Does Transition to IFRS Substantially Affect Key Financial Ratios in Equity-Based Common Law Regimes? Evidence from the UK

Advances in Accounting, vol. 30, no. 1, pp. 241-250

Posted: 8 Feb 2015

See all articles by Rainer Lueg

Rainer Lueg

Leuphana University of Lueneburg - Department of Accounting, Business & Management; University of Southern Denmark - Department of Accounting, Business & Management

Pawel Punda

Independent

Michael Burkert

Independent

Date Written: January 1, 2014

Abstract

This paper provides evidence of how a transition to IFRS affects key financial ratios and the pertinent financial statement items. Building on Lantto and Sahlström's (2009) evidence from creditor-oriented code law regimes, we examine the impact of IFRS transition on listed companies in the shareholder-oriented common law regime of the UK. The study contributes two insights: First – despite their similarities – conversion from the UK General Accepted Accounting Principles (GAAP) to IFRS leads to substantial differences in key financial ratios. These even surpass differences reported by companies in creditor-oriented code law regimes. We find that medians of profitability ratios increased substantially: Operating Income Margin (OPM) increased by 10.8%, Return on Equity (ROE) by 27.0%, and Return on Invested Capital (ROIC) by 14.4%. The Current Ratio (CR) and Price-to-Earnings (P/E) Ratio also exhibit significant but less drastic changes of 4.2% and −2.9%, respectively. Second, differences in shareholder-oriented common law regimes have the same causes as in creditor-oriented code law regimes, i.e., an increase in Operating Income, Net Income, Current Liabilities and Invested Capital, as well as a decrease in Shareholder Equity.

Keywords: IFRS, UK GAAP, Transition, Reconciliation, Ratio, Common law, Code law

JEL Classification: M10

Suggested Citation

Lueg, Rainer and Punda, Pawel and Burkert, Michael, Does Transition to IFRS Substantially Affect Key Financial Ratios in Equity-Based Common Law Regimes? Evidence from the UK (January 1, 2014). Advances in Accounting, vol. 30, no. 1, pp. 241-250, Available at SSRN: https://ssrn.com/abstract=2561299

Rainer Lueg (Contact Author)

Leuphana University of Lueneburg - Department of Accounting, Business & Management ( email )

Universitätsallee 1
Lüneburg, 21335
Germany

University of Southern Denmark - Department of Accounting, Business & Management ( email )

Universitetsparken 1
Kolding, 6000
Denmark

Pawel Punda

Independent ( email )

Michael Burkert

Independent ( email )

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