IFRS ADOPTION AND KEY ACCOUNTING RATIOS: AN EVIDENCE FROM COLOMBO STOCK EXCHANGE

Abstract

The purpose of this study is to investigate the impact of International Financial Reporting Standards (IFRS) adoption on key accounting ratios of firms listed in the Colombo Stock Exchange (CSE). The study also sought to test if the entity’s sector discriminates the impact that the IFRS adoption has on accounting ratios being evaluated. Descriptive statistics and non-parametric univariate analysis (Mann Whitney U test) were used to compare pre and post IFRS convergence ratios. The researchers tested eleven accounting ratios falling under profitability, liquidity, leverage, and market performance. We randomly sampled 40 firms listed in CSE, 20 each from the service and manufacturing sectors. The study period was ten years from 2007 through 2016, whereby the periods corresponding to pre-IFRS convergence were from 2007 through 2011, and post-IFRS convergence was captured from 2012 through 2016.. We showed that all profitability measures we tested were significantly impacted by IFRS adoption. We infer that the direct comparability of the profitability measures across pre and post-IFRS periods is no longer useful for decision making. In contrast, all liquidity ratios investigated were significantly indifferent between the pre and post-IFRS adoption. We have argued that liquidity measures have not changed considerably due to IFRS adoption and may thus still be comparable across pre and post-IFRS periods. Leverage and market ratios returned mixed results. We also document that the IFRS convergence’s impact on profitability and leverage ratios tends to be influenced by the sector in which firms operate, while its impact is not evidenced in relation to liquidity measures and market ratios. The limitation of this paper is that the effects of firm-specific variables and macro-economic factors on accounting ratios were not controlled. The results are useful for those interested in analyzing the long-term trends of accounting ratios. Our findings will also help the policymakers, standards setters, financial analysts, and future researchers about the behaviors of accounting ratios and quality financial reporting due to convergence to IFRS-based accounting regimes. This study is one of very few works on this topic in Sri Lanka, an IFRS jurisdiction with a developing economy.