The Economic Consequences of IFRS: The Impact of Ias 32 on Preference Shares in the Netherlands

27 Pages Posted: 3 May 2006

See all articles by Abe de Jong

Abe de Jong

Rotterdam School of Management, Erasmus University

Miguel Angel Rosellón Cifuentes

Erasmus University Rotterdam (EUR) - Department of Financial Management

Patrick Verwijmeren

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Date Written: May 8, 2006

Abstract

The consequences of international accounting standards are likely to reach beyond the impact on financial statements. This paper demonstrates one of the economic implications of international standards. We focus on the impact of the IFRS regulation on preference shares (IAS 32) in the Netherlands. IAS 32 causes most preference shares to lose their classification as equity and these shares will hence be classified as liabilities. We document that for Dutch firms with preferred stock outstanding, the reclassification will on average increase the reported debt ratio by 35%. We find that 71% of the firms that are affected by IAS 32 buy back their preference shares or alter the specifications of the preference shares in such a way that the classification as equity can be maintained. The main determinant of the decision whether to give these consequences to IAS 32 is the magnitude of the impact of IAS 32 on a firm’s debt ratio. We conclude that IFRS does not only lead to a decrease in the use of financial instruments that otherwise would have added to the capital structure diversity, but also changes firms’ real capital structure.

Keywords: IFRS, Accounting Changes, Economic Consequences, IAS 32, Magnitude Effect, Preference Shares

Suggested Citation

de Jong, Abe and Rosellón Cifuentes, Miguel Angel and Verwijmeren, Patrick, The Economic Consequences of IFRS: The Impact of Ias 32 on Preference Shares in the Netherlands (May 8, 2006). ERIM Report Series Reference No. ERS-2006-021-F&A. Available at SSRN: https://ssrn.com/abstract=899523

Abe De Jong

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T08-25
Rotterdam, 3000 DR
Netherlands
+31 10 408 1022 (Phone)

HOME PAGE: http://https://www.rsm.nl/people/abe-de-jong/

Miguel Angel Rosellón Cifuentes

Erasmus University Rotterdam (EUR) - Department of Financial Management ( email )

P.O. Box 1738
Room T09-53
3000 DR Rotterdam
Netherlands

Patrick Verwijmeren (Contact Author)

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

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