Relevance and Sufficiency of Pre-Reporting: Transition of Finnish Small and Medium-Sized Listed Companies to IFRS

Abstract

This study focuses on the implementation and valuation impacts of mandatory transition to International Financial Reporting Standards (IFRS), using samples of Finnish first-time IFRS users. The Finnish data is used since prior research findings suggest large differences between Finnish accounting standards (FAS) and IFRS. The relevance of firms' IFRS pre-reporting (pre-reporting is recommended by the Committee of European Securities Regulators, CESR) is evaluated by studying the association between the amount of disclosed IFRS-related information during the implementation phase and the impact of IFRS on certain accounting figures in the reconciliation report. Sufficiency of pre-reporting is studied by the stock market responses around the release of the reconciliation report. Our results show that, on average, IFRS adoption significantly increases reported earnings and total assets of companies. However, IFRS pre-reporting seems to be somewhat associated with IFRS impacts on company equity and assets, but not with reported earnings. Finally, we did not find evidence of stock market impacts in the vicinity of the release of the reconciliation report. Our main conclusion is that companies have supplied enough relevant information to the market about IFRS impacts before the release of the reconciliation report. However, since IFRS pre-reporting is usually quite descriptive and without strong connection to changes in accounting figures, investors may have sufficient means to interpret financial statements prepared in accordance with FAS. Thus, the transition to IFRS from FAS in Finland has been quite transparent without causing any major surprises.