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Globalization is the integration of goods and capital markets between countries - this has had very lasting impact on the world's economy, especially in the last few decades. (Akisik, O. and Pfeiffer, R. 2009). Hence the need for International Accounting Standards (IAS) which is consistent and comparable has been gaining a lot of acceptance and prominence.
Generally Accepted Accounting Principles (GAAP) as such is used worldwide but it is moderated according to the needs of the respective countries' accounting regulations. However, in 2005, most of the UK listed companies were required to adopt International Financial Reporting Standards (IFRS) in their consolidated accounts and now this financial reporting standard has become most widely accepted accounting standards used in over more than 100 countries.
The UK and Europe was at the forefront in the introduction of International Financial Reporting Standards (IFRS). IFRS had been implemented simultaneously across many countries as a common language for business and financial reporting. IFRS was regulated by the European Council of Ministers in 2002 which required all EU listed companies to prepare their financial statements in accordance to the guidelines of the IFRS form 2005.
International Accounting Standards Boards (IASB) had adopted the IFRS in 2001 and it has many of the same standards previously specified under International Accounting Standards (IAS) which were set to improve the visibility of the firms' finances.
A recent survey conducted by International Corporate Governance Network (ICGN) about financial reporting and auditing concluded that investors around the world wanted a single comprehensive set of global financial reporting standards with 83% of the investors viewing this as a kind of harmonization which will witness a positive effect.(www.deloitte.com, Aug 2010)
Ian Griffiths quotes that "Every company in the country is fiddling its profits. Every set of published accounts is based on books which have been gently cooked or completely roasted. The figures which are fed twice a year to the investing public have all been changed in order to protect the guilty. It is the biggest con trick since the Trojan horse. . . In fact this deception is all in perfectly good taste. It is totally legitimate. It is creative accounting". (Amat O, Blake J, Dowds J, 1999)
Comparability is one of the most important factors in the implementation of IFRS along with higher standards of accounting. IFRS enables comparability of the firms' financial reports and along with an increase in transparency and reduction in information asymmetry and hence increasing the liquidity of the firms' by increasing investments (Chen, H.,Tang, Q., Jiang Y. and Lin, Z. 2010) and making the markets competitive and efficient.
Financial report provides investors with an insight to the firm's financial health and performance. Access to accurate information can be achieved with higher standards of accounting which help the investor to make an informed decision about their investment in the firm.
IFRS is regarded as a move-forward towards the fair valuation of assets and liabilities. The backers of IFRS argue that it is the best form of accounting which not only enables comparability and reduction in information asymmetry but also increases transparency (Horton, J., Serafeim, G., and Serafeim, I. 2009). But the critics of IFRS argue that the fair value orientation of IFRS will create volatility in the for the financial reporting due to manipulations by the mangers (Ball, R. 2006).
Impact of adoption of the IFRS on firms' finances varies from country to country. IFRS imposes very stringent disclosure requirements on firms which are intended at improving the visibility of the firm's liabilities, disclosure of pension-related obligation, executive remuneration by disclosing stock option in the accounts (www.qfinance.com, Aug 2010). IFRS has set standards for the way the firms account for their fixed assets by setting standards for the estimations of fair value of assets. Mergers and acquisition strategies are also affected considerably by the adoption of IFRS.
Financial reports pertaining to a firm can be used by different users for their own need. With the implementation of IFRS, information asymmetry would be reduced and hence communication between the firm and the users of its financial reports is made effective and smooth. Effective communication leads to lower agency cost. Firms that have implemented IFRS benefit from higher degree of comparability, reduced transaction costs and greater investment from international investors. Investors are greatly benefited from the implementation of IFRS which help them make informed decisions and predictions of the future financial performance of the firm and gives quality accounting practices and transparency (Iatridis G, 2010). IFRS tends to reduce earnings manipulation and enhance stock market efficiency.
Academics from Dundee University in the UK and University of Brescia in Italy lead a project to examine the financial reports of about 175 companies in the UK, Ireland and Italy (www.icas.org.uk, Aug 2010). The main impact of the switching from GAAP to IFRS was increased reported profits and net equity reduction.
In the UK, reported profits were 51% higher under IFRS than in UK GAAP
In the UK, Net Equity under IFRS was 35% lower compared to the reports under national GAAP
UK is recognised as having a highly regarded accounting standard in the Europe which is very much similar to the IFRS (Iatridis G, 2010). As such, the UK provided a very distinctive implementation framework unlike other EU countries and as a result, the investors were able to segregate various accounting alteration in a single time frame which helped in eliminating the possibility of any clutter from IFRS disclosures. (Horton J and Serafeim G, 2008).
The study aims at investigating the impact of IFRS on firm's listed in the UK stock exchange by analysis the financial reports and identifying new information disclosed and whether or not they have any impact of the stock prices of the firm. And to determine if the new standards are more comparable and transparent and if they reflect the true future potential of the firm. Financial and investment ratios are done to calculate the financial performance of the company based on the information collected. The study is conducted on two companies Rio Tinto Plc and Anglo American Plc for the year 2004 and 2005. Accounting information for the year financial year 2004 are available under UK GAAP and IFRS standards and relate this information to the stock market prices of the shares to determine which set of ratios reflect on the market valuation.