Abstract
This study examines the extent to which the change from UK GAAP to IFRS has affected companies listed on the Alternative Investment Market (AIM) in the UK. The results suggest that, on average, profit reported under IFRS is higher than that reported under UK GAAP; however, the difference is much smaller for AIM listed companies as compared to what existing literature suggests for firms listed on main stock markets. The Gray's partial analysis results indicate that despite the extensive programmes for improving convergence over time there is still a considerable discrepancy between IFRS and UK GAAP.
Notes
1 CitationHofstede (1980) identifies four different dimensions of culture as; power distance, individualism, uncertainty avoidance, and masculinity. Under this framework, power distance is interpreted as gauging the level of equality or the lack thereof in power distribution across institutions and organizations. Similarly, uncertainly avoidance relates to whether people in a society attempt to manage the future by planning minute details without any flexibility or go with the tide. According to Hofstede, societies with high uncertainty avoidance have rules, standardized procedures, and formal organizational structures with little flexibility and tolerance to accommodate behaviours and opinions that differ from their own. In addition, individualism refers the extent to which individuals are integrated into groups. Individualistic societies typically depict the attributes of people concerned with themselves rather than the groups to which they may belong. Finally, the masculinity dimension of culture explores the extent to which there is a preference for success, heroism, achievement, and assertiveness in society. Based on Hofstede's framework, UK for instance, would typically be characterized by a high index value for individuality and masculinity, while a lower value for power distance and uncertainly avoidance dimensions.
2 Over the years UK has maintained sophisticated financial reporting standards with the largest capital market in the European Union.
3 Under the assumptions of Positive Accounting Theory, managers of firms will adopt certain accounting methods for self-interest (CitationWatts & Zimmerman, 1978).
4 CitationAisbitt (2006) notes that it is commonly believed that there would be insignificant adjustments to the reported figures under the UK GAAP, as both IFRS and UK GAAP stemmed from the same Anglo-Saxon reporting mode. She invalidates this presumption and argues that all these adjustments are dependent on individual cases and could vary from company to company.
5 Evidence in the existing literature shows differences between IFRS and UK GAAP along with effective dates (e.g., CitationOrmrod & Taylor, 2004; PriceWaterhouseCoopers, Citation2005, Citation2010).
6 At the start of the data collection process telephonic enquiries were made from randomly selected firms where we asked all those firms whether they prepare their accounts in house or outsource it to external parties. Through the outcome of the enquiries it came to the authors’ knowledge that most of the enquired firms which employed less than 20 permanent employees at the time hired third party services to prepare their transitional IFRS compliant financial statements. On the basis of this finding we assumed that due to their size and limited resources small firms may not have the desired technical expertise to deal with the new accounting regulation and/or understand its implications and have therefore excluded all those firms with less than 20 permanent employees from our sample.
7 The index was renamed by CitationWeetman, Jones, Adams, and Gray (1998), as the “Comparability Index".
8 The index has been used for measuring conservatism in equity (CitationAdams, Weetman, & Gray, 1993) and for exploring differences in return on equity (CitationHellman, 1993).
9 In those cases where material quantitative differences existed between IFRS and UK GAAP figures.
10 According to IFRS-1, companies are required to provide sufficient details in their reconciliation statements. This also provides an opportunity to examine distinctive standards adjustments. Partial index of materiality (CitationWeetman & Gray, 1991) is therefore used to analyse the effect of individual IAS. Partial adjustments, individual standard's adjustments, were calculated from reconciliation statements.
11 The resulting statistics show that the sample data is not normally distributed, and as a result, due care was needed in examining the mean values. The study thus gave consideration to both the mean and median values. This argument is based on the perception that in such circumstances, median values may provide a better estimate of adjustments than the mean values.
12 CitationLeuz (2010) argues that due to several differences across countries in accounting regulation, financial reporting systems are unlikely to converge at the global stage.
13 While commenting on the accounting treatment of purchased goodwill under IFRS, CitationBaboukardosa and Rimmela (2014) argue that in the treatment of purchased goodwill high compliance with IFRS is resulting in the generation of value relevant accounting numbers.