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JAAR
12,1

A cross-country analysis of IFRS

reconciliation statements
Suzanne Fifield, Gary Finningham, Alison Fox and David Power
University of Dundee, Dundee, UK, and

26

Monica Veneziani
University of Brescia, Brescia, Italy
Abstract
Purpose One of the most fundamental changes to affect financial reporting in recent years has been
the introduction of International Financial Reporting Standards (IFRS). This paper aims to examine
the nature of the Income Statement and Net Equity IFRS adjustments for a sample of companies from
the UK, Ireland and Italy following the introduction of IFRS.
Design/methodology/approach A sample of IFRS Reconciliation Statements are examined to
identify the most significant IFRS adjustments. Using an index of conservatism, these amounts are
further analysed to assess their impact on the accounting numbers reported under previous national
GAAP.
Findings For all three countries, the IFRS profit was greater than that reported under previous
national GAAP. IFRS also had a significant effect on net worth; while UK and Italian companies
experienced an increase in equity upon the adoption of IFRS, the Irish firms in the sample recorded a
decrease. The analysis also indicated that the impact of IFRS on profit and net worth was primarily
attributable to a few core standards including IFRS 2, IFRS 3, IFRS 5, IAS 10, IAS 12, IAS 16, IAS 17,
IAS 19, IAS 38 and IAS 39.
Practical implications A multi-country perspective for future IFRS research is required as the
impact of individual IFRS varies in importance from one country to another.
Originality/value By analysing the IFRS that have had a significant impact on accounting
numbers prepared under previous national GAAP, opportunities for future research are identified.
Keywords International finance, Financial reporting, United Kingdom, Italy, Ireland
Paper type Research paper

Journal of Applied Accounting

Research
Vol. 12 No. 1, 2011
pp. 26-42
r Emerald Group Publishing Limited
0967-5426
DOI 10.1108/09675421111130595

1. Introduction
One of the most fundamental changes to affect financial reporting in recent times has
been the introduction of International Financial Reporting Standards (IFRS). These
standards were applied to the consolidated financial statements of European Union
(EU)-listed companies for annual accounting periods beginning on or after 1 January
2005. Previous year comparatives were also required to be shown in the first set of
financial statements published under the new rules, together with reconciliations to the
equity and profit figures that were calculated according to previous national
accounting standards. Therefore, in the EU, the basis underpinning the preparation of
the annual report, as well as the components, format and presentation of financial
statements, have changed dramatically.
Preliminary evidence suggested that changes to the financial statements were
substantial. For example, in 2005, Vodafone plc reported that the application of IFRS
resulted in the restatement of a 1.9 billion loss into a 4.5 billion profit in its financial
statements because goodwill was no longer written off to the income statement
(Financial Times, 2005a). Similarly, in the same year, ICI highlighted the impact of IFRS
on corporate earnings when it revealed that the application of the new rules boosted its
Monica Veneziani contributed to this project with particular reference to Italy.

2004 profit by 6 per cent, primarily because of changes in the accounting treatment of
pensions, goodwill, derivatives and share options (Financial Times, 2005b). Further,
Astra Zenecas 2005 re-stated results showed that earnings per share had decreased
by $0.02 and net assets had decreased by $48 million when it adopted International
GAAP (Accountancy, 2005), while BA announced that it would not be able to pay a 2005
dividend because of its 1.4 billion pension deficit under International Accounting
Standard (IAS) 19 (Financial Times, 2005c). Therefore, a study of the actual impact of
IFRS adoption is required so that general conclusions about the financial effects of the
new standards can be made[1].
This paper reports an analysis of the IFRS reconciliation statements of a large
sample of EU companies from the UK, Ireland and Italy. It investigates the impact of
IFRS on both the net profit and the net worth of the sample companies as well as
examining the effect of individual international standards. A cross-country
comparison between the three countries is also made. Therefore, this study is not
intended as a theoretical piece of work, but rather serves to inform subsequent
research. The remainder of this paper is organised as follows. Section 2 summarises the
developments towards the international harmonisation of accounting standards in the
EU and reviews prior research that has identified those IFRSs that have proved
problematic due to the significant financial impact they have had upon
implementation. The financial reporting environments of the countries examined in
this study are described in Section 3. Section 4 details the dataset used and presents
some preliminary statistics while the method of analysis adopted, and the results, are
discussed in Section 5. Finally, Section 6 offers a number of concluding observations.
2. The EU Implementation of IFRS
Until the 1990s, companies from different countries prepared their financial statements
according to different national GAAPs that meant that direct comparisons were not
possible. As a result, reconciliation statements were required in some capital markets
especially the USA (Street and Bryant, 2000; Haller, 2002). Over time, as the costs of
such reconciliations increased, the benefits from harmonising the financial reporting
requirements of different countries became more apparent. In addition, as the process
of globalisation gathered pace, it was argued that harmonisation would enable
stakeholders anywhere in the world to use a set of financial statements without
worrying about different accounting and disclosure treatments that existed in various
countries at that time (Street and Shaughnessy, 1998). It would also allow companies
with subsidiaries in different countries to produce financial statements according to a
single set of accounting principles (Buchanan, 2003).
One of the main driving forces behind the harmonisation process was the launch of
the International Accounting Standards Committee (IASC) in 1973. Since the IASCs
inception, professional accountancy bodies from different countries have worked
together on this committee to obtain a consensus about a common set of accounting
rules. From 1973 until 2001, the IASC issued IASs which were approved by a majority
of the ten member countries (Australia, Canada, France, Germany, Ireland, Japan,
Mexico, The Netherlands, the UK and the USA) (ICAEW, 2006)[2]. On 1 April 2001, the
International Accounting Standards Board (IASB) replaced the IASC and the new IASs
became known as IFRSs. Table I contains a list of current IFRS and IAS.
In June 2002, the EU mandated that publicly traded EU incorporated companies had
to prepare consolidated accounts under International GAAP (European Commission,
2001). At the time, it was estimated that this regulation would potentially affect 7,000

IFRS
reconciliation
statements
27

JAAR
12,1

28

Table I.
Existing IFRS and IAS

Panel A: IFRS
1. First-time adoption of International Financial Reporting Standards
2. Share-based payment
3. Business combinations
4. Insurance contracts
5. Non-current assets held for sale and discounted operations
6. Exploration for and evaluation of mineral resources
7. Financial instruments: disclosures
8. Operating segments
Panel B: IAS
1. Presentation of financial statements
2. Inventories
7. Statement of cashflows
8. Accounting policies, changes in accounting estimates and errors
10. Events after the balance sheet date
11. Construction contracts
12. Income taxes
16. Property, plant and equipment
17. Leases
18. Revenue
19. Employee benefits
20. Accounting for government grants and disclosure of government assistance
21. The effects of changes in foreign exchange rates
23. Borrowing costs
24. Related party disclosures
26. Accounting and reporting by retirement benefit plans
27. Consolidated and separate financial statements
28. Investments in associates
29. Financial reporting in hyperinflationary economics
31. Interests in joint ventures
32. Financial instruments: presentation
33. Earnings per share
34. Interim financial reporting
36. Impairment of assets
37. Provisions, contingent liabilities and contingent assets
38. Intangible assets
39. Financial instruments: recognition and measurement
40. Investment property
41. Agriculture
Note: This table summarises the current international accounting standards in publication, where
IFRS represents International Financial Reporting Standards issued by the IASB and IAS represents
International Accounting Standards issued by the IASC

European companies ( Jermakowicz and Gornik-Tomaszewski, 2006); as of 2001, only

275 were actually reporting under IAS (Haller, 2002). Surprisingly, Dutch, Irish and UK
firms were least in favour of the new regulation, although their standards were already
closely aligned with those of the IASB; it has been argued that companies in these
countries believe their national accounting standards to be superior (Haller, 2002).
Prior research has indicated that the implementation of IFRS has caused preparers
of financial statements a variety of problems for a number of reasons (Dunne et al.,
2008). For example, the adoption of some IFRS has required many companies to change
the way that their underlying information systems capture and categorise accounting
data. In addition, some IFRS have resulted in increased disclosure in the financial

statements and others have had a material financial impact on the income statement
and/or balance sheet.
Most concerns, within an EU context, have focused on the disclosure requirements
of IAS 39 Financial instruments: recognition and measurement, especially for larger
firms in certain industries (PwC, 2006a, b, 2007). However, the implementation of IAS
39 has also required many companies to account for, and disclose, their financial
instruments for the first time, recognise derivatives on the balance sheet and employ
hedge accounting practices (Cairns, 2004). Similarly, the implementation of IAS 19
Employee benefits has also caused problems in financial statements in terms of the
complexity of the calculations that are required and their impact on the volatility of the
income statement numbers (Fearnley and Hines, 2002; Cairns, 2004; Jermakowicz and
Gornik-Tomaszewski, 2006; KPMG, 2006; PwC, 2007).
A third standard that has been the focus of much attention in the literature is IFRS 2
Share-based payments (Jermakowicz and Gornik-Tomaszewski, 2006; PwC, 2006c,
2007). For example, Ernst & Young (2006) note that 90 per cent of companies of the
companies in their study had charges to the income statement under this standard
where previously there had been little disclosure. Likewise, IFRS 3 Business
combinations and IAS 36 Impairment of assets have caused much controversy
because of their impact on the volatility of the income statement numbers
(Jermakowicz and Gornik-Tomaszewski, 2006; PwC, 2006a, c, 2007). For example,
Ernst & Young (2006) reported that 50 per cent of the companies in its sample reported
impairment to goodwill and 67 per cent reported impairments to assets generally when
these standards were implemented.
IAS 12 Income taxes, and the associated change in deferred taxation, is another
standard that has caused concern (Fearnley and Hines, 2002; PwC, 2006a), although
KPMG (2006) found that FTSE 250 companies were more affected by changes to
deferred tax rules than their counterparts in the FTSE 100.
Other standards that have also been cited as problematic because of their financial
impact include, IAS 16 Property, plant and equipment (PwC, 2006a), IAS 18 Revenue
(PwC, 2007), IAS 37 Provisions, contingent liabilities and contingent assets
( Jermakowicz and Gornik-Tomaszewski, 2006), IAS 38 Intangible assets (Fearnley
and Hines, 2002; Jermakowicz and Gornik-Tomaszewski, 2006; PwC, 2006b, c, 2007) and
IAS 17 Leases as exemplified by Sir David Tweedies well-publicised joke that he would
like to fly on an aeroplane that is actually owned by an airline before he dies (ICAS, 2007).
A small number of studies have analysed the implementation of IFRS, most notably
Aisbitt (2006) who examined the reconciliation statements of the FTSE 100 companies.
Aisbitt (2006) discovered that, although the overall effect of IFRS on FTSE 100
companies was relatively small, the change in convention for line items was significant.
There was a sectoral bias whereby healthcare firms in the sample experienced a
negative impact on net equity upon adopting IFRS while companies in the consumer
goods sector recorded a positive impact on net equity. This finding differs with the
results of Jermakowicz and Gornik-Tomaszewski (2006) who noted that net equity rose
by 11 per cent for their sample of EU-firms upon the adoption of IFRS.
In Aisbitts analysis, the standards that had the biggest effect on net equity
were IAS 19 (15 per cent), IAS 16 ( 11 per cent), IAS 7 ( 8 per cent), IAS 12
( 6 per cent), IFRS 3 (4 per cent) and IAS 39 ( 4 per cent). The standards
that appeared most frequently in the IFRS reconciliation statement included IFRS 2,
IAS 10, IAS 12, IAS 16, IAS 17, IAS 18, IAS 19, IAS 21 and IAS 32/29. Refer to Table I
for details of the accounting issues to which these standards relate.

IFRS
reconciliation
statements
29

JAAR
12,1

30

3. The UK, Irish and Italian financial reporting environments

The UK, Ireland and Italy were selected for analysis in this paper to help explain any
differential application across the three jurisdictions. While the reporting environment
of the UK and Ireland are very similar, that of Italy is quite different. The regulation of
the UK and Irish financial reporting environments originates from three sources:
(1)

accounting standards[3];

(2)

Stock Exchange requirements[4]; and

(3)

company law[5].

The requirements of accounting standards and the stock exchange tend to inform the
content of company law, which in effect, codifies best practice. Also, UK and Irish
financial statements provide information to a wide range of stakeholders.
In Italy, Roman law prevails; this system is characterised by the importance of
written codified law, as opposed to custom and usage. Accounting standards are issued
by a rule-making body called Organismo Italiano di Contabilita` (OIC) and, together
with the provisions of the Civil Code, the resulting accounting standards contribute
to the formation of financial statements. However, the role of accounting standards is
subordinate; in other words, they are not compulsory but have an integrative and
interpretative function with respect to the provision of the law (Marchi, 2000). In this
country, the most common type of company is the small-medium enterprise (SME). The
majority shareholdings in such companies are usually held within a single family and the
main source of finance tends to be the bank. In this environment, accounting practice
typically generates financial statement disclosure which meets legal requirements and
provides communication of a general nature only (Vigano, 1990). This role for disclosure
contrasts with the Anglo-Saxon model, where there are large numbers of management-run
companies that rely on millions of private shareholders for finance. In countries such as
Italy, creditors as opposed to investors, are considered to be the main users of corporate
financial statements. Furthermore, in this environment the stock exchange is characterised
by a small number of listed companies and, hence, it does not act as a regulatory body.
Therefore, from an accounting standpoint, Italian companies apply accounting
regulations which class creditors as the primary user/stakeholder and assume that
they have not changed significantly over time. By contrast, the IFRS regime is
designed primarily around the Anglo-Saxon model which results in some difficulties
for Italian preparers of financial statements. In addition to these differences, there is
also diversity in some of the qualitative characteristics such as prudence[6], the basic
assessment criterion[7] and the principle of substance over form (Di Pietra, 2002;
Provasoli, 2003; Adamo, 2004)[8].
4. Data and summary statistics
The aim of this research is to examine how the introduction of international GAAP has
impacted on the financial reporting practices of a sample of adopting companies in the
UK, Ireland and Italy. The analysis focuses on the reconciliation statements included
in the first annual reports produced under IFRS from a sample of companies in these
three countries. In the UK, the FTSE 100 firms and a random sample of other listed
firms were selected for inclusion in the analysis. The initial UK sample consisted of
171 companies, although 39 firms had to be excluded for reasons set out in Table II;
a sample of 132 thus resulted. Ten Irish firms were randomly selected from the
companies listed on the Irish Stock Exchange. The companies listed on the MIB 30 as

Initial sample considered

Companies excluded
Data unavailable
Change in ownership status
Financial statements not prepared under IFRS
Sample examined
Companies excluded
Reconciliation statement could not be analysed
Sample for analysis
Subsample analysed: income statement
Subsample analysed: balance sheet

UK

Ireland

Italy

Total

171

10

30

211

(14)
(15)
(4)
138

(0)
(0)
(0)
10

(0)
(1)
(2)
27

(14)
(16)
(6)
175

(6)
132
88
92

(0)
10
7
6

(0)
27
27
27

(6)
169
122
130

Notes: This table details the sample used in the analysis of reconciliation statement. In particular, the
table outlines the initial sample of companies considered and the reasons why certain companies were
excluded from the investigation

at 31 December 2004 represented the initial group of companies chosen for the Italian
investigation. The MIB 30 consists of the 30 largest and most frequently traded
companies in Italy. Three of these firms had to be excluded from the analysis; further
details regarding the reasons for exclusion are given in Table II. Thus, in total, 169
post-IFRS annual reports were analysed for this research.
IFRS 1 specifically required first-time adopters to:
(1)

reconcile its equity reported under national GAAP to its equity under IFRS[9];
and

(2)

reconcile its most recent annual profit/loss reported under national GAAP to
the equivalent IFRS profit/loss[10].

Although the standard does not prescribe a format for the reconciliation statement, the
implementation guidance does contain an example of a line-by-line reconciliation of the
financial statements. Of the 169 companies that produced a line-by-line reconciliation,
only a subset provided information that enabled transitional adjustments to be
matched to specific IFRSs; therefore, further companies were omitted from the
investigation as the absence of a line-by-line reconciliation did not allow the impact of
individual standards to be examined. The final sample for the income statement
analysis consisted of 122 companies: 88 from the UK, seven from Ireland and 27 from
Italy. The final sample for the balance sheet analysis included 125 companies: 92 from
the UK, six from Ireland and 27 from Italy.
For each of these companies, the reconciliations were grouped according to the
relevant standard and the amount of the adjustment was expressed as a percentage of
the total equity adjustment in the balance sheet or total profit (loss) adjustment in the
income statement. These percentages were then analysed statistically and descriptive
information produced. This information is reported for the whole sample in Table III.
The left-hand half of this table (Table III) relates to the income statement adjustments
while the right-hand half relates to the balance sheet adjustments.
Table III is each split into nine columns; the first outlines the accounting standard
associated with the IFRS adjustment while the next four columns supply descriptive
statistics for the income statement adjustments; the final four columns provide

IFRS
reconciliation
statements
31

Table II.
Sample details

JAAR
12,1

32

Table III.
Descriptive statistics for
the total sample

IFRS income statement adjustments

Mean
SD
Min
Max
IFRS 1
IFRS 2
IFRS 3
IFRS 4
IFRS 5
IAS 1
IAS 2
IAS 10
IAS 12
IAS 16
IAS 17
IAS 18
IAS 19
IAS 21
IAS 23
IAS 27
IAS 28
IAS 31
IAS 32
IAS 36
IAS 37
IAS 38
IAS 39
IAS 40
IAS 41
IAS 28/IAS 31
IAS 32/IAS 39
IAS 27, 28 and 31
Goodwill
IFRS 3 and IAS 38
IFRS 4 and IAS 39
IAS 28 and IAS 21
IAS 32, 39 and IFRS 4
Minority interests
Reallocations
Asset swaps
Unclassified (other)

1.26
41.45
114.79
1.99
11.52
1.35
0.57
3.02
10.41
3.00
11.14
0.85
10.69
2.64
0.40
5.43
9.70
0.25
0.06
2.73
9.26
10.14
47.21
5.11
0.86
0.13
0.21
1.22
7.70
2.37
1.63
0.11
0.00
0.61
0.59
0.03
0.59

13.05
403.03
547.03
40.03
127.07
10.05
5.45
18.09
127.67
29.67
255.30
14.15
140.50
19.72
3.25
66.76
112.14
3.97
0.40
36.62
48.89
397.93
225.73
24.42
9.33
2.47
16.96
10.30
30.41
14.42
19.08
1.11
0.00
4.65
6.20
0.28
120.44

0.00
2,875.00
1,050.00
265.29
1,337.50
0.33
0.00
0.01
244.64
289.41
912.50
61.29
352.11
120.44
0.86
140.00
1,173.77
13.37
3.49
367.74
320.33
3,863.16
1,477.42
1.96
3.57
13.79
110.14
0.00
83.67
0.00
18.67
11.73
0.00
40.00
0.00
0.00
850.00

137.50
2,200.00
5,447.37
260.98
40.93
77.70
57.35
122.79
1,130.43
45.16
2,512.50
120.49
1,075.00
42.58
33.33
684.21
111.18
29.90
0.00
102.17
127.59
1,467.74
96.79
157.48
98.23
19.96
73.33
106.88
166.41
96.79
200.00
0.00
0.00
1.73
65.32
3.00
635.42

IFRS equity adjustments

Mean
SD
Min
Max
5.17
5.13
28.65
2.69
0.00
1.51
0.96
101.66
10.72
14.13
6.86
2.40
165.27
0.12
1.64
0.16
0.15
0.42
3.26
0.87
7.88
10.88
2.08
0.18
0.98
0.10
4.16
22.87
1.79
1.22
0.00
3.21
0.21
3.16
2.04
1.54
10.13

48.64
16.79 508.20
19.82
21.05 149.58
57.36 210.16 329.11
20.34 189.47
28.79
0.00
0.00
0.03
16.01
0.00 170.17
7.07
3.78
68.05
459.54
0.00 4,822.73
346.83 1,688.98 3,136.36
113.69 336.44 925.97
24.61 143.79
8.59
15.04 129.73
18.00
864.37 9,136.36
78.26
2.00
7.42
17.44
9.75
0.00
80.95
6.01
47.04
28.95
9.34
66.67
70.79
5.47
56.96
10.32
21.92 206.33
23.35
6.60
34.02
30.92
42.57
30.88 378.72
61.26 114.29 481.82
40.16 246.22 190.40
1.11
8.83
0.00
10.38
0.23 110.37
1.46
6.50
13.85
39.13 101.67 373.40
136.87 119.74 1,264.83
9.95
0.00
88.98
13.00 138.16
0.00
0.04
0.00
0.42
25.62 142.86 116.63
1.31
10.22
0.00
51.70 234.36 410.53
19.31 203.72
0.00
14.37 121.05
53.42
106.31 1,120.78
90.35

Notes: This table reports the IFRS adjustments calculated as a percentage of the total adjustment to the
profit (loss) and equity under national GAAP as at 31 December 2004. Specifically, summary statistics are
reported: Mean is the average, SD is the standard deviation, Median is the mid-point while Min and Max are
the minimum and maximum values. In calculating these summary statistics, the absolute value of the total
adjustment was used in the denominator of the percentage calculation

descriptive information for the balance sheet adjustments. In particular, the mean size
of each adjustment as a percentage of the total adjustment, along with its standard
deviation, is provided. The minimum and maximum percentage size of the adjustment
associated with each standard across all the companies in the sample is displayed in
order to provide some insight about the range of adjustments made by the sample
firms for the different IFRS.

A distinctive picture emerges from an analysis of the income statement adjustments

in Table III. On average, the positive impact of the reconciliation to IFRS GAAP was
mainly due to IFRS 3 (114.79 per cent), IAS 12 (10.41 per cent), IAS 17 (11.14 per cent)
and IAS 19 (10.69 per cent). However, the positive impact of these adjustments on total
profit under national GAAP was offset to some extent by changes required under
IFRS 2 (41.45 per cent), IFRS 5 (11.52 per cent), IAS 38 (10.14 per cent) and IAS 39
(47.21 per cent). The standard deviation values in the income statement part of
Table III are sizeable for some of the accounting standards (IFRS 2 (403.03 per cent),
IFRS 3 (547.03 per cent), IAS 17 (255.30 per cent), IAS 38 (397.93 per cent) and IAS 39
(225.73 per cent)) indicating that there was considerable variation in their impact on the
total adjustment for the sample of firms. This view is confirmed by the minimum and
maximum values which are very large in a number of cases. For example, the range of
adjustments for IAS 38 varies from 3,863.16 per cent to 1,467.74 per cent of the
total adjustment to profit (loss) under national GAAP. Eleven IASs had no material
impact on the income statement reconciliation figures and these have therefore been
excluded from Table III (IAS 7, IAS 8, IAS 11, IAS 14, IAS 20, IAS 24, IAS 26, IAS 29,
IAS 30, IAS 33 and IAS 34).
A visual inspection of the balance sheet half of Table III also reveals a number of
interesting findings. First, the overall impact on the balance sheet of implementing
IFRS for this sample of firms varied from standard to standard. The main standards
which increased total equity were those associated with IAS 10 (101.66 per cent), IFRS
3 (28.65 per cent), IAS 38 (10.88 per cent) and IAS 16 (14.13 per cent). These positive
adjustments to total equity were partly offset by changes put through under IAS 19
(165.27 per cent) and IAS 12 (10.72 per cent). For some of the sample firms, the
information supplied by companies in their reconciliation statements did not permit
the allocation of an adjustment amount to one specific standard; in these few cases, the
multiple standards are shown in the tables and involve sizeable average percentage
values in certain circumstances.
Second, these mean percentage adjustments mask a wide spread of values across
the sample firms. The four largest standard deviation figures relate to IAS 19 (864.37
per cent), IAS 10 (459.54 per cent), IAS 12 (346.83 per cent) and IAS 16 (113.69 per cent).
This impression is confirmed by an analysis of the minimum and maximum
percentage adjustment values. The gap between these figures is very big for several of
the accounting standards suggesting that the impact of different IFRS varied from
company to company. For example, the adjustments associated with IAS 12 range from
a low of 1,688.98 per cent to a high of 3,136.36 per cent of the total adjustment to the
equity figure under national GAAP. The spread of the percentage of the adjustment for
IAS 19 ranges from 9,136.36 per cent to 78.26 per cent.
5. An index of conservatism
The IFRS disclosures of companies from the three sample countries were also
examined by means of a conservatism index. This index, which was developed by
Gray (1980), is useful for assessing whether there are material quantitative differences
in profits and equity reported under IFRS as compared to that reported in accordance
with national GAAP[11]. To examine the impact on profit from moving from national
GAAP to IFRS, the index was calculated as:
1

ProfitNational GAAP  ProfitIFRS

jProfitNational GAAP j

IFRS
reconciliation
statements
33

JAAR
12,1

Similarly, to assess the extent of the differences in equity reported using national
GAAP and IFRS, the index was calculated as:
1

34

EquityNational GAAP  EquityIFRS

jEquityNational GAAP j

If the index assumes a value greater than 1, this indicates that profits or equity
reported using IFRS are less conservative than those reported using national GAAP.
By contrast, an index value of less than 1 means that IFRS-based figures are more
conservative than those produced using national GAAP. An index value equal to 1
indicates neutrality between IFRS-based and national GAAP-based figures[12].
In addition to calculating an overall index of conservatism for profit and equity, the
relative effect of individual adjustments required under each IAS was also examined
by constructing partial indices as:
1

Partial adjustment
jProfitNational GAAP j

1

Partial adjustment
jEquityNational GAAP j

and

Equations (1-4) were used to calculate index values for each of the sample companies.
The index values were then averaged across the companies for each of the three sample
countries and the results reported in Table IV for the income statement and in Table V
for the balance sheet. In particular, Tables IV and V show that, for each country, the
mean and standard deviation for the overall conservatism index as well as for each of
the partial indices. The tables also report the results from a t-test that was used to
determine whether the mean index values were significantly different from the neutral
value of 1[13].
Perhaps the most salient point arising from an examination of Table IV relates
to the mean index values that were calculated for the profit figures reported under
IFRS and national GAAP. In particular, the table shows that, on average, the profit
reported under IFRS for the sample companies was higher than that reported under
UK, Irish or Italian GAAP. More specifically, the results show that profits under IFRS
were 101.0 per cent, 23.6 per cent and 16.5 per cent higher than their value under
UK, Irish and Italian GAAP, respectively. Furthermore, reported profits using IFRS
were significantly greater than those reported under UK and Italian GAAP at the
1 per cent and 10 per cent level, respectively; the p-value for the UK conservatism
index is 0.010, while the corresponding figure for the Italian conservatism index is
0.052. Thus, the results suggest that IFRS had a significant impact on the reported
profits of UK and Italian firms, although the impact was greater for the UK firms in
the sample.
The effect of individual IASs also varied across the sample countries. For example,
the number of standards that resulted in a statistically significant adjustment was
highest (lowest) for the UK (Irish) firms in the sample; significant p-values were
obtained for two UK and two Italian partial indices while only 1 adjustment was
significant for the Irish companies[14]. Further examination of these results reveals
that IFRS 3 had a significant negative impact on the income statement of UK and

Index

UK
Mean StDev

Profit
2.010
IFRS 1
1.000
IFRS 2
1.005
IFRS 3
0.682
IFRS 4
1.000
IFRS 5
0.996
IAS 1
0.995
IAS 2
0.998
IAS 10
0.906
IAS 12
1.102
IAS 16
1.030
IAS 17
1.051
IAS 18
0.994
IAS 19
0.996
IAS 21
1.027
IAS 23
1.000
IAS 27
1.000
IAS 28
1.000
IAS 31
0.985
IAS 32
1.002
IAS 36
1.003
IAS 37
0.996
IAS 38
0.925
IAS 39
1.006
IAS 40
0.496
IAS 41
0.990
IAS 28/IAS 31
1.000
IAS 32/IAS 39
0.868
IAS 27, 28 and 31

Goodwill
0.957
IFRS 3 and IAS 38
1.992
IFRS 4 and IAS 39
1.000
IAS 28 and IAS 21
1.000
IAS 32, 39 and IFRS 4

Minority interests
1.002
Reallocations
0.990
Asset swaps
1.000
Unclassified (other)
0.998

3.585
0.000
0.361
0.934
0.005
0.031
0.040
0.019
0.606
0.773
0.250
0.475
0.058
0.151
0.195
0.002
0.003
0.002
0.178
0.017
0.038
0.036
0.574
0.035
3.016
0.099
0.000
1.259

0.281
0.124
0.003
0.003

0.011
0.099
0.000
0.034

p-value

Ireland
Italy
Mean StDev p-value Mean StDev p-value

0.010***
0.320
0.892
0.002***
0.305
0.209
0.222
0.267
0.148
0.222
0.270
0.316
0.299
0.808
0.203
0.320
0.181
0.595
0.435
0.292
0.504
0.337
0.226
0.117
0.121
0.323
0.188
0.327

0.158
0.093*
0.508
0.320

0.109
0.320
0.320
0.515

1.236
1.000
1.013
0.795
1.000
1.000
1.000
1.000
1.000
0.950
1.000
1.001
1.018
0.993
1.008
0.987
0.999
1.000
0.999
1.000
1.000
1.000
0.999
1.001
1.000
1.000
1.000
0.999

1.002
1.996
1.000
1.000

1.000
1.000
1.000
1.002

0.546
0.000
0.016
0.437
0.000
0.000
0.000
0.000
0.000
0.130
0.000
0.003
0.047
0.021
0.021
0.035
0.003
0.001
0.002
0.001
0.000
0.001
0.003
0.004
0.000
0.000
0.003
0.004

0.007
0.000
0.000
0.000

0.000
0.000
0.000
0.003

0.296

0.073*
0.262

0.348

0.356
0.356
0.381
0.350
0.356
0.356
0.717
0.356
0.356

0.356
0.946
0.356

0.356
0.356

0.175

0.219

1.165
0.999
1.005
0.808
0.970
1.000
1.000
0.999
1.000
1.009
1.005
1.004
1.003
1.046
1.000
1.000
0.996
0.988
1.000
1.000
1.002
1.019
0.979
1.035
1.000
1.000
1.000
1.000
0.966
1.000
2.000
1.000
1.000
1.000
1.000
1.000
1.000
1.002

0.422
0.003
0.016
0.381
0.109
0.000
0.000
0.005
0.000
0.040
0.022
0.015
0.022
0.133
0.001
0.001
0.024
0.068
0.000
0.000
0.015
0.077
0.119
0.123
0.000
0.000
0.000
0.000
0.167
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.152

0.052*
0.327
0.100
0.015**
0.165

0.327

0.258
0.238
0.238
0.453
0.083*
0.332
0.352
0.441
0.365

0.518
0.225
0.357
0.145
0.327

0.297

0.956

Notes: For each of the three sample countries, the table details the mean conservatism index value
(Mean), its standard deviation (StDev) and the results from a t-test (p-value) that was used to test
whether the mean index value was significantly different from the neutral value of 1. *, ** and
*** denote significance at the 10 percent, 5 percent and 1 percent levels, respectively

Italian companies; profits under IFRS were 31.8 per cent (UK firms) and 19.2 per cent
(Italian firms) lower than under national GAAP because of the differences in the
treatment of business combinations.
Several standards had no effect on the profits reported by UK, Irish and Italian
companies and have therefore been excluded from Table IV. Eleven of these zero
impact standards were common to companies in all three countries (IAS 7, IAS 8, IAS
11, IAS 14, IAS 20, IAS 24, IAS 26, IAS 29, IAS 30, IAS 33 and IAS 34)[15].

IFRS
reconciliation
statements
35

Table IV.
Index of conservatism for
the income statement

JAAR
12,1

36

Table V.
Index of conservatism
for the balance sheet

Index

UK
Mean StDev

p-value

Ireland
Italy
Mean StDev p-value Mean StDev p-value

Equity
IFRS 1
IFRS 2
IFRS 3
IFRS 4
IFRS 5
IAS 1
IAS 2
IAS 10
IAS 12
IAS 16
IAS 17
IAS 18
IAS 19
IAS 20
IAS 21
IAS 23
IAS 27
IAS 28
IAS 31
IAS 32
IAS 36
IAS 37
IAS 38
IAS 39
IAS 40
IAS 41
IAS 28/IAS 31
IAS 32/IAS 39
Goodwill
IFRS 3 and IAS 38
IFRS 4 and IAS 39
IFRS 3 and IAS 38
IAS 28 and IAS 21
IAS 32 and IAS 39
IAS 27, 28 and 31
IAS 32, 39 and IFRS 4
Prior year/Op. b/s adjustment
Opening b/s adjustment(s)
Fixed assets
Hindsight adj.
Asset swaps
Minority interests
Unclassified (other)

1.203
0.991
0.998
0.820
1.000
1.000
0.998
0.999
0.928
1.031
0.994
1.007
1.002
1.101
1.000
1.000
0.996
1.000
1.001
1.000
1.001
1.000
0.998
0.949
1.007
1.003
1.000
1.000
0.996
0.983
0.995
1.000
1.000
1.000

1.000
1.001
1.000
1.000
1.000
1.000
1.000

0.321
0.265
0.000***
0.269
0.320
0.320
0.320
0.253
0.002***
0.037**
0.132
0.014**
0.197
0.001***

0.800
0.320
0.230
0.326
0.452
0.420
0.250
0.156
0.219
0.281
0.182
0.294
0.875
0.267
0.259
0.134
0.320
0.439
0.320

0.176
0.364
0.320
0.320
0.320
0.320
0.909

0.945
1.000
0.999
0.978
1.000
1.000
1.000
1.000
0.959
1.061
0.997
0.999
1.019
1.039
1.000
1.000
0.994
1.002
1.000
1.000
1.000
1.000
0.999
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000

1.000
1.000
1.000
1.000
1.000
1.002
1.010

1.950
0.076
0.004
1.552
0.003
0.000
0.019
0.006
0.214
0.139
0.037
0.027
0.012
0.279
0.000
0.002
0.038
0.001
0.010
0.002
0.007
0.003
0.013
0.397
0.064
0.002
0.005
0.002
0.033
0.148
0.029
0.002
0.002
0.001

0.002
0.011
0.000
0.000
0.000
0.000
0.019

0.052
0.000
0.001
0.035
0.000
0.000
0.000
0.000
0.039
0.119
0.007
0.004
0.048
0.074
0.000
0.000
0.016
0.005
0.000
0.000
0.000
0.000
0.004
0.001
0.000
0.000
0.000
0.001
0.000
0.001
0.000
0.000
0.000
0.000

0.000
0.000
0.000
0.000
0.000
0.004
0.012

0.048**

0.311
0.179

0.048*
0.270
0.363
0.363
0.363
0.254

0.363
0.363

0.363

0.363
0.363

0.363
0.363
0.363

0.363
0.117

1.052
1.000
1.000
0.969
1.005
1.000
1.000
1.000
1.000
0.981
0.988
1.000
1.005
1.016
1.000
1.000
0.999
1.002
0.998
1.000
1.004
1.008
0.988
0.992
0.983
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.000
1.006
1.001
1.006
1.000
1.000
1.000
1.000
1.000
1.000
0.998

0.164
0.001
0.001
0.065
0.033
0.000
0.000
0.004
0.000
0.098
0.031
0.003
0.019
0.038
0.000
0.000
0.002
0.013
0.018
0.000
0.008
0.031
0.052
0.077
0.113
0.001
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.000
0.046
0.001
0.027
0.000
0.000
0.000
0.000
0.000
0.000
0.032

0.113
0.327
0.692
0.019**
0.453

0.612

0.325
0.045**
0.647
0.205
0.038*
0.327
0.229
0.234
0.361
0.551
0.327
0.029**
0.185
0.251
0.603
0.430
0.327

0.496
0.084*
0.266

0.720

Notes: For each of the three sample countries, the table details the mean conservatism index value (Mean), its
standard deviation (StDev) and the results from a t-test that was used to test whether the mean index value
was significantly different from the neutral value of 1. *, ** and *** denote significance at the 10 percent,
5 percent and 1 percent levels, respectively

A similar analysis of the balance sheet adjustments to IFRS was also conducted; some
of the results from this exercise are reported in Table V. In particular, the
table details the mean index value, its standard deviation and the results from a
t-test that was conducted to determine if the mean values were significantly
different from the neutral value of 1. The results are shown for the equity index and for
each partial index for each of the three sample countries. One key finding to emerge
from an examination of this table is that the impact of IFRS adjustments to national
GAAP is not common across all three countries. For example, the effect of IFRS
adjustments on UK and Italian companies was to increase total equity; on average,
total equity under IFRS was 20.3 per cent and 5.2 per cent higher than under UK
and Italian GAAP, respectively. By contrast, implementation of IFRS had a negative
effect on the total equity of Irish firms; the mean index value was 0.9459,
indicating that IFRS-based total equity was 94.5 per cent of its value under Irish
GAAP. However, it should be noted that there was considerable variation in the
impact of IFRS on the equity of the sample companies; the standard deviation of
the index values is sizeable at 195.0 per cent for UK firms and 16.4 per cent for
Italian firms.
Table V indicates that a larger number of international standards required
adjustment in the balance sheets of UK firms than either Irish or Italian companies,
however only a few resulted in significant adjustments. More specifically, only five
of the standards had a significant impact on the reported equity of UK firms, four had
a material effect on Italian firms and only one standard resulted in a significant
adjustment for Irish companies. Closer examination of these standards reveals that
their impact was different across the sample countries. In particular, while IFRS 2
(IAS 12 and IAS 19) significantly decreased (increased) the reported equity of UK
firms, it (they) had only a minimal negative (positive) effect on the balance sheet of
Irish companies and no (a mixed) effect on the net worth of Italian firms. Similarly,
it was only Italian companies that recorded significantly lower (higher) equity as a
result of IFRS 3 and IAS 16 (IAS 32). However, the impact of some standards was
common across the three countries, with IAS 10 (IAS 19) significantly decreasing
(increasing) reported equity in the UK and Ireland (UK and Italy)[16].
Taken together, Tables IV and V suggest that any analysis of the impact of IFRS
needs to take account of the nationality of the company. Such a finding is not
surprising since the impact of IFRS will vary according to the differences between the
national and IASs being studied.
6. Conclusion
This paper has analysed the extent and nature of IFRS adjustments using the
reconciliation statements that companies were required to produce under IFRS 1
First-time adoption of International Financial Reporting Standards. It did so in two
ways: first, by expressing the IFRS adjustment required by each standard as a
percentage of the total profit (loss) adjustment in the income statement or total
equity adjustment in the balance sheet for all countries together, and second, by
calculating an index of conservatism for each country.
The results indicate that the impact of IFRS implementation on profit in each of the
sample countries was significant; on average, profit calculated under national GAAP
increased by a sizeable percentage once figures were reported using IFRS. Some of the
standards responsible for this percentage increase included IFRS 3, IAS 12, IAS 17 and
IAS 19. However, the positive impact of these adjustments on total profit under

IFRS
reconciliation
statements
37

JAAR
12,1

38

national GAAP was offset to some extent by changes required under IFRS 2, IFRS 5,
IAS 38 and IAS 39. The results also show that the introduction of IFRS had a variable
effect on the total equity of companies from the three sample countries; while UK and
Italian companies experienced an increase in equity, the Irish firms in the sample
recorded a decrease. The standards that appear to have had the largest negative effect
on balance sheet figures included IAS 12 and IAS 19, although the decrease in equity
was partially offset by the positive effect of IAS 10, IAS 16, IAS 38 and IFRS 3. Perhaps
not surprisingly, some standards have no material impact on equity calculated under
national GAAP. These standards are predominantly, although not exclusively,
orientated towards disclosure. While further work is required to investigate why
certain standards had the most impact, the current paper provides some direction as to
where subsequent researchers should focus their attention. In addition, the current
paper suggests that researchers should adopt a multi-country approach when
undertaking any investigation of the impact of IFRS as standards vary in importance
from one country to another.
Notes
1. This approach differs from existing IFRS research which can be loosely based around five
themes: first, simulations of what might happen to company financial statements (Kasanen
et al., 1992; Teodori and Veneziani, 2005); second, anecdotal evidence from the experiences of
a few early UK adopters (Accountancy Age, 2004; Financial Times, 2005b); third, consultancy
reports by firms advising companies on preparation for the change (KPMG Ireland, 2003;
PwC, 2004); fourth, empirical surveys of the practices or experiences of early adopters in
European countries (Larson and Street, 2004; Ortiz, 2005); and fifth, the empirical findings of
studies examining the possible changes that might take place following the introduction of
IFRS (Fearnley et al., 2007).
2. The IASC often involved itself in joint projects with other accounting bodies. For example,
the harmonisation process was boosted in 1987 when the IASC and the International
Organization of Securities Commissions (IOSCO) joined forces to create a set of core IASs
(Haller, 2002). Similarly, four of the main accounting standard-setters (the US, UK, Canada
and Australia), and the IASC also formed a separate group known as G4 1 to act as a
think-tank based on producing transparent, capital market-based financial reports (Street,
2006). It achieved a measure of success in harmonising the accounting practices of its
members during the 1990s and issued 12 discussion papers on matters such as recognition
and measurement, financial instruments, hedge accounting, leases and share-based
payments (Street and Shaughnessy, 1998). The G4 1 gradually evolved to become an
embryonic standard-setter but, despite these developments, progress towards
harmonisation on a wider scale was slow.
3. Before 1970, there was no formal system governing accounting standard-setting and
guidance on particular accounting matters was typically provided by the professional
bodies. In the UK, accounting standards are currently issued by the Accounting Standards
Board. As Institute of Chartered Accountants of Ireland (ICAI) is also involved in that
standard-setting process, the resulting standards typically include a separate section
detailing differences for application by companies operating in the Republic of Ireland.
These differences primarily relate to variations in taxation.
4. The Stock Exchange requirements contained in the listing rules are designed to regulate the
flow of information in the market. These requirements must be complied with by listed
companies; those failing to do so face expulsion from the market. Most of these requirements
have been incorporated into statute and existing accounting standards in both the UK and
Ireland.

5. In the UK, the Companies Act 1981 reformed the form and content of published financial
statements by standardising their presentation. This legislation was amended in 1989 and
has since been replaced by the Companies Act 2006 which is more wide-ranging in nature.
For example, it focuses on areas beyond the scope of traditional financial statements such
as how companies deal with social and environmental issues. Irish company law is primarily
contained in the Companies Acts 1963-1990 and the Companies (Auditing and Accounting)
Act 2003 which are largely based on their UK equivalents.
6. In Italy, prudence is the basic criterion used when drawing up financial statements whereas,
for the IASB, it represents only a characteristic relating to the reliability of information
(Rossi, 2003).
7. The introduction of the fair value concept represents an important change in accounting
traditions for Italian companies that have tended to use historical cost (Ijiri, 1970).
8. The principle of substance over form was introduced into the Italian financial reporting
environment in the company law reform of 2003. However, in reality, the application of this
principle has only ever been partial.
9. This reconciliation was required both at the date of transition to IFRS and at the end of the
latest period presented in the entitys most recent annual financial statements under national
GAAP.
10. It also required first-time adopters to provide an explanation of any material adjustments
to the cashflow statement but only where one had been presented under national GAAP.
Given that not all companies would have produced a cashflow statement under national
GAAP, this part of the reconciliation was excluded from the analysis.
11. Some commentators argue that the term conservatism index is misleading as accounting
methods that result in lower profit or equity figures are not necessarily more conservative.
Instead, they argue that the index is better viewed as a comparability index as it indicates
how similar or dissimilar reported figures are (Roberts et al., 2002).
12. The conservatism, or comparability, index has been used in several studies that have
examined the differences in reported figures produced under various GAAP. For example,
Weetman and Gray (1991) used the index to examine the effect of accounting principles on
profits produced under Dutch, Swedish, UK and US GAAP while Weetman and Gray (1990)
and Weetman et al. (1998) studied the impact of UK and US accounting principles on
reported profits. Other studies have examined the figures reported under various European
accounting regimes (Emenyonu and Gray, 1992; Canib~ano and Mora, 2000).
13. To guard against the possibility that outlying index values may distort the mean results,
medians were also calculated and a non-parametric Wilcoxon signed ranks test was
conducted to determine whether the median index values were significantly different from
the neutral value of 1. Information about these median results is available from the authors
upon request.
14. In particular, IFRS 3 and IFRS 3/IAS 38 resulted in significant adjustments in reported
profits for UK companies while IFRS 2 had a material impact on the reported profits of Irish
firms. For the Italian companies in the sample, significant adjustments in profits were
required under IFRS 3 and IAS 19.
15. To guard against the possibility that outlying index values may distort the mean results,
medians were also calculated and a non-parametric Wilcoxon signed ranks test was
conducted to determine whether the median index values were significantly different from
the neutral value of 1. The median index values and the results from the Wilcoxon signed
ranks test largely confirm the findings from Table IV that first, profits reported under IFRS
were higher than those reported using national GAAP; and second, IFRS 2 and IFRS 3 had a
material impact on the reported profits of the sample firms. However, the results also suggest

IFRS
reconciliation
statements
39

JAAR
12,1

40

that reported profits were significantly affected by IAS 10, IAS 21, IAS 39 and IAS 40 in the
UK and IAS 37, IAS 38 and IAS 39 in Italy. Due to space considerations, these results are not
presented here but are available from the authors on request.
16. The results from an analysis of median index values support these findings. Specifically, in
addition to the significant standards identified in Table V, the results from the analysis of
median index values indicate that IFRS 3 and IAS 38 had a material effect on the reported
equity of UK firms, while IAS 37 and IAS 38 resulted in a significant adjustment to the
reported equity of Italian companies.
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Corresponding author
Alison Fox can be contacted at: a.m.fox@dundee.ac.uk

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