Harmonisation Of Accounting Standards

Published Date: 02 Nov 2017

Issues and Controversies in Accounting Project

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Practical Implications to All Organisations of Implementing the International Financial Reporting Standards in the UK

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BSc (Hons) Business and Management (Accounting)

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Declaration

I declare that all materials in this project report that are not my own work have been acknowledged and I have kept all materials used in this research, including samples, research data, preliminary analysis, notes and drafts, and can produce them on request.

Acknowledgements

I would firstly like to thank [], my dissertation supervisor. His guidance and feedback has been invaluable. I would also like to thank [] for the lectures delivered on business research. This greatly helped to shape this research project.

Finally I would like to thank all of the participants who made this research possible. Their participation was therefore really appreciated.

Table of Contents

Chapter 1: Introduction 1

1.2 Key Terms 1

1.2.1 International Accounting Standards Board (IASB) 1

1.2.2 International Financial Reporting Standards (IFRS) 1

1.3 Background Information 2

1.4 Rationale 2

1.5 Purpose, Aims and Objectives 3

1.5.1 Purpose 3

1.5.2 Aims and Objectives: 3

1.6 Structure of the Report 4

Chapter 2: Literature Review 4

2.1 Introduction 4

2.2 Literature Review 4

2.2.1 Harmonisation of Accounting Standards 4

2.2.2 Benefits of implementing IFRS 5

2.2.3 Costs of implementing IFRS 8

2.2.4 Effect of individual standards 10

2.2.5 Conclusion 11

Chapter 3: Methodology 12

3.1 Introduction 12

3.2 Research Philosophy 12

3.3 Methodology 13

3.3.1 Research Approach 13

3.3.2 Research Strategy 13

3.3.3 Research Methods 13

3.3.4 Data Analysis 14

3.3.5 Sample Selection 14

3.3.6 Advantages and Disadvantages of Research Method Selected 14

3.4 Limitations, Problems & Solutions 15

3.5 Research Ethics 15

3.6 Concluding Remarks 16

Chapter 4: Research Findings, Analysis and Discussion 16

4.1 Introduction 16

4.2 Findings and Analysis 16

4.2.1 Does implementing IFRS increase access to capital? 18

4.2.2 Does implementing IFRS reduce the cost of capital? 19

4.2.3 Does implementing IFRS result in better comparison of financial statements? 20

4.2.4 Does implementing IFRS result in greater transparency in financial statements? 20

4.2.5 Does implementing IFRS result in improved quality and timeliness of management information? 21

4.2.6 Does implementing IFRS help in consolidation of accounts? 21

4.2.7 Does implementing IFRS result in higher cost at transition? 22

4.2.8 Does implementing IFRS result in higher disclosure of competitive information? 22

4.2.9 Does implementing IFRS increase volatility of earnings? 23

4.2.10 Does IFRS result in higher breach of covenants? 23

4.2.11 Does IFRS cause change in tax strategies? 23

4.2.12 Does IFRS cause change in information system in the company? 24

Chapter 5: Conclusion 25

5.1 Conclusion 25

5.2 Limitations 26

5.3 Recommendations for Further Research 26

Chapter 6: Appendices 27

6.1 References and bibliography 27

6.2 Questionnaire 32

Chapter 1: Introduction

Chapter 1: Introduction

1.1 research issue

The main purpose of this research is to investigate the practical implications to all companies in the UK adopting the International Financial Reporting standards (IFRS). When the IFRS were developed, their main aim was to achieve harmonisation of accounting standards giving better consistency to financial reporting worldwide. Most countries have their own accounting bodies which are responsible for setting accounting standards and applying them to financial statements. Having a single set of accounting standards would lead to better consistency, and comparability of financial statements. It would assist investors and other users of financial statements gain a better understanding of companies operating in different regions. The implications of implementing IFRS will differ across international boundaries depending upon the state and enforcement of their accounting standards before implementing IFRS. The focus of this research will be companies based in the UK. The research will investigate the benefits and costs of implementing IFRS for UK companies and whether the costs overshadow the potential gains.

1.2 Key Terms

1.2.1 International Accounting Standards Board (IASB)

The IASB Was formed in 2001, replacing the International Accounting Standards Committee (IASC). The IASB is the independent standard-setting body of the International Financial Reporting Standards Foundation (IFRS Foundation, 2011). The IASB is based in London. The IASB issues International Financial Reporting Standards (IFRS) but the adoption and monitoring of those standards are left to the national accounting bodies of each country.

1.2.2 International Financial Reporting Standards (IFRS)

IFRS is a set of standards promulgated by the IASB. The approach adopted by the IASB in preparing IFRS is to develop standards based on sound, clearly-stated principles, on which interpretations may be required (Mirza and Holt, 2011). IFRS are principle-based standards and focus more on the business or economic purpose of a transaction and the underlying rights and obligations (Mirza and Holt, 2011).

1.3 Background Information

The fundamental role of financial reporting is to provide information to a range of stakeholders that is useful in business decision making. Accounting standards are developed to promote high quality of financial reporting and instil confidence in investors so as to allow companies to raise capital and maintain liquidity in markets. The overall objective of the International Accounting Standards is to give a fair presentation of the state of affairs and performance of a business (Alexander and Nobes, 2007).

All listed companies in the UK had to adopt IFRS from 2005 after European Union (EU) enacted a law to make it compulsory. However, the listed companies in the EU are allowed to use IFRSs that have been endorsed by the Accounting Regulatory Committee of the EU. All other companies in the UK are allowed to use IFRS but few have chosen to do this (ACCA, 2011). Companies deemed ‘small’ under the Companies Act are allowed to use the Financial Reporting Standard for Smaller Entities (ACCA, 2011).

The IASB issued IFRS for SMEs in 2009. As national accounting boards are responsible for the implementation of IFRS, the Accounting Standards Board of the UK has issued FRS 102 and the proposed effective date for the new framework is periods beginning on or after 1 January 2015 (Dean, 2012). The adoption of FRS 102, an abridged version of IFRS, can have significant impact for SMEs in the UK.

1.4 Rationale

The motivation behind this research topic is driven by the knowledge that fair value accounting, one of the main aspects of implementing IFRS, was mentioned for increasing volatility during the financial crisis in 2007-09. Fair value accounting forced companies to take excessive losses during the financial crisis as market values of assets, especially financial assets, declined rapidly (Jones, 2011). The volatility in earnings of insurers was particularly high because of the nature of their assets in equities and bonds. The IASB is looking at limiting the extent to which the insurers will be obliged to recognise the fair values of financial assets that they hold (Jones, 2011).

Additionally, the US has still not made it mandatory for its companies to use IFRS. In an analysis of IFRS by the Securities and Exchange Commission it was pointed out that the adoption of IFRS would be costly for US public companies (IFRSUSA, 2012). Without the adoption of IFRS in US, the true benefits of harmonisation of accounting standards would not be achieved undermining the efforts and costs of companies in the UK.

1.5 Purpose, Aims and Objectives

1.5.1 Purpose

This research will analyse the practical implications of implementing IFRS by companies in the UK. The requirement for SMEs to implement FRS 102, an abridged version of IFRS, from 2015 onwards will have implications for companies in terms of resources, costs and impact on their financials. Understanding implications from financial officers of companies in the UK gives a more practical grasp of issues being faced by them.

1.5.2 Aims and Objectives:

The research carried out will help to meet the following aims and objectives:

To research the costs of implementing IFRS to UK companies. This will be useful in understanding whether SMEs are prepared for implementing FRS 102.

To research the benefits of implementing IFRS to UK companies. The benefits may differ according to the size of the business.

To compare the costs and benefits and therefore analyse whether the implementation of IFRS will have overall positive or negative effects.

1.6 Structure of the Report

Chapter 2 reviews the extant literature on the costs and benefits of implementing IFRS. This will also help in forming the research methodology to achieve the aim and objectives of this dissertation. Chapter 3 on methodology will discuss the approach used including collection and analysis of data. Limitations of the research will also be discussed. Chapter 4 on analysis and discussion will review the primary data and compare the results with previous studies. Chapter 5 will conclude the research with key findings and potential for future research.

Chapter 2: Literature Review

2.1 Introduction

This literature review will critically analyse existing literature on the requirement of IFRS, and the costs and benefits of their implementation to organisations.

2.2 Literature Review

2.2.1 Harmonisation of Accounting Standards

Historically, countries have had their own national accounting standards (Mirza and Holt, 2011). However, with increasing globalisation of trade, it is difficult for businesses to analyse the financial position of the counterparty if their domestic countries had different accounting standards. Thus there was a need for global accounting standards that are understood, used and interpreted by different people in the same manner (Mirza and Holt, 2011).

Global harmonisation of accounting standards is the long-term endeavour of the IASB (KPMG, 2012). Harmonisation of accounting standards is desired because it would establish a set of high quality standards that would enable accounts to be understood in any territory with added benefits for capital markets (KPMG, 2012). Adoption of IFRS will remove many of the differences in national accounting standards. However, IFRS will not bring in complete harmonisation among nations, particularly when the standards allow for significant discretion (Schultz and Lopez, 2001). This is because IFRS are based on principles and it is the national accounting boards in each that are responsible for implementing IFRS in totality or with some modifications. Even in Europe, the EU approved IFRS with minor modifications to the one suggested by the IASB.

2.2.2 Benefits of implementing IFRS

Greater access to capital

The perceived increase in transparency, quality and comparability of financial reports under IFRS across countries should make it less difficult for investors to analyses and compare companies based in different jurisdictions (Daske, 2006). This encourages greater flow of capital across countries and therefore, increases the access of capital to companies.

Adoption of IFRS results in higher market liquidity (Drake et al., 2010). Higher market liquidity implies that more investors are willing to invest in companies. Some of the secondary market liquidity may result in higher demand for equity issues by companies. Covrig et al. (2007) said that adoption of IFRS results in more investment flows through foreign mutual funds.

Lower cost of capital

Convergence of accounting standards of countries has economic benefits. In an empirical study of European firms implementing IFRS, it was found that companies with the highest quality pre-adoption information witnessed positive share price reaction at the time of the implementation of IFRS (Armstrong et al., 2010). The highest quality of pre-adoption information sharing meant that investors did not expect to see additional information from the implementation of IFRS. The rise in share price was thus due to the expected benefits of convergence such as better analysis of clients and therefore lower bad debts (Armstrong et al., 2010).

Smaller companies are less likely to raise finance on the public markets. Listed companies need to communicate with external stakeholders such as debt and equity markets (Walton, 2011). The cost of capital of listed companies can increase due to asymmetric risk. Easy comparison of standard format financial statements will help investors gain higher clarity and reduce the cost of capital. With increasing globalisation of financial and capital markets, the use of a single set of high quality accounting standards encourage investment across borders, which reduces the cost of capital (Mirza and Holt, 2011).

The benefits of reduction in cost of capital are witnessed in case of firms that adopt IFRS before the official adoption date (Daske et al., 2008). The capital-market benefits occur in those countries where firms have incentives to be transparent (Daske et al., 2008). The voluntary adoption of IFRS signals investors about the high transparency in accounting of a firm. Some of the reduction in cost of capital around the adoption of IFRS also occurs when countries make effort to improve their enforcement and governance regimes at the same time as they implement IFRS (Daske et al., 2008). The importance of better enforcement environment in lowering cost of capital through reduction in financial analysts’ forecast errors was observed when mandatory adoption of IFRS was compared across countries with strong and weak enforcement (Byard et al., 2011).

In an empirical study of stock market reactions to adoption of IFRS by companies in Europe, it was found that markets reacted positively for firms with lower pre-adoption information quality (Armstrong et al., 2010). Investors expected that the implementation of IFRS will result in greater information benefits for these firms as a result of which the cost of capital will decline. However, Daske (2006) found out from the empirical study of companies in Germany implementing IFRS that they did not benefit from a decline in cost of capital. One of the reasons behind no reduction in the cost of capital in Germany is that firms use significantly higher percentage of debt than equity in Germany. Lenders have more access to information than small shareholders and therefore the benefits of improved information from IFRS would be of less value to lenders to result in a drop in the cost of capital.

Better comparability with other businesses

Tan et al. (2011) said that mandatory IFRS adoption attracts foreign analysts and improves their forecast accuracy. This shows that harmonisation of accounting standards by using IFRS brings comparability benefits that enhance the usefulness of accounting data (Tan et al., 2011).

Greater reporting transparency

Academic literature indicates that the adoption of IFRS leads to less earnings management, more timely loss recognition and more value relevance of accounting amounts (Barth et al., 2008). It is difficult to segregate the improvements in quality of statements to that from the adoption of IFRS or to changes in firms’ incentives and the economic environment (Barth et al., 2008).

A principles-based reporting system such as IFRS can also increase the clarity by requiring the consistent application of same accounting principles across an organisation (Wright and Hobbs, 2010). Transactions in a principles-based system are reported on the basis of their economic significance rather than by following complex rules in the rules-based accounting system. This improves the value of transaction information to external stakeholders. Cairns (2004) said that the recognition of all derivatives on the balance sheet at fair value is one of the most significant effects of the change to international standards. Traditional accounting systems use historic cost convention which does not reflect market value of many assets.

In an empirical study of real estate firms, it was found that mandatory adoption of IFRS result in a larger decline in information asymmetry as observed through lower bid-ask spreads (Muller et al., 2011). Common adoption of fair value accounting in IFRS can reduce but not eliminate information asymmetry (Muller et al., 2011).

When Chen et al. (2010) analysed the empirical results for the quality of information by controlling some of the factors, they found that majority of accounting quality indicators improved after IFRS adoption in the EU. There is less management of earnings towards a target and lower magnitude of discretionary accruals (Chen et al., 2010).

However, in an empirical study it was found that earnings management has intensified since the adoption of IFRS in Europe as discretionary accruals have increased in the period following implementation (Callao and Jarne, 2010). The increase in earnings management was attributed to the fact that there is some room for manipulation under IFRS when compared to national standards (Callao and Jarne, 2010).

Improved quality and timeliness of management information

Barth et al. (2008) that the firms voluntary adopting IFRS generally experience more timely loss recognition. The need to disclose additional information implies that the management will have to gain access to information on regular basis.

Consolidation of accounts

Smaller businesses do not typically have foreign subsidiaries and therefore, are less concerned about convergence of accounting standards (Walton, 2011). Many large companies have foreign subsidiaries and would benefit from single accounting standards as it would reduce costs of consolidating group accounts. It would also make it easier for the management to analyse and compare performances of different geographical units. However, large companies with no or little foreign activity will see very little advantage.

2.2.3 Costs of implementing IFRS

Costs of transition

The additional disclosure requirements under IFRS increase the cost of transition as companies have to prepare for disclosing additional information. In case of deferred tax accounting, the recognition and disclosure requirements are typically much more extensive under IFRS. Adoption of IFRS is likely to cause material additional costs for firms with respect to deferred tax accounting (Chludek, 2011). Companies using LIFO for inventory accounting will also need to change to other inventory accounting policies as IFRS does not recognise LIFO (Rood and Kinney, 2008).

The transition process will take up considerable resources depending upon the size of a firm. Large companies will have to devote higher amount of resources because they have additional disclosures as compared to SMEs which will only implement a much smaller version of IFRS.

Disclosure of information to competitors

One of the costs of implementing IFRS is that it may lead to higher disclosure of confidential or proprietary information to competitors and therefore lower the competitive advantage of a business. IFRS generally requires more information disclosure that under GAAP requirements of most countries (Wright and Hobbs, 2010). IFRS exposes more information about a company which is good for analysis by external stakeholders but can also be used by competitors.

Increased volatility of earnings

Factors that cause higher volatility of earnings in IFRS include recognition of more assets and liabilities at fair value, tougher rules on recording off-balance sheet transactions, more rigorous impairment assets, and the requirement to gain actuarial gains and losses (Jermakowicz and Gornik-Tomaszewski, 2006). Fair values of financial instruments move sharply during periods of market uncertainties and lower liquidity. Insurance firms faced high volatility because most of their assets are in terms of equity and bonds. Equity prices suffered high volatility and as a consequence, profits of insurance companies first declined and then recovered at a high rate during the financial crisis. In 2003, France complained to the president of the European Commission that the excessive use of market values would increase volatility in the economy (Aisbitt, 2006).

Absence of readily available market for determining prices makes it difficult for firms to value their assets. The subjectivity available to managements for pricing their assets in absence of readily available markets can result in greater divergence of results.

Higher probability of breach of financial covenants

The increased volatility of earnings under IFRS exposes companies to higher probability of breach of financial covenants. Ormrod and Taylor (2004) said that the change to IFRS could have unexpected consequences for reported financials of a company that were unrelated to changes in the company's circumstances. The new figures could lead to a company being in breach of the terms of loan covenants if changes adversely affect the value of its assets on the balance sheet and/or results in sharp drop in operating and net income.

Change in tax strategies

IFRS does not recognise Last-In, First-Out inventory policy (Rood and Kinney, 2008). Companies using LIFO need to change their accounting systems and adopt other inventory policies in confirmation with IFRS. This impacts the taxation of companies. Differences in deferred tax treatments between IFRS and national accounting standards will have an implication of tax strategies of companies.

Changes in information system to support IFRS financial statements

If a company’s IT and financial systems are substantially integrated globally or the national standards in the country were similar to IFRS, then the degree of impact or modifications in information systems at the time of transition may be low.

2.2.4 Effect of individual standards

Effect of individual standards on the pre-IFRS financial statements can differ depending upon the accounting standards in place and the choice of a company to select between alternative options, if available. In an empirical study on the effect of IFRS adjustments relative to UK GAAP equity in 2005, it was found that employee benefits and share based payments will have the maximum negative impact (Aisbitt, 2006). The value of equity under the IFRS was 10% lower than in UK GAAP (Aisbitt, 2006). On the other hand, effect of events after the balance sheet had the highest positive impact on equity (Aisbitt, 2006). On majority of IFRSs, the difference between UK and IFRS was close to 0%. This could be due to the fact that UK had already started aligning its standards to IFRS by the time companies adopted them in 2005.

2.2.5 Conclusion

The implementation of IFRS will have both benefits and costs to companies. The benefits could be access to more capital at lower cost of capital, better information to analysts and investors. Costs could be due to transition, high volatility of earnings, more disclosure to competitors, etc.

The implications of implementing IFRS to companies will vary depending upon their size and previous adoption of similar standards. Large size companies will have to adopt more stringent standards than SMEs. However, large companies may have already done some groundwork as UK’ Accounting Standards Board had started aligning its standards closer to IFRS. The implications will also differ on the basis of nature of the company with financial companies facing higher volatility due to the nature of majority of their assets.

Further study on suggested EU audit reforms will be investigated. The perceptions of audit reforms that could be implemented in the UK will be researched. Views of "Big 4" accountants, an executive director and audit students will be analysed, compared and contrasted with each other. Participant’s views will also be compared and contrasted to existing literature and seminal studies such as Beattie and Fearnley (2002).

Chapter 3: Methodology

3.1 Introduction

This chapter provides a detailed description of the chosen methodology, which is supported by a detailed explanation of its selection and suitability for this study. For this research, the primary data was collected from executives in financial departments of a number of companies. Their experience in implementing IFRS is relevant for the purpose of this dissertation because of their involvement in the transition process and preparation of accounts in line with IFRS.

3.2 Research Philosophy

The choice of research strategy is driven by the nature of the research questions being probed (Adam et al., 2007). The research philosophy is based on positivist epistemology, which states that there exists an unidirectional cause-effect relationship that can be identified and tested through the use of hypothetic-deductive logic and analysis (Information resources management association, 2011). Some of the main techniques used in the positivist research methodology are inferential statistics, hypothesis testing and mathematical analysis (Nodoushani, 2000). The positivist approach is better suited for this research than the interpretivist approach because of the availability of primary data that can be used to meet the objectives of this research. The positivist approach also results in objective analysis (Collis and Hussey, 2009).

3.3 Methodology

3.3.1 Research Approach

The concepts researched in the extant literature are applied in this research to understand the implications of implementing IFRS to organisation in the UK. The results of the analysis of primary data used in this dissertation will be compared with results in literature.

3.3.2 Research Strategy

The research strategy of this dissertation is based on analysing the results of a questionnaire based survey. Information on the implications of implementing IFRS is collected through questionnaire based surveys from executives in a range of companies. The questionnaire is one of the most widely used data collection techniques within the survey strategy (Saunders et al., 2009).

3.3.3 Research Methods

The method of data collection was questionnaire based survey. This involved using same set of closed questions based on the Likhert-style rating scale (Saunders, 2009). Respondents have to choose one among five preferences in each question and therefore list questions were used (Saunders, 2009). Questionnaires were used to collect primary data from executives in the financial departments of organisations because of their close involvement in implementing IFRS. The questionnaire included a total of 12 questions based on the existing literature reviewed (See appendix 6.2 for the questionnaire constructed from existing literature). The use of questionnaire approach allowed the researcher to obtain primary data from a number of respondents in a short period and by using low amount of resources.

3.3.4 Data Analysis

The results of existing literature indicate both benefits and costs of implementing IFRS to organisations. Different studies have come out with contradictory results which show the difficulty in analysing the impact of IFRS on companies. One of the reasons for differences is that studies use data from different countries. As national accounting standards varied across countries before they adopted IFRS, the scale and relevance of various costs and benefits differ. Therefore to analyse the implication for companies in the UK, primary data was collected and descriptive statistics were used. This helped to clearly analyse the data collected. It allowed the data to be summarised in a more compact form and identification of patterns (Collis and Hussey, 2009).

The quantitative analysis was primarily completed using bar charts. Mean and standard deviation of each question were also analysed to understand the diversity in responses to gain a perspective into potential reasons for that.

3.3.5 Sample Selection

The analysis is based on 35 responses. This is higher than a sample size of 30 participants as suggested for drawing conclusion (Saunders et al, 2009). The companies within the sample are not biased as all results obtained from the survey are included in this research. Surveys were posted to 200 companies, representing a mix of large, medium and small companies to get a broader perspective of the implications of implementing IFRS.

3.3.6 Advantages and Disadvantages of Research Method Selected

A survey is a fast and inexpensive way to collect primary information (Mitchell and Jolly, 2012). Surveys are also useful in ensuring that participant’s responses remained anonymous and therefore reliable (Jankowicz, 2000).

Surveys are also useful in performing statistical analysis (Jankowicz, 2000). The standardised questions with only a limited number of options allow for a statistical analysis to be possible.

One of the main drawbacks of using surveys is that if participants’ self-reports are inaccurate, the survey will yield poor results (Mitchell and Jolly, 2012). It is hard to ascertain numerical answer to each question asked in the survey. Also, prior incorrect estimates of values or attributes may result in a participant forming a wrong view about the outcome of a process or an event.

Surveys also cannot reveal why something happened (Mitchell and Jolly, 2012). The researcher has to use his knowledge and interpretation to form an opinion about the rationale behind a survey result.

3.4 Limitations, Problems & Solutions

The main limitation of the methodology of this dissertation is that the primary data was collected from only 35 firms. This limits the scope of the work to be generalised as firms of all sizes and sectors are not covered in the data. Also, the results from obtained from the executives in finance departments. Some of the respondents may not be present at the time of actual transition. Further, large companies implemented IFRS in 2005 and therefore their executives may not have a total recall of the issues raised in this survey.

3.5 Research Ethics

In a research, the four main ethical principles are – (a) no harm should be done to participants; (b) informed consent should be taken in collecting data about individuals and publications; (c) no invasion of privacy of individuals; and (d) no deception in analysing and reporting results and collection of data (Bryman and Bell, 2011). No harm was done to any individual. All individuals were clearly informed about the purpose of this research and were assured that their details will not be shared. This also protects respondents from potential harm in the future. Thus, the dissertation meets the ethical requirement of respecting privacy. All published sources are acknowledged as per the referencing standards of the university.

3.6 Concluding Remarks

The research method based on questionnaire survey allowed the researcher to gather perceptions of executives in companies about the implications of implementing IFRS. Questionnaire method was quick and effective in collecting primary data. The descriptive statistic approach helped analyse, compare and contrast the perceptions of the participants.

Chapter 4: Research Findings, Analysis and Discussion

4.1 Introduction

The primary data collected from the questionnaire is analysed in this chapters. All questions regarding the benefits and costs of implementing IFRS in the UK were based on the topics covered in the literature.

Table 4.1 - Existing Literature aligned with the Questionnaire

Questionnaire was sent to 200 companies from a number of industries. The potential respondents were selected from small, medium and large companies so as to get an overall perspective of implementing IFRS from firms of different sizes. 35 responses were received which imply a response rate of 17.5%.

Topic of the Literature

Question Numbers

Chapter in Literature Review

Benefits of implementing IFRS

2-7

2.2.2

Costs of implementing IFRS

8-14

2.2.3

4.2 Findings and Analysis

The participants’ responses were analysed on a question-by-question basis. 8 out of 35 respondents were from large companies and 27 from SMEs. The results from the survey used in this dissertation were compared against relevant literature and empirical studies. The summary results for each survey question are shown in table 4.2.

Table 4.2 – Summary results

 

Average score

Standard deviation

Greater access to capital

2.46

0.69

Better cost of capital

2.06

0.53

Better comparability

2.74

0.69

Greater reporting transparency

2.71

0.66

Improved quality and timeliness of management info

2.66

0.53

Consolidation of accounts

3.20

0.82

Costs of transition

3.94

0.75

Disclosure of information to competitors

2.71

0.70

Increased volatility of earnings

3.29

1.03

Higher breach of covenants

2.51

0.73

Change in tax strategies

1.77

0.72

Change in information system

3.20

0.95

4.2.1 Does implementing IFRS increase access to capital?

Question 2 analysed whether implementing IFRS increases access to capital. The average response on the 1-5 scale with 5 being ‘very strongly’ was 2.26, less than the average and close to disagree. This implies that, on average, the respondents felt that implementation of IFRS does not increase access to capital. Separating the impact of IFRS from other factors such as macroeconomic conditions is difficult when it comes to accessing capital. Companies faced tough economic and credit environment during the last 4 years after the financial crisis. Also, some of the companies in the survey may not have approached capital markets immediately after implementing IFRS and thus, would not have observed change in access to capital. The results are similar to those of Jermakowicz and Gornik-Tomaszewski (2006) who also said that companies, on average, do not expect better access to capital after implementing IFRS. This could be due to the fact that most companies plan to raise capital within their country and hence, implementing IFRS does not make a significant difference to their sources of capital.

There was variation in the response of ‘large’ companies and SMEs. Large companies, on average, did not notice better access to capital. This can be explained that large companies were listed on the stock exchange and already had access to a number of sources for raising capital even before they implemented IFRS. SMEs, on average, say that access to capital increases as a result of IFRS. This is because they can now gain access to more investors and lenders across countries who understand IFRS.

4.2.2 Does implementing IFRS reduce the cost of capital?

Question 3 analysed whether implementing IFRS reduces the cost of capital. The average response was 2.06, very close to disagree. This implies that, on average, the respondents felt that implementation of IFRS does not reduce the cost of capital. Again, it is difficult to separate the impact of IFRS from other factors such as macroeconomic conditions. Also, some of the companies in the survey may not have approached capital markets immediately after implementing IFRS and thus, would not have observed change in access to capital. The results are similar to those of Jermakowicz and Gornik-Tomaszewski (2006) who also said that companies, on average, said that they strongly think that IFRS will not reduce costs of capital. This could again be due to the fact that most companies plan to raise capital within their country and hence, implementing IFRS does not make a significant difference to the quality of information to their capital providers.

The large companies and SMEs were almost unanimous in their analysis of implementing IFRS on the cost of capital as both categories disagreed that cost of capital will reduce. It was expected that SMEs may say that cost of capital declines because they have to gain more the adoption of IFRS in terms of better quality of accounts. However, the IFRS SMEs is a scaled down version of the main IFRS and therefore does not give investors and lenders substantial additional insights in accounts of a company.

4.2.3 Does implementing IFRS result in better comparison of financial statements?

Question 4 analysed whether implementing IFRS will increase the comparability of financial statements. The average response was 2.74, closer to the score of 3. This implies that, on average, the respondents felt that implementation of IFRS neither improves nor reduces the comparability of financial statements of companies. This can be explained by the fact that IFRS requires companies to provide more information as well as do fair value accounting. However, IFRS is a principle-based accounting standard with some scope for subjectivity. The results are similar from those of Jermakowicz and Gornik-Tomaszewski (2006) who also said that companies, on average, found that companies agree with better comparison impact of implementing IFRS.

There are significant differences between interpretations of large companies and SMEs. The average score of large companies was more than 3, thus indicating that comparability increases. The average score of SMEs was less than 3. The lower score of SME is because the applicable standards for SMEs are not that stringent. SMEs have more scope in what and how much they disclose in the IFRS for SMEs.

4.2.4 Does implementing IFRS result in greater transparency in financial statements?

Question 5 analysed whether implementing IFRS will increase the transparency of financial statements. The average response was 2.71, again closer to the score of 3 but marginally lower. This implies that, on average, the respondents felt that implementation of IFRS neither improves nor reduces the transparency of financial statements of companies. This result is somewhat unexpected as the main idea of IFRS is to increase convergence and improve transparency of financial statements. The use of special purpose vehicles by banks to keep debt off their balance sheets before the financial crisis when they have already implemented IFRS in the UK shows that full transparency still is a distant dream. Also, IFRS does allow some scope for adjustments based on subjectivity of individuals which could result in less than expected transparency.

There are significant differences between interpretations of large companies and SMEs with large companies indicating that IFRS improves transparency as they have to use fair value accounting and disclose more information about different types of financial transactions and liabilities. The application of a different IFRS for SMEs with lower burden on companies to disclose information makes it difficult for higher transparency in financial statements.

4.2.5 Does implementing IFRS result in improved quality and timeliness of management information?

Question 6 analysed whether implementing IFRS will improve the quality and timeliness of management information. The average response was 2.66, lower than the indifference score of 3. This implies that, on average, the respondents do not feel that implementing IFRS will improve the quality and timeliness of management information. IFRS for financial statements are more for external providers of capital as management has more up to date knowledge of financials of a company. Hence, the additional features of IFRS such as more disclosure, do not make it more attractive to managements in terms of quality of management accounts.

There are significant differences between interpretations of large companies and SMEs with large companies. The average score in case of large companies was just above 3 which implies a very marginal improvement. The average score for SMEs was 2.5 which is significantly lower than the indifference score of 3. SMEs may have to do additional work to prepare accounts which will delay the process because of their limited resources.

4.2.6 Does implementing IFRS help in consolidation of accounts?

Question 7 analysed whether implementing IFRS helps in consolidation of accounts. The average response was 3.20, higher than the indifference score of 3. It implies that, on average, the respondents felt that implementation of IFRS makes it easier to consolidate financial statements. This is expected as same set of accounting standards in different countries reduces the time required and costs in consolidating accounts. The average score in case of large companies was 4.12, which infers that large companies found the consolidation process much easier. This is likely due to the fact that large companies may have more international operations and subsidiaries than smaller companies.

4.2.7 Does implementing IFRS result in higher cost at transition?

Question 8 analysed whether implementing IFRS causes companies to spend high amount during the transition. The average response was 3.94, which implies that, on average, the respondents agree that implementation of IFRS is associated with high cost at the time of transition. This result is expected as IFRS asks companies to disclose more in their financial statements. Also, the fair value of accounting in IFRS requires additional effort to determine the market value of assets and liabilities. If companies were using accounting policies such as LIFO which are not approved under IFRS, they need to do additional work. Companies also have to restate the financial position at the start of the implementation period. All of these factors result in higher cost. The results are different from those obtained by Jermakowicz and Gornik-Tomaszewski (2006) as respondents in their survey were undecided about the costs of transition.

4.2.8 Does implementing IFRS result in higher disclosure of competitive information?

Question 9 analysed whether implementing IFRS results in higher disclosure of competitive information. The average response was 2.17, which implies that, on average, the respondents were indifferent to the additional disclosure risk of implementing IFRS. However, there were significant differences between responses from large companies and SMEs. The average score of large companies was 3.4 which implies that large companies believed more than SMEs that higher disclosures under IFRS will result in sharing of more competitive information. The waivers available to smaller companies under IFRS for SMEs reduce the potential sharing of competitive information and therefore SMEs were less concerned about this.

4.2.9 Does implementing IFRS increase volatility of earnings?

Question 10 analysed whether implementing IFRS results in higher volatility of earnings. The average response was 3.29, which implies that, on average, the respondents were ‘indifferent-to-agree’ impact to the increase in volatility of earnings. The difference in responses of large companies and SMEs is high. The average score of large companies was 4.25. It infers that they agreed that IFRS will result in higher volatility of earnings. Large companies have experienced the impact of IFRS on their earnings during the financial crisis when fair value accounting caused sharp swings in earnings. Banks and financial institutions reported large losses due to fair value accounting. The average score of smaller companies was 3 which implies, that on average smaller companies were not concerned about the volatility of earnings. This is again due to many exemptions available to SMEs therefore they were less concerned about this.

4.2.10 Does IFRS result in higher breach of covenants?

Question 11 analysed whether implementing IFRS results in higher breach of covenants. The average response was 2.51, which implies that, on average, the respondents were ‘indifferent-to-disagree’ impact of IFRS on breach of covenants. The difference in responses of large companies and SMEs is high. The average score of large companies was 3 which infers that they were they were did not perceive it as threat. The average score of smaller companies was 2.37, which implies that they kind of disagree about the potential of IFRS to cause breach of covenants. This is because volatility is because of non-cash change in earnings and breach covenants do look at cash items also. The SMEs are subject to less stringent regulations under IFRS and also exempted in many categories of fair value accounting.

4.2.11 Does IFRS cause change in tax strategies?

Question 12 analysed whether implementing IFRS can cause a company to change its tax strategies. The average response was 1.77, which implies that, on average, the respondents disagree with the potential impact of IFRS on tax strategies of companies in the UK. The average score of large companies was 2.25 and 1.67 for SMEs. One of the main reasons for the lower impact of IFRS on tax strategies is because tax regulations are not always same as those in accounting standards. Results from another empirical study also show that respondents do not believe in change in tax strategy implication of implementing IFRS by (Jermakowicz and Gornik-Tomaszewski, 2006).

4.2.12 Does IFRS cause change in information system in the company?

Question 13 analysed whether implementing IFRS requires a company its information system. The average response was 3.20, which implies that, on average, the respondents believe that implementation of IFRS does not need a new information system. However, SMEs were more close to agreeing that information systems require changes or upgrades. It may also be due to the fact that they may be looking to change information system at some stage and combining it with IFRS is a good opportunity.

Chapter 5: Conclusion

5.1 Conclusion

The purpose of this research was to study the implications of implementing IFRS in organisations in the UK. All listed companies in the UK are required to publish IFRS financial statements since 2005 under a directive from the EU. IFRS has also come out with IFRS for SMEs which is a lighter version of the main IFRS to reduce the resource and cost implications of implementing IFRS in SMEs.

The benefits, as discussed in academic literature, of implementing IFRS are greater access to capital, lower cost of capital, better comparability of accounts, greater reporting transparency, better quality and timeliness of management accounts and easier consolidation of accounts. The results of the survey in this research shows that respondents do not believe that IFRS results in better access to capital or lower cost of capital. Similarly, the response on greater reporting transparency was neither agree nor disagree. The exemptions available to SMEs under IFRS make it difficult for better comparison. Exemptions also hinder greater reporting transparency though the response of large companies was more agreeable. Respondents, especially large firms, did agree that IFRS helps in easier consolidation of accounts because of few adjustments between parent company and international subsidiaries if subsidiary companies also follow IFRS.

The costs of implementing IFRS are costs of transition, more disclosure of competitive information, increased volatility of earnings, higher breach of covenants, change in tax strategies and change in information system. Respondents from large companies agreed with high cost of transition. SMEs did not view cost as a major factor, probably because of many exemptions available to them. Large companies also agreed with higher volatility of earnings, as witnessed during the financial crisis. But firms did not agree whether increase in volatility will also result in breach of covenants. Companies also did not think implementing IFRS results in significant changes in tax strategies. SMEs were more inclined to think that IFRS implementation will require a change in information system.

5.2 Limitations

The research has some limitations which are discussed here. Firstly, the sample size is only 35 companies. Though this does meet the minimum 30 sample size requirement, it does not cover companies in depth from different perspectives such as size and sector. A bigger sample with coverage of more sectors will be a better representation of implications of implementing IFRS on companies in the UK.

Secondly, the ratio of large to SMEs was skewed in favour of SMEs. This does reflect the higher percentage of SMEs in number but the number of sectors covered in large companies was less and the results cannot be generalised.

5.3 Recommendations for Further Research

The effectiveness and credibility of results can be enhanced by incorporating the following suggestions for future research.

Increase the sample size to include companies from all sectors in both large companies and SMEs.

Include results from interviews as subjective views can highlight why companies believed in some of their answers. This will also improve the credibility of the analysis.

Chapter 6: Appendices