The researchers investigate the impact of implementation of International Financial Reporting Systems on key financial rations in Finland. In 2005, listed companies in the European Union made a step towards financial reporting from a bank-based to a market-oriented system when they implemented reporting in the International Financial Reporting Standards (IFRs). The authors points that although there is literature evidence that the quality of financial reporting is affected by the differences in the accounting standards, there is no description on what kind of impact these differences in reporting standards have on accounting numbers and financial ratios which are used as performance indicators.
The authors find suitability in the using data from Finland because the domestic accounting standards of the country (Finnish Accounting Standards-FAS) are similar to those of other countries in the European Continents and that the transition reporting of the country is more extensive than those of other countries in the same region. In addition, Finland has a high quality domestic accounting standards and a strong legal enforcement. The authors made assumptions that there was generally reliable transition reporting in Finland, as well as high-quality supervision by the Finnish authorities. The differences between the key financial rations on the domestic accounting standards (DAS) and IFRS are used by the authors to investigate whether IFRS changes the key financial ratios and these differences also help to investigate the main reasons for the differences in the DAS-based and IFRS-based financial statement items and accounting practices. Adoption of IFRS could result in changes of accounting figures because they are different from the DFS. There are some rules on reporting that are in the former and not featured in the latter although the domestic system allows accounting treatment as IFRS. The impacts of the reported difference in the accounting figures presented in the two systems may only be empirical question because it may be impossible to predict the remaining impact of the reporting practice on figures as companies may chose to report using the domestic or the international system. Since there is no possibility of predicting the exact impact of the adoption of system(s) that allow fair value accounting on accounting figures, the impact of adopting the systems may also be empirical question according to the authors. In financial reporting by the IFRS, firms are required to present transactions and event not only to meet legal requirements but also in their substance and economic reality while the domestic accounting standards do not carry the requirements that of substance and economic reality therefore they may be merely represented in accordance to their legal form.
Financial transparency and comparability of financial statements between European firms improves with the adoption of IFRS, although the adoption process is complex and burdensome for European firms. The intention of adopting IFRS may as well include making the capital market accessible to foreign investors, to improve investor protection and improve comprehensiveness and comparativeness. Resolution of information asymmetry between a firm and capital providers may be solved more likely by providing accounting information privately to the capital providers in countries in continental Europe with a code-law system and where the capital provided by families, banks or state tend to be more important than in countries of North America. In the latter, provision of high-quality public financial reporting may resolve the so said asymmetry.
The researchers find evidence that adopting IFRS change the magnitude of key accounting rations of the Finnish companies although the current ratio among ratios does not change after converting from FAS to IFRS. There was rise in the profitability ratio from 9-19% and a decline in price-to-earnings (PE) ratio by 11% after financial statements were converted from FAS-based to IFRS-based. This change can be accounted for by the increase in income statement profits. There was a decline of 0.7% and 0.2% in equity and quick ratio respectively. The gearing ratio increased by 2.9%. Increase in current liabilities may have been the major explanation of the decline in liquidity ratios. The changes in the key accounting ratios may be explained as occurring because of adoption of rules concerning the accounting of financial instruments, rules concerning lease accounting and income tax accounting, and the rules concerning fair value accounting.
International Financial Reporting Standards are different to the domestic reporting standards in European Union countries and thus they lead to changes in accounting figures. These systems have additional rules and requirements on reporting not featured in the DFS.
References and Bibliography
Lantto Anna-Maija, Petri Sahlström. (2009). Impact of International Financial Reporting Standard adoption on key financial ratios. Accounting and Finance 49.41–361. Journal of Compilation.