The Impact and Importance of Mandatory Adoption of International Financial Reporting Standards in Europe

Abstract

In this paper we report the results of conducting a two-stage analysis on the impact and importance of mandatory adoption of International Accounting Reporting Standards (IFRS) on European Union (EU) firms. In the first stage we determined the impact of mandatory adoption of IFRS across fifteen countries and twenty industries in the EU. This was accomplished by identifying significant differences in return on assets (ROA) for firms computed under IFRS and local, generally accepted accounting principles (LG). Significant positive differences were detected for firms in Finland, France, Italy, the Netherlands, Norway, Sweden, Switzerland and the UK: only Belgium firms exhibited a negative average significant difference between ROA calculated using IFRS and LG. Repeating the analysis of differences in ROA on an industry-by-industry basis yielded additional German, Portuguese and Spanish firms for the second stage of the analysis in which the impact of mandatory IFRS adoption was assessed. Defining impact in terms of market and financial reporting quality, we found a statistically significant relationship between IFRS accounting information and market returns for firms in the all-countries combined sample, and in the countries of Belgium, Finland, Germany, Norway and the United Kingdom. Support for the timeliness of IFRS accounting information was uncovered for firms in Belgium, Finland, France, Italy, the Netherlands, Sweden and Switzerland. Finally, evidence to support the proposition that an IFRS regime produces quality discretionary accruals was found for firms from the all-countries-combined sample and from Belgium, Finland, Germany, Norway, Portugal, Spain and the United Kingdom. Results of comparing differential accounting information constructed under IFRS and LG, however, were less profound and consistent. Specifically, we identified firms in the all-countries-combined sample and the countries of Portugal and Spain as having more value relevant earnings per share based on IFRS than those derived using LG. When our examination focused on the timeliness of earnings, a positive differential impact between earnings constructed on the basis of IFRS and local accounting standards was detected for Belgian firms only. Finally, the quality of discretionary accruals was shown to be significantly higher under IFRS than LG for firms in Portugal and Spain.