A study on the impact of IFRS adoption has looked beyond the early adopters for evidence. Phillip Ormrod and Peter Taylor reveal some surprising findings.

Seldom have regulatory changes to financial reporting been so long anticipated and debated so widely and intensely as the adoption of International Financial Reporting Standards. Yet, the focus of the debate so far has been, very largely, about compliance and implementation and has given less attention to the issues surrounding the impact and consequences of IFRS implementation.

This article reports some early evidence from a project at Liverpool University, which is attempting to measure the consequences of the implementation of IFRS in the UK. Specifically, it asks the question: how has the adoption of IFRS impacted on reported profit and on the equity of listed companies compared to UK GAAP? At this stage, the results of the project are those of work-in-progress but they provide preliminary quantitative data on the consequences of IFRS adoption.

There have been a number of 'early adopters' of IFRS and the impact on the financial statements of these companies has been quite widely reported.

By itself this is unreliable evidence of the generalised consequences of IFRS adoption as this early adopter sample suffers from self-selection bias. In other words, those companies that have adopted IFRS early are likely to have selected to do so for a specific reason, such as the likelihood that it would have a favourable effect on reported profit or equity.

In short, evidence from the early adopters cannot be relied upon to be an unbiased sample. For this reason we have looked beyond the early adopters for evidence.

The study

The study at Liverpool initially looks at the interim financial statements of the FTSE 100 non-financial companies. It looks at the impact of IFRS adoption on profits and equity as reported under the reconciliation disclosures required by para 39 of

IFRS 1, First-time Adoption of International Financial Reporting Standards.

The

IFRS 1 reconciliation provides a unique opportunity to collect evidence for companies' comparative periods, which would have been presented both under UK GAAP and IFRS. Hence, for the same set of underlying economic events, we are able to compare the evidence of two different measurement bases, but for one year only. This information may thus inform analysts' interpretation of company performance under IFRS in future years when no reconciliation back to the currently more familiar UK GAAP will exist. The data

The sample consisted of 50 of the non-financial FTSE 100 companies. It excluded companies that had failed to report the

IFRS 1 reconciliation in their interims and also early adopters which are not required to reproduce the reconciliation in subsequent years.

Vodaphone was also excluded as one single item reported by it was so large as to distort the general results of the sample.

The data from the IFRS reconciliation of each company was inserted into a spreadsheet, which reconciled UK GAAP profit (and equity) and IFRS profit (and equity) with separate explanatory columns for each standard.

The results

For all 50 sample companies taken together, the overall impact of IFRS compared to UK GAAP was to inflate group profit after tax by 39%. The analysis of the components making up this overall effect reveals that it is concentrated in a few standards. Conversely, and somewhat surprisingly, there are many standards where the differences between UK GAAP and IFRS were minimal.

The following table indicates the results of the impact of the adoption of IFRS, rounded to the nearest 1%. Each company's impact on the data underlying the table is weighted by its relative size, thus larger companies tend to have a more significant effect. The zeros in the table indicate that there was some effect of that standard but that it was less than 0.5% and was thus rounded to zero.

The largest single effect on profit was the change in the treatment of goodwill in

IFRS 3 to test for impairment as compared with FRS 10, Goodwill and Intangible Assets, which normally requires the amortisation of goodwill.

Somewhat surprisingly (as it is an industry-specific standard), the second largest effect was

IAS 40, Investment Properties. The adoption of IFRS had a very significant effect on the small number of investment property companies in the sample. The reported effect arose from the option to recognise fair values through profit or loss in IAS 40, whereas SSAP 19, Accounting for Investment Properties, recognises any gains through reserves with no effect on profit. However, this effect is now moderated by the IAS 12 requirement to recognise deferred tax on such gains.

Turning to the effect on equity, the impact of IFRS adoption is deflationary, with an overall reduction of 23%. It was no surprise that pensions had the major effect in the

IFRS 1 reconciliations but it was surprising that few other standards had much impact on equity, with only dividends, goodwill and deferred tax really having any material effect.

As expected, the consequence of

IAS 19 was significant. This was almost entirely as a result of the treatment of defined benefit pension schemes.

However, in terms of recognised values for most companies, this effect was in the transition from SSAP 24, Accounting for Pensions Costs, to

IAS 19 rather than from FRS 17, Retirement Benefits, to IAS 19. As such, the IFRS 1 reconciliation in this case more reflected the change in UK GAAP from SSAP 24 to FRS 17 than it did a change to IFRS.

Those companies, such as BP, which had already adopted

FRS 17, had minimal IAS 19 reconciliation adjustments. However, there was a variety of choice exhibited by companies with respect to IAS 19. The most common policy was to opt for early adoption of the IAS 19 amendment and thereby recognise actuarial losses in full through the statement of recognised income and expense. A number of companies did, however, adopt the 'corridor' approach. Discretion

The norm for

IFRS 1 adoption is full retrospective application of all IFRSs. However, certain departures are required and others permitted.

Sample companies adopted varying approaches, with the result that the starting point under the new regime varies between companies.

Common features were that most companies elected not to present comparative information with respect to

IAS 32 and IAS 39, thus the above reconciliations are likely to understate the long-term effects of these standards. Similarly, IFRS 2, Share-based Payment, displayed inconsistency of treatment with some companies applying it only to post 7 November 2002 grants as permitted by IFRS 1, while others applied it to all share option schemes.

There was significant consistency in companies not restating for acquisitions.

Conclusion

Perhaps the most surprising insight is that a small number of standards have had a large impact and that a large number of standards have had very little impact.

Impact of first-time adoption of IFRS in the UK for FTSE 100 non-financial companies

	Profit	Equity
UK GAAP	100%	100%
IAS 1 - Presentation of financial statements	0	0
IFRS 2 - Share-based payment	-2%	0
IFRS 3 - Goodwill	+24%	+3%
IFRS 3 - Other	+3%	0
IFRS 4 - Insurance	0	+1%
IFRS 5 - Discontinued activities and assets held for sale	0	0
IAS 10 - PBSE (dividends payable)	0	+3%
IAS 12 - Income taxes	-4%	-3%
IAS 16 - Property, plant and equipment	+2%	0
IAS 17 - Leases	-1%	-1%
IAS 19 - Employee benefits	+1%	-26%
IAS 21 - Foreign currencies	0	0
IAS 28 - Associates	0	0
IAS 31 - Joint ventures	-1%	0
IAS 32 - Financial Instruments	+4%	0
IAS 36 - Impairment	0	0
IAS 37 - Provisions	0	0
IAS 38 - Intangibles	0	0
IAS 39 - Financial instruments	0	0
IAS 40 - Investment properties	+13%	0
IFRS profit after tax	139%	77%

Phillip Ormrod is senior lecturer in accounting and Peter Taylor is professor of Accounting at Liverpool University.

ormrod@liv.ac.uk.