Move to international standards hits balance sheets, ICAS study finds

6 October 2008

The transition to International Financial Reporting Standards (IFRS) has had a significant impact on the profits and net equity of companies, according to a report published by the Institute of Chartered Accountants of Scotland.

The project examined the annual reports of 175 companies in three European countries – the UK, Ireland and Italy, and interviewed preparers and users of the reports, such as investors.

The switch from domestic GAAP (generally accepted accounting principles) to IFRS (international financial reporting standards) led to an increase in reported profits, but reduced net equity. This increase in profits was more marked for the UK (51 per cent) than in Italy (18 per cent) or Ireland (12 per cent).

In the UK, net equity under IFRS was 35 per cent lower compared to that reported under national GAAP. For Ireland the figure was 6 per cent and for Italy, companies’ reported equity was 3 per cent higher.

The Italian users were very positive that financial statements were now to be aimed at investors rather than creditors, with greater disclosure. UK and Irish interviewees were more sceptical about IFRS and did not feel that the change altered or improved their analysis of financial statements. They also felt that IFRS-compliant statements were too complex and that users had to be financially literate to understand them.

Commenting on the research, ICAS’s executive director, technical policy, David Wood, said: “Any change which heightens the perception of risk could scare off funders, especially in the present climate. The report emphasises the need to communicate to users that, despite the change in reported figures, the economic reality of the business has not been affected by the switch to IFRS.”