Deviations from the Mandatory Adoption of IFRS in the European Union: Implementation, Enforcement, Incentives, and Compliance

Abstract

In this paper, we evaluate the common assertion that EU firms began using IFRS by 2005 when the EU formally adopted IFRS. We find that although the incidence of firms using local (or some other) GAAP has declined between 2005 and 2009, it is still nontrivial. For instance, by 2009 the incidence of non-IFRS financial statements was still in excess of 17% (42% of which were fully consolidated). We estimate a model of the non-adoption of IFRS as a function of proxies for EU-wide and country-specific implementation of the IFRS regulation, country-specific enforcement mechanisms, and firm-specific reporting incentives. We find that being traded in EU-regulated markets, preparing fully consolidated financial statements, and having a more diversified corporate structure are positively associated with the likelihood of using IFRS, and using US GAAP in the preceding year is significantly negatively associated with adopting IFRS. We find little evidence that country-specific enforcement is associated with IFRS adoption during our time period. Finally, we find that several reporting incentives proxies are associated with adopting IFRS, such as being large and closely-held with wider analyst following. We interpret our results to mean that many EU firms do not use IFRS; that firms exploited definitions, exemptions, and deferrals in the regulation to avoid adopting IFRS; and that firms responded to their reporting incentives in making the decision to adopt IFRS.

Keywords: EU, IFRS, enforcement, reporting incentives