRS implementation differences. Following Meek and Thomas (2004) call to study the continuing relevance of taxonomies of accounting systems in the IFRS era, the study also provides evidence for a survival of the traditional micro-based vs. macro-uniform, strong vs. weak equity market, and outsider vs. insider economy classifications of accounting systems into the IFRS implementation decisions of EU and EEA member countries. These results suggest that traditional accounting system classifications remain important in the post-IFRS era.     

Adoption of IFRS in Spain: Effect on the comparability and relevance of financial reporting

EU Regulation 1606/2002 requires application of International Financial Reporting Standards (IFRS) by groups listed on European stock markets. In Spain, listed groups are now obliged to prepare consolidated financial information under IFRS, and legislative changes to bring local rules into line with international standards have been tabled.In this context, the potential impact of IFRS is fraught with uncertainty. Our study of IBEX-35 companies focuses on the effects of the new standards on comparability and the relevance of financial reporting in Spain. We address these objectives by seeking significant differences between accounting figures and financial ratios under the two sets of standards (i.e. Spanish accounting standards and IFRS).The results obtained show that local comparability has worsened. The study reveals that local comparability is adversely affected if both IFRS and local accounting standards are applied in the same country at the same time. Reforms to bring local rules into line with international standards are therefore urgent. We also find that there has been no improvement in the relevance of financial reporting to local stock market operators because the gap between book and market values is wider when IFRS are applied. While there has been no gain in terms of the usefulness of financial reporting in the short-term, improved usefulness may be achieved in the medium to long-term.     

Mandatory IFRS adoption and the cost of debt in Italy and UK

This paper analyses the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) within the EU on the cost of corporate debt. In order to avoid the imprecision involved in a large-scale cross-country study, we examine the impact of IFRS in two very clearly different institutional settings, the UK and Italy. The UK is a common-law country characterised by strong enforcement and national generally accepted accounting principles (GAAP) which are equivalent to IFRS. Italy is a typical European code-law country, characterised by a weak outside investor protection system, and national GAAP significantly different from the IFRS model. No IFRS effect is observed in the UK, consistent with it having standards which are close to IFRS. During the post-IFRS period, in Italy more weight is placed on the accounting numbers to assess the cost of debt. We also find that accruals quality improves in Italy, thus suggesting that public financial reporting data are enhanced relative to privately held information about borrowers' credit ratings.     

Implications of IFRS for the European Insurance Industry—Insights From Capital Market Theory

The European insurance industry is currently undergoing a substantial change in financial reporting requirements. Beginning in 2005, compliance with the International Financial Reporting Standards (IFRS) has been required in the European Union. Substantial sections of the IFRS—leading to a market-oriented valuation of insurance contracts—are still under construction and will be introduced in the next few years. To date, assessment of the potential impact of the new IFRS accounting and reporting system is largely found in trade literature, and in insurance industry business leader and expert commentator statements. The tenor of opinion is that the IFRS will create a serious challenge for the European insurance industry. To evaluate the impact of IFRS more scientifically, this article applies—where indicated—capital market theory and the concept of information efficiency. The article suggests that concerns about the effects of IFRS are exaggerated, and reveals that the main area of IFRS impact on the European insurance industry is likely to be on insurance product design.     

LARGE ACCOUNTING FIRMS’ SURVEY REVEALS EMERGENCE OF “TWO STANDARD” SYSTEM IN THE EUROPEAN UNION

Convergence with International Financial Reporting Standards (IFRS) as promulgated by the International Accounting Standards Board (IASB) is receiving great attention. In 2005, all listed companies domiciled in the European Union (EU) will be required to prepare consolidated accounts based on IFRS. Individual EU member states are, however, permitted to decide whether IFRS will be required or allowed for non-listed companies or for listed companies’ individual accounts. Based primarily on data collected by the six largest international accounting firms during their most recent convergence survey, this paper examines each of the 15 EU member states’ convergence plans and their perceived barriers to convergence.The findings indicate that most EU members do not plan to converge national GAAP with IFRS, thereby highlighting the great significance of the large firms’ concerns regarding emergence of a “two-standard” system in the EU. The survey indicates the majority of EU countries will continue to require or allow national GAAP for individual accounts. While Belgium is considering requiring IFRS for all consolidated accounts, other EU countries have decided to allow or are considering allowing non-listed companies to prepare IFRS consolidated accounts.In most EU countries, the link between financial accounting and tax accounting represents a major barrier to convergence. Other frequently cited barriers include disagreement with certain IFRS and the complicated nature of certain IFRS. International requirements for financial instruments are viewed as particularly problematic.     

Accounting Classification in the IFRS Era

The degree to which, and the purposes for which, International Financial Reporting Standards (IFRS) have been adopted vary internationally. This paper uses classification techniques in order to investigate the reaction of countries, or companies within them, to IFRS. In addition, this paper investigates five aspects of this; for example, whether European countries mandate IFRS for unconsolidated financial reports. Previous classifications in accounting are used to help to predict and explain this.     

The Effect of Mandatory IFRS Adoption on Financial Analysts’ Information Environment

This paper examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European Union on financial analysts’ information environment. To control for the effect of confounding concurrent events, we use a control sample of firms that had already voluntarily adopted IFRS at least two years prior to the mandatory adoption date. We find that analysts’ absolute forecast errors and forecast dispersion decrease relative to this control sample only for those mandatory IFRS adopters domiciled in countries with both strong enforcement regimes and domestic accounting standards that differ significantly from IFRS. Furthermore, for mandatory adopters domiciled in countries with both weak enforcement regimes and domestic accounting standards that differ significantly from IFRS, we find that forecast errors and dispersion decrease more for firms with stronger incentives for transparent financial reporting. These results highlight the important roles of enforcement regimes and firm‐level reporting incentives in determining the impact of mandatory IFRS adoption.     

Revenue Recognition and EU Endorsement of IFRS

This paper comments on a previous paper in this journal concerning EU endorsement of IFRS. It is suggested here that the previous authors should consider whether there can be more than one true and fair view even in one country and especially across European countries. It is further suggested that the previous analysis of five accounting standards does not support the claim that the European Commission wrongly endorsed them. It is also argued here that the previous analysis of the nature of most gains under IFRS is faulty.     

Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market

Using a sample of Italian firms, this paper investigates whether separate financial statements are useful to capital market investors, and whether International Financial Reporting Standards (IFRS) are more value-relevant than domestic generally accepted accounting principles (GAAP). These issues are key in evaluating the decision made by some states in the European Union to extend the use of IFRS to separate financial statements. The study provides evidence that separate financial statements are value-relevant, regardless of the accounting standard set. However, contrary to expectations, separate financial statements under IFRS do not have incremental information content beyond domestic GAAP. There is even some evidence that domestic GAAP financial statements are more value-relevant than IFRS. Finally, this paper documents the important role of model specification in value-relevance studies.     

International financial reporting standards and experts' perceptions of disclosure quality

From 2005, over 7,000 listed firms in the European Union and many more around the world are required to adopt International Financial Reporting Standards (IFRS). The introduction of a uniform accounting regime is expected to ensure greater comparability and transparency of financial reporting around the world. However, recent research has questioned the quality of financial statements prepared under IFRS standards, particularly in the presence of weak enforcement mechanisms and adverse reporting incentives ( Ball et al. , 2003 ). In this paper, we assess the quality of the financial statements of Austrian, German and Swiss firms which have already adopted internationally recognized standards (IFRS or U.S. GAAP). The study makes use of available disclosure quality scores extracted from detailed analyses of annual reports by reputed accounting scholars ('experts'). This work complements other contemporary research on the quality of IFRS financial statements where the properties of earnings are used as an evaluation metric ( Barth et al. , 2005 ). Our evidence shows that disclosure quality has increased significantly under IFRS in the three European countries we analyse. This result holds not only for firms which have voluntarily adopted IFRS or U.S. GAAP, but also for firms which mandatorily adopted such standards in response to the requirements of specific stock market segments. Although we cannot establish direct causality due to the inherent self-selection issues for most of our sample firms, the evidence shows that the quality of financial reports has increased significantly with the adoption of IFRS.