Thumbs up for IFRS, says financial analysts

May. 17, 2016

IFRS has been a change mostly for the good – at least in the view of financial analysts. That was the conclusion at a seminar arranged by the Swedish House of Finance on April 25.

The effects of the International Financial Reporting Standards, IFRS, that were adopted in the EU in 2005, have been researched in numerous studies. But researchers face challenges in measuring the effects – how do you separate the effects of IFRS from the effects of other changes occurring at the same time? And if you do find an increase in quality of accounting, how do you know that it is not simply due to the fact that all listed companies now report with the same standards?

Hanna Setterberg, SSE, and Per Olsson, European School of Management and Technology, Berlin, aim to solve this dilemma – and presented their research on the effects of IFRS during the seminar.

- Trying to disentangle the comparability effect to the quality effect is quite messy and hard, said Hanna Setterberg.

One major challenge for researchers is that several of the countries that adopted IFRS in 2005, also made a change in how their enforcement bodies worked at the same time. This makes it difficult to tell whether observed effects are due to accounting standards, or due to the changes in enforcement. Previous studies have come to different conclusions in this matter, even based on the same data.

- This is a famous fight in accounting research, stated Per Olsson.

 

So – how can this be solved? In their study, which was conducted together with Tomas Hjelström, HHS, and Frank Ecker, Duke University, Hanna Setterberg and Per Olsson have opted to use a different measurement. By using analysts’ adjustments to reported earnings as a measurement, they aim to avoid some of the problems previous research has encountered.

The study compares the analysts’ adjustments before and after the firms had transitioned from domestic standards to IFRS. This way, the study uses the magnitude of analysts’ earnings adjustments as a summary indicator of how the analysts perceive the quality of reported earnings: if they perceive the quality of reported earnings to be poor, they will make larger or more adjustments.

- This is a pretty messy field of research where results are all over the place. But the area of financial analysts is one area which is more consistent than others, explained Per Olsson.

 

The study shows that analysts’ adjustments decreased significantly after firms had adopted IFRS.

- The financial analysts seem to perceive the earnings per share to be of higher quality, or more useful for their purposes, after the adoption of IFRS – as they do fewer adjustments, said Hanna Setterberg.

 

One question posed both by the researchers themselves, and by the audience, was how the changes in IFRS regarding amortization of goodwill affected the results of the study. Could the changes in quality be due to the changes in amortization of goodwill?

- We can’t find that at all, responded Hanna Setterberg. And the fact that comparability is higher doesn’t seem to drive the result either.

 

During the seminar, the researchers posed several questions to the audience who were able to answer in an anonymous poll. On the question “Do you believe the financial reporting quality in Sweden improved with the introduction o IFRS?”, the answer was almost unanimously “yes”.

However, when asked whether Swedish listed firms fully comply with IFRS standards, almost half of the participants answered no.

 

Peter Malmqvist, equity analyst, visiting teacher at SSE and chairman of the Swedish Society of Financial Analysts, gave his view on IFRS – and was very optimistic.

- I’ve looked through 150-200 interim and quarterly reports every quarter since 1997. And I can tell you – it’s never been better than today. The kind of information you can get from a company today, when it comes to accounting details, is fantastic.

But there is room for improvement, especially regarding goodwill:

- The goodwill is in average 45 per cent of equity today, and I think it will go up. This gives incentive to acquire a company instead of trying to expand organically. Then you can put all the accumulated market cost in the balance sheet, and at least 75 per cent of that is not amortized on. That’s what we will live with in the long run. Goodwill needs to be solved better in IFRS, said Peter Malmqvist.