WHAT ARE THE PRACTICAL IMPLICATIONS TO ALL ORGANIZATIONS IMPLEMENTING THE INTERNATIONAL FINANCIAL REPORTING STANDARDS IN THE UK?

1. Introduction

Accounting standards play a principal role in the presentation of financial statements for any business organization (Deegan & Unerman 2005). The primary objective of implementing these accounting standards is to regulate the accounting principles needed for proper classification of financial statements. Currently, the Accounting Standards Board is harmonizing the accounting standards in the UK to be consistent with the International Financial Reporting Standards (IFRS). The implementation of the amendments in UK reporting standards to match the IFRS is likely to impose numerous practical implications for organizations that are currently using the UK Generally Accepted Accounting Principles.

Recent developments in UK accounting standards have seen listed companies compelled to make use of IFRS in reporting their consolidated accounts. In addition, ASB aims at extending the use of IFRS to all publicly accountable business entities and singe-company accounts. Latridis (2010) affirms that the implementation of IFRS in the UK will help in the elimination of information asymmetry and would facilitate smooth communication between stockholders, managers, lenders and other interested stakeholders (Belverd & Marian 2010). Theoretically, this has the capability of lowering costs associated with equity and debt financing. Other hypothesized implications of IFRS adoption in the UK include higher levels of comparability, reduced transaction costs and increased international investment. This gradual transition from UK Accounting standards to IFRS poses the need to analyze the respective practical implications associated with the move in order to have a rational for ensuring that UK accounting standards are consistent with the IFRS (Gibson 2010).

2. Research Problem

Recent advancements in UK financial reporting standards have led to business organizations to consolidate their financial reporting standards to match the IFRS (Gray 2001). It is a fact that this consolidation imposes some practical implications for firms that are currently using UK GAAP, especially with respect to accounting practices and financial performance. This study aims at providing evidence concerning the practical implementation associated with the implementation of IFRS on UK organizations. Specifically, the study will examine both financial and organizational implications associated with IFRS adoption.

2.1 Main Objectives

The following are the objectives of this research:

1. To compare the performance measures of organizations under UK accounting standards and IFRS
2. To determine organizational implications of IFRS adoption by organizations in UK

2.2 Research Question

What are the Practical Implications to All Organizations Implementing the International Financial Reporting Standards in the UK?

3. Motivation for the Study

Prior studies and empirical literature have placed more emphasis on IFRS compliance and implementation issues. The present research aims at providing empirical evidence concerning the practical implications for organizations implementing the IFRS in the UK. The motivation for this study lays on the fact that previous studies focused only on the macro implications; that is, the implications of IFRS on the UK accounting platform as a whole, rather than the practical implications for individual organizations. Therefore, this study serves to assess the transition gap existing between the existing UK accounting standards and IFRS. In addition, this study focuses on implications that extend beyond the reported accounting figures to include wide-spectrum implications of IFRS implementation among UK organizations such as stakeholder relationships, corporate governance, financial reporting standards, impact on financial reporting practices, and potential economic impacts such as profitability and equity of UK organizations.

4. A Brief Review of Literature

Numerous studies have placed emphasis on the impact of implementing the IFRS on core financial measures of UK businesses and the volatility effects associated with IFRS adoption. A study by Latridis (2010) concluded that IFRS implementation in the UK has imposed some considerable impacts on the financial performance of organizations, especially regarding their profitability and growth potential. Latridis (2010) further affirmed that the fair value aspect of IFRS has increased volatility in the income statement amounts. Specifically, the findings of the study reported that key financial measures (growth potential and profitability) are relatively higher under IFRS than UK GAAP. In addition, IFRS implementation among UK organizations has led to higher leverage measures by UK firms, which are mainly attributed to the high financial reporting quality of IFRS. Latridis (2010) infers that this serves to enhance the credibility and bargaining power of organizations.

According to ACCA (2010), the implementation of the IFRS is a key driving factor in implementing changes in the accounting standards and practises in the UK. The ASB considers the use of IFRS in the United Kingdom financial reporting standards as a rational step to facilitate the synchronization of the UK GAAP with the various reporting standards used in other countries. In accord with proposals suggested by the ACCA, the United Kingdom ASB maintains that substituting the UK accounting standards with the IFRS is a significant landmark in improving the financial reporting standards and practises in the country (Iain & Stuart 2007). As such, the ASB reports that IFRS adoption will enhance comparability among listed and unlisted companies in the United Kingdom, and with other organizations worldwide that are using the IFRS. The ACCA (2010) uses this framework to conclude that the adoption of IFRS by organizations in the UK will increase opportunities for global business. The implication of this is that users of financial statements in the United Kingdom will be certain that the information presented in the financial statements are consistent with the global standards (ACCA, 2010). Further, the ASB is of the view that replacing the UK accounting standards with the IFRS will lead to comparability between financial statements of organizations with numerous jurisdictions, which serves to increase the magnitude of cross-border trade in the United Kingdom.

Gray (2001) conducted a study to evaluate the impacts of IFRS adoption by SMEs. The implementation of IFRS by Small and Medium-Sized Enterprises means that financial reporting will primarily involve simplified accounting for the various stakeholders. Gray (2001) noted that the replacing the UK accounting standards with the IFRS requires constant training and education of accounting professionals and users of the financial statements in order to facilitate the adoption of a single system by organizations for financial reporting. The recent advancements in financial reporting have placed emphasis on a tiered framework, which facilitates targeted response by concerning financial reporting entities by both listed and unlisted companies (Higson 2003). Therefore, the recent transition from UK accounting standards to IFRS poses the need for significant changes; specifically, companies will incur costs associated with initial training, upgrading of accounting software packages and costs associated with preparing and auditing financial reports. However, Gray (2001) noted that these costs are superseded by the fact that modification of the UK accounting standards relating to financial reporting will lead to considerable improvements in comparability and uniformity in the financial reporting practices and standards in the UK with their global counterparts. Companies that are currently using full UK GAAP will be mostly affected by the transition of the accounting standards to IFRS (Solomon, 2010).

To the best of my knowledge, no study has evaluated the practical implications of IFRS adoption on individual organizations. It is evident that most prior studies and theoretical frameworks place emphasis on the macro effects of IFRS adoption on the UK, and they have limited their studies on financial implications, rather than wide spectrum impacts on individual organizations using IFRS. This presents a vast opportunity to conduct a research that aims at exploring the practical implications of IFRS to organizations beyond key financial measures. Therefore, this research will add on the existing literature concerning the implementation of IFRS in UK.

5. Research Methodology

Methods of research depend on the structure of research question, implying that this research will need the analysis of both qualitative and quantitative data from selected organizations in the UK. The study will make use of both primary and secondary data to achieve the research objectives.       

5.1 Study Design

This study will be sample-based, implying that it will examine the IFRS implications on selected organizations in the UK. The criterion for sample selection will be current usage of IFRS accounting standards among the organizations (Ryan, Robert & Theobald 2002). In addition, it is essential that the selected organizations will have used UK accounting standards before migrating to IFRS. This will facilitate a comparative analysis of the practical implications between IFRS and UK accounting standards. Comparative analysis will entail an analysis of key financial and organizational measures under previous UK accounting standards and currently IFRS. Financial companies will be excluded from the sample because they have different financial characteristics, especially regarding the nature of financial instruments (Ryan, Robert & Theobald 2002).

5.2 Nature of the Data to be Collected

The study will make use of both qualitative and quantitative data from both primary and secondary sources. Quantitative variables will comprise mainly of financial variables such as IFRS impact on profitability, growth potential, equity, and other financial variables used in reporting the financial position of an organization. In addition, organizations adopting IFRS for the first time will be required to document how the transition from the previous UK accounting standards to IFRS affected its financial position, cash flows and financial performance. Qualitative variables will comprise mainly of organizational implications of IFRS such as implications on the accounting practices, organizational constraints associated with the transition, and the level of comparability and its respective business advantages. Other qualitative variables used in the study will include impacts on accounting utilities such as the need to customize accounting software packages to meet the changes in financial reporting, and perceptions by accounting professionals concerning the transition. The study will also take into consideration the impacts of IFRS adoption on the quality of financial statements and stakeholder’s confidence on the process of financial reporting.

5.3 Data Collection Methods

Primary data collection will entail the use electronic questionnaires mailed to the selected organizations in UK. Questionnaires will be used to facilitate the collection of data such as on profitability, growth potential, equity and financial positions of organizations. Primary data sources serve as an effective method of carrying out a research because the information gathered is usually raw and devoid of manipulation, which increases the accuracy of the research study. Primary data will entail a direct interaction between the researcher and the respondents, whereas secondary data will entail an analysis of interim financial statements of the selected organizations, their annual reports.

5.4 Data Coding

This study will use both qualitative and quantitative data, implying that data coding will involve inferential and descriptive statistics. Descriptive statistics are used mainly to summarize and describe data, whereas inferential statistics are used in generalization of the selected organizations. Inferential statistics will entail the use of statistical test variables; for instance, paired t-test analysis will be used to assess the effect on reported profit and equity, and the impacts on the balance sheet and income statement figures. Since it is a comparative study, bivariate analysis will be used in the comparative analysis of implications under IFRS and UK accounting standards.

 

 

 

 

 

 

References

ACCA 2010. The future of UK GAAP. [Online] Available at:            http://www.acca.co.uk/members/publications/accounting_business/CPD/uk_gaap   [Accessed 26 April 2012].

Alexander, D, Britton, A & Jorissen, A 2007, International financial reporting and analysis,          Cengage Learning EMEA, New York.

Belverd, N & Marian, P 2010, International Financial Reporting Standards: An introduction,        Cenagge Learning, New York.

Deegan, C & Unerman, J 2005, ‘The financial reporting environment’, in Financial accounting      theory, McGraw Hill, London.

Gibson, C 2010, Financial reporting & analysis: using financial accounting information,    Cengage Learning, New York.

Gray, R&B 2001, ‘External reporting and auditing 1: Reporting within the financial statements’,   in Accounting for the Environment, Sage, London.

Higson, A 2003, Corporate financial reporting: theory and practice, Sage, London.

Iain, G & Stuart, M 2007, The audit process: principles, practice and cases, Cengage Learning     EMEA, New York.

Jones, R & Pendlebury, M 2000, Public sector accounting, FT/Prentice Hall, New York.

Latridis, G 2010, ‘IFRS adoption and financial statements effects: the UK case’, International      Research Journal of Finance and Ecinomics, no. 38, pp. 165-172.

McLaney, E & Atrill, P 2007, Accounting: An introduction, Financial Times Prentice Hall, New    York.

Ryan, B, Robert, SW & Theobald, M 2002, Research method and methodology in finance and      accounting, Academic Press, New York.

Solomon, J 2010, Corporate governance and accountability, John Wiley and Sons, New York.