The introduction of international financial reporting standards (ifrss)

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The focus of this study is to examine the relationship between the introduction of International Financial Reporting Standards (IFRSs) and the impact on shareholders of FTSE 100 companies as demonstrated by the movement in share prices as a result of the disclosure of information concerning the IFRSs.

The project to harmonise accounting standards globally began in 1973 with the formation of the International Accounting Standards Committee (Elliot and Elliot, 2006, p.141). This was restructured in 2001 to “give an improved balance between geographic representation, technical competence and independence,” (Elliott and Elliot, 2006, p.142) as the International Accounting Standards Board (IASB). Throughout this whole project, concerns have been raised regarding the impact the new standards will have on companies and consequently, the shareholders. These criticisms have increased in recent years due to countries adopting the standards and experiencing difficulties with them. It is therefore important to identify whether the concerns are justified, as if the shareholders are negatively impacted by the standards, the harmonisation project could fail. 11

This project begins with the hypothesises to be tested before a review of the literature concerning both the development of the IFRSs and their implementation by European companies. The advantages of a single set of standards and the problems companies perceived they would encounter are discussed. This chapter goes on to focus on the specific standards that were expected to cause the greatest impact on the financial statements. There is also a review of the literature on the efficient market hypothesis as this underpins the research conducted by the author.

The second part of this project then discusses the methodology available for use in testing the hypothesises. The benefits and drawbacks are used to justify and explain the method employed by the author to conduct research into this topic area. The limitations of the research technique will then be examined.

The results from the research are outlined in the findings chapter of this study. The analysis of the results is shown in the fifth chapter of the project. This aims to bring together the academic research from the literature review with the findings from the author‟s research, therefore combining the theory of this topic with the reality as demonstrated within the FTSE 100 in the United Kingdom.

Finally, the conclusions that can be made from this study will be discussed in the last chapter. This utilises the evidence from the research to 12

substantiate (or otherwise) the hypothesises that have been developed. The limitations of the whole study and opportunities for potential further studies will then be outlined. 13



The three hypothesises to be tested during this study are:

Hypothesis 1: the concerns expressed prior to the publication of the first financial reports using IFRS were justified for the companies listed on the FTSE 100.

Hypothesis 2: the concerns expressed prior to the publication of the first financial reports using IFRS were not justified for the companies listed on the FTSE 100.

Hypothesis 3: the concerns expressed prior to the publication of the first financial reports using IFRS were justified for some sectors of the FTSE 100. 14




The aim of the literature review is to develop an understanding of the issues with the IFRSs as viewed by the companies and the stakeholders prior to the implementation, focusing on the way in which they could impact on the shareholders.

The author will outline the benefits of accounting harmonisation before focusing on the concerns expressed prior to the implementation of the IFRSs in the United Kingdom. The author will then discuss efficient market hypothesis to explain the movement of share prices on a stock exchange.

Accounting Harmonisation background

Harmonisation is defined as the “process of increasing the compatibility of accounting practices by setting bounds to their degree of variation,” (Nobes & Parker, 2006, p.75). In order to achieve this, the IASB developed IFRSs “that are capable of achieving wide international acceptance,” (Roberts, Weetman & Gordon, 2005, p.6). One common set of accounting standards is widely believed to increase comparability internationally (Roberts, Weetman & Gordon, 2005, p.8) and therefore decrease costs and risk for both the company and its shareholders (Roberts, Weetman & Gordon, 2005, p.8). The IFRSs themselves have 15

been developed to show more transparency within the accounts, helping to show the shareholders exactly what is happening in their companies. As a result the European Union made IFRS the compulsory reporting framework for listed companies from 1st January 2005 (IASB, no year, a). The Secretary General of the European Financial Reporting Advisory Group, (EFRAG) Rutteman (KPMG, 2004a) believes this adoption will eventually “result in a common capital market across Europe.” This benefit was extended by Eccles (2004) who argues that IFRS is the first step towards “a global capital market” thus allowing “companies to tap into pools of liquidity all over the world with minimal frictional costs,” as well as enabling investors to “invest in companies all over the world.” Consequently, during the development of the IFRSs, the adoption of the standards was expected to benefit the shareholders, thus impacting on the share price. The direction of this impact however could not be predicted as, for example, increased transparency is beneficial to shareholders but could reveal negative news regarding the company.

Despite the important advantages, there were many concerns expressed prior to the implementation of IFRS by companies, shareholders, analysts and auditing firms. Some of these concerns related to the attitudes of those involved in the implementation, as they assumed the change would be merely differing accounting policies but “they will also impact on many other related corporate areas,” (Stittle, 2004). KPMG (2004b) conducted 16

research with investment analysts and found “over half believe the changes will affect share prices,” for a variety of reasons explained below.

General Concerns Regarding the IFRSs


One of the concerns expressed related to the timing of the implementation. Listed companies in the UK were expected to report under IFRS from the 1st January 2005, however, the IASB “only completed a substantial review of IFRS in March 2004,” (King & Wheatcroft, 2004, p.16), therefore there was less than a year for accountants to learn and understand the impacts of the new standards and be able to communicate these to the shareholders and analysts.

Financial reports are produced for shareholders, who do not necessarily have a financial background, yet the reports are becoming increasingly more complex for the users to read and understand (KPMG, 2008). This increased complexity would impact on the shareholders during the implementation of IFRS, as they can only rely on what the business is disclosing to them concerning the new standards. The change in standards will make the financial information harder to understand for those shareholders that were used to UK GAAP, whilst also increasing the amount of information available in a short period of time. 17

Objections to IFRS were also raised by the management of the companies who would be adopting them as they wanted one period of disclosure to shareholders so that the share prices would not be affected by „piecemeal‟ information reaching the markets (KPMG, 2004a). They also felt they should have been included in the consultation period for the standards, this would have helped resolve any specific issues before the standards were set (KPMG, 2004a). If this had occurred they would have been more motivated to adopt the new standards, as it was they felt that they were simply being imposed from above, despite the issues that this would cause.


Other issues raised concerning harmonisation were due to the differing cultures and environments present in countries around the world. The development of the IFRSs was dominated by the UK (Buchanan, 2003) and is now undergoing a convergence programme with the Financial Accounting Standards Board (FASB) in the USA (IASB, no year, a). The culture and business environment within the UK and the USA are similar, both have a strong accounting profession that develops and advises on accounting standards, the government has little influence in this area resulting in independent accounting and taxation rules. The majority of company funding is raised through the stock markets, however, not all countries are structured in this way. Due to the companies in France and Germany being funded through bank and governmental loans, the 18

governments have strong influence over the accounting rules. In these countries the users of the financial statements are the creditors (banks) who require information concerning whether they will be repaid or not, often resulting in companies consistently under reporting their true income level through the use of off-balance sheet reserves, to be more prudent (Dzinkowski, 2000). This is fundamentally different from the UK and the USA where financial statements are produced for shareholders who require information about the on-going performance of the company. By making the financial statements more transparent and forcing off-balance sheet reserves to be declared, Dzinkowski (2000) argues that firms will “suffer financial impacts because of the changes in tax liability.” This is due to the influenced of the government in France and the resulting tax rules dominating the financial statements so the tax liability is calculated from the announced profit. These are major issues in the implementation of a single set of accounting standards as the solutions require a fundamental mind-set change for various countries, even if the business environment does not alter with this. The cost of compliance for companies in these countries would increase as a result. Due to this issue, the harmonisation project was expected to falter therefore some questioned whether it was worth altering countries‟ Generally Accepted Accounting Principles (GAAP) and disrupting their progress for an experiment. This would impact on UK firms and shareholders as it emphasises the changes required to make the standards work within Europe - let alone the rest of the world. 19

A further concern with the introduction of IFRS is the interpretation of the standards by different companies, sectors and countries. Studies by analysts “suggest that companies often are applying IFRSs in a way that reflects historical (previous GAAP) accounting, when permitted by IFRSs,” (KPMG, 2005). This issue would give the perception of harmonised accounting standards without this occurring in reality, therefore misleading shareholders and anyone else attempting to compare companies. If a standard is open to judgement, it is expected those interpreting it will act out of self interest which may cause differing actions. The formation of the EFRAG to “liaise with the IASB to try to ensure that the standards take account of issues seen as important in Europe,” (Nobes and Parker, 2006, p.103) could exacerbate this problem as the other countries will also want this negotiation when implementing IFRS. The confusion this would cause will impact on the share prices as shareholders will not know what they are looking at.


Further changes are expected to be introduced to IFRS (KPMG, 2004a) in order for the standards to become more aligned with US GAAP (IASB, no year, a). Buchanan (2003) argues “Perhaps the most pervasive resistance to the acceptance of IFRS is the pressure exerted by the United States.” This resistance against the USA is due to the negative press US GAAP has received due to accounting scandals such as Enron and WorldCom. As a result, countries are opposed to adopting US GAAP or US influenced 20

IFRSs as they do not appear to be „best practice.‟ This would lead to further volatility, confusion and restatements to maintain transparency while this transition occurs. This has caused some obstructions to the implementation of IFRS as they do not appear to be a permanent solution, “some of what was put forward were just quick fixes, providing a foundation for the mandatory introduction of international financial reporting standards,” (Grant, 2005).

The ongoing debate concerning the conceptual framework for the international standards also impacted on the willingness of companies to accept the IFRSs. The USA uses a rules based approach to accounting whereby “prescriptive theories of how accounting should be undertaken,” (Deegan, 2004, p.135) are documented, whereas the IFRSs uses a principles based approach that provides “guidance in relation to the objectives,” (Deegan, 2004, p.138) and relies upon the accountants judgement in recording transactions. Although both approaches work well, the fundamental approach is often non-transferable, for example, the principles based approach will be harder to apply in countries with a low standard of accountant as their professional judgement may not be adequate, therefore there may be issues applying them to developing countries or countries using the rules based approach. This issue may be exacerbated due to the US convergence programme as the level of rigour required in the USA is perceived to be not necessary in other business cultures where litigation is not as significant (Dzinkowski, 2000). As well as this, the expected development is opposed. The willingness of 21

shareholders and analysts to fully understand the new standards and therefore the impacts of IFRS will be influenced due to the transient nature of the standards. Work is involved for everyone who compiles or interprets financial information but if they know the standards are not permanent, they may be less willing to put that work in immediately. Disclosure

The introduction of IFRS could require major changes to the accounting systems within the companies (Chopping1, 2004 and Gordon and Morell2, 2005). The new standards do not just enforce disclosure of known items but also include those that may not have been measured in the past, (Chopping, 2004) therefore this information would have to be captured historically so the system change must have this capacity. This issue was further emphasised by the Financial Services Authority in April 2005 as they discussed the “importance of embedding IFRS into the business, rather than relying on short-term fixes, such as spreadsheets,” (Gordon and Morell, 2005). Specific Concerns Regarding the IFRSs Fair Values

1 Partner at Moore Stephens 2 Partner and Director at PriceWaterhouse Coopers

IFRS are in favour of fair value assessment, however King and Wheatcroft (2004, p.16) expressed a concern with this method of accounting as it is 22

“complex and unpredictable.” This was supported by Wilson3 (Perrin, 2005) who argued that it “raises all sorts of questions about reliability and stability,” due to the measurements relying upon managements assumptions. Fair value measurement is still raising concerns today, (KPMG, 2008) “preparers are still uncomfortable with the direction that fair value accounting is taking, and question the relevance of some of the numbers produced.” Another concern with the standards promoting the use of fair value is that they do not give guidance or objective criteria on this measurement resulting in subjective valuations occurring. This is encompassed within IAS 36 Impairment of Assets which requires the company to assess the assets for impairment at the balance sheet date and recognise this impairment immediately in the income statement (IASB, no year, b). The impairment would then be tested every year for indications that it should be reversed. Again the reversal would go through the income statement causing volatility in the profit of companies. Analysis by KPMG (2005) on the 2004 restated financial results discovered the “average swing … in the UK … was 36%.” The increased volatility was expected to impact on the share price of the companies especially if the impairments resulted in a profit becoming a loss.

3 Partner in Ernst and Young's International Financial Reporting group

Under UK GAAP, goodwill was amortised over its useful life (to a maximum of 20 years). Amortisation of assets was no longer permitted under IFRS; instead IFRS 3 Business Combinations stated that goodwill 23

was to be tested annually for impairment following the rules within IAS 36 (IASB, no year, c). This change in treatment was expected to have a significant, one-off impact on the financial reports of companies as the amortised goodwill is reversed, causing an increase in profit for the year and an increase in the net assets of the company. This would also have a continuing impact due to the previously regular amortisation not reducing profit and net assets. Employee Benefits

IAS 19 Employee Benefits was expected to cause a major impact on the financial results of companies as it raises the prospect of very large and volatile pension scheme deficits directly hitting balance sheets,” (Punwani4, 2004). Although significantly similar to the UK GAAP equivalent on pension, this standard was extended to include other employee benefits such as sabbatical leave and housing benefits (IAS Plus, no year, a). The standard requires any costs incurred in providing the employee benefits to be recognised in the period in which they are earned, rather than when they are paid (IAS Plus, no year, a) and a liability to be recognised in the balance sheet in this period (IASB, no year, d). This has resulted in liabilities being projected forward and assumptions made regarding salary increases but similar assumptions are not made concerning asset growth (Wilson in Perrin, 2005). This would result in the pension liabilities being overstated in the balance sheet and therefore the

4 Partner at Lane Clark and Peacock 24

financial statements being overly prudent. The standard also introduced the 10% corridor allowing actuarial gains and losses to be unrecognised if they are “less than 10% of the greater of the fair value of plan assets or the present value of the defined benefit obligation,” (Wild5, 2005). This would result in increases to liabilities (as more benefits are recognised earlier) as well as decreases in profit for the costs incurred. Wilson (Perrin, 2005) argues that due to the increased disclosure requirements of IAS 19, the shareholders have “increased information overload” but the standard misses the key issue of the funding which is the “information management uses in making decisions about pensions,” (Perrin, 2005). Share-Based Payments

5 Global leader of IAS in Deloitte 6 Senior IFRS technical partner at KPMG 7 Chairman of UK Accounting Standards Board

IFRS 2 Share-Based Payments requires expenses associated with remuneration, in any form, to be recognised (Tweedie, 2004) in the financial statements. This will increase the “frequency and amount of expenses recorded,” (Osborne6, 2004) and therefore profit will decrease. The decrease should also impact on the share price. Income Taxes

IAS 12 Income Taxes is “more complicated than FRS 19” (Keegan7, 2003) and was expected to cause an impact on the financial statements due to the requirement to recognise deferred tax assets and liabilities on 25

revaluations. Any deferred tax asset would then be assessed annually to ensure sufficient taxable profit is still expected to allow the benefit to be utilised (IASB, no year, e). In reality the changes that are required under IFRS would not impact on the shareholders of the company “until the asset is sold,” (Day, 2005) but by disclosing them the share price may be altered. This means that the IFRSs are introducing change when it is not required in the financial statements. IAS 12 also requires companies to recognise the tax implications of transactions in the same manner as the transactions themselves (in the income statement or on the balance sheet) (IASB, no year, e).

IAS 10

IAS 10 Events after the Balance Sheet Date required a change in treatment of dividends announced after the balance sheet date. Under UK GAAP they were recognised in the financial period for which they related, however under IFRS they were deemed to be a “non-adjusting event” (IAS Plus, no year, b) and therefore a liability would not be made in the previous accounting period. This change would have a one-off effect on the restated financial statements for the 2004 financial period as the liability would need to be reversed.

Exchange Rates

IAS 21 The Effects of Changes in Foreign Exchange Rates required the companies to translate all foreign operations through the income 26

statement, thus creating more volatility. The exchange rate gains and losses previously made were to be unwound.


The introduction of IAS 32 Financial Instruments: Disclosure and Presentation and IAS 39 Financial Instruments: Recognition and Measurement was delayed until the 1st January 2005 due to the opposition the standards received. This allowed the preparers to avoid incorporating these standards into the restatements. Despite this some of the companies studied made direct reference to these standards claiming “volatility may be caused by IAS 39,” (AstraZeneca, 2004).

Gordon and Morell (2005) argue that “over half of the companies that have made separate IFRS announcements experienced an immediate price movement of 1% or more.” This will be tested in this study by looking at the share price movements of FTSE 100 companies. This share price movements ranged “from a 4% share price increase to a 5% share price fall,” (Gordon and Morell, 2005).

Stock Market Pricing

Arnold (2005, p.684) defined the efficient market hypothesis (EMH) as “if new information is revealed about a firm, it will be incorporated into the share price rapidly and rationally, with respect to the direction of the share price movement and the size of that movement.” This means, if the stock 27

market is efficient, only new information will cause a movement in a share price.

It is important that stock markets are efficient for both the shareholders judging the company and for the managers. An efficient stock market will encourage share buying as “investors need to know they are paying a fair price and that they will be able to sell at a fair price,” (Arnold, 2005, p.688) if this did not occur the funds available to companies would be reduced, thereby inhibiting the growth. The main objective of a company is to “maximise shareholder wealth,” (Neale & McElroy, 2004, p.10) therefore an efficient market is required for the managers to ensure that the implications of their decisions are “accurately signalled to shareholders and to management,” (Arnold, 2005, p.688). Management are judged on their decisions and the impacts they have on the shareholders, therefore if the market was inefficient and incorrectly priced the shares, the judgements could also be incorrect.

An efficient market will also help to allocate the resources of shareholders - “a poorly run company in a declining industry with highly valued shares because the stock market is not pricing correctly … will be able to issue new shares and thus attract more of society‟s savings,” (Arnold, 2005, p.689). An efficient market ensures the shares of companies are priced correctly, based upon all currently available information and therefore shareholders are able make rational decisions concerning each company and allocate their resources accordingly. 28

Total stock market efficiency assumes “free and instantly available information, rational investors and no tax or transaction costs,” (Pike and Neale, 2003, p. 47), as this is unlikely to occur, Fama (1970) described three levels of efficiency in stock markets. In the first, weak form efficiency, “share prices fully reflect all information contained in past price movements,” (Arnold, 2005, p.691). In semi - strong form efficiency, “share prices fully reflect all the relevant publicly available information,” (Arnold, 2005, p.691), while in the strong form efficiency “all relevant information, including that which is privately held, is reflected in the share price,” (Arnold, 2005, p.691). This form does not exist as insider trading does occur and results in abnormal profits for those involved (hence why it is illegal), (Neale and McElroy, 2004, p.45).

The weak form efficient market supports Kendall‟s random walk theory (1953) where it was identified that “the prices of shares moved in a random fashion - one day‟s price change cannot be predicted by looking at the previous day‟s price change,” (Arnold, 2005, p.689).

The efficient market hypothesis has been criticised due to the share price movements as a result of released information. As the presence of a semi-strong form efficient stock market underpins the research method in this study the author will consider these arguments. The first criticism of the efficient market hypothesis is the assumption that all investors are rational, or if some are irrational the rational investors eliminate the pricing anomalies, (Arnold, 2005, p.719). As “behavioural finance proponents 29

argue that investors frequently make systematic errors and their errors can push the price of shares … away from fundamental value for considerable periods of time,” (Arnold, 2005, p.719) this assumption is flawed.

Within an inefficient stock market, an under-reaction could occur (with the market taking a few days to absorb the new information), an anticipation could occur (causing the share price to move before the information release), an over-reaction could occur (and then decreases over the following days) or the market may not price the share correctly for a considerable period. These movements are often identified by analysts who make a career out of identifying shares that have been incorrectly priced in the markets and buying or selling accordingly. “The existence of a profit opportunity of this sort is … the classic definition of weak form market inefficiency,” (Atkins and Dyl, 1993). Therefore the efficient market hypothesis does not appear to stand up in reality, however, Atkins and Dyl (1993) suggest that these criticisms assume “investors can actually buy or sell at the closing price,” whereas in reality there is a difference between the ask price (the price investors can buy at) and the bid price (the price investors sell at). The difference means that although the prices of shares can appear to overreact, “on average no opportunities for profitable trading are present.”

Arnold (2005, p.720) and Neale and McElroy (2004, p.37) argue that if the stock market was not efficient the benefits derived from an efficient market 30

would not be present - so investors would be deterred. The requirements for an efficient market, as outlined by Neale and McElroy (2004, p.38) are the presence of a large number of buyers and sellers, transaction costs that do not discourage trading and up to date information that is cheap and easily accessible. These are all present in the FTSE 100 and therefore it is safe to assume the stock market is semi - strong form efficient. If the concerns expressed prior to the introduction of the IFRS were valid, any communication on this topic, made to the shareholders, by the companies, would cause an immediate movement in the share price. 31




Jankowicz (2005, p.224) defines the methodology as “the analysis of, and rationale for, the particular method or methods used in a given study.”

The aim of this chapter is to consider the methods of data collection available to the author for the completion of this study. The author will then provide a rationale for the data collection method selected in order to test the hypotheses set out above. The main justification for the method selected is linked to the benefits and drawbacks of each possible method and their suitability for achieving the objectives.

Research methods available

Research sources are either primary or secondary (Collis & Hussey, 2000, p.160). Primary data has been “collected specifically for a particular purpose,” (Smailes & McGrane, 2000, p.4) and could be utilised in this study through the use of questionnaires or interviews with shareholders. The collection of this data is designed to be appropriate for the study requirements but can be difficult to collect as a result. Secondary data on the other hand is “originally collected for one project, but which then can be used for another purpose,” (Smailes & McGrane, 2000, p.5). It is usually “easier and cheaper to collect” (Lancaster, 2005, p.75) but may not 32

be entirely appropriate for the study. For this study, secondary research sources could include press releases and annual reports from the companies.

Data can be either quantitative or qualitative, where quantitative can be “measured, counted or quantified,” (Smailes and McGrane, 2000, p.3) while qualitative is “non-measurable,” (Smailes and McGrane, 2000, p.2). For this study, qualitative techniques will be employed due to the need to link non-numerical information from the companies to the share price.

Data can be collected using either a sample or a population, (Smailes & McGrane, 2000, p.4). The population is defined as “a complete set of people, occurrences or objects,” (Jankowicz, 2005, p.388), whereas the sample is “a set of people, occurrences or objects chosen from a larger population,” (Jankowicz, 2005, p.389). The population allows conclusions to be drawn about everything, whereas the sample is easier, cheaper and often more appropriate to collect. Due to the time constraints involved in this study, the sample collection will be utilised. The sample size will be 50, thus allowing enough companies to be studied in order to provide evidence to answer the question and formulate conclusions regarding the hypothesises. Any additional companies studied after this point would add little extra information to the study in relation to the time required to gather the data. 33

There are a variety of methods available to draw a representative sample from a population. The first method available to the author is simple random sampling where “all units in the population have the same chance of being included,” (Ghauri and Gronhaug, 2002, p.114). To produce this type of sample, the author would give each company in the FTSE 100 a unique identification number and then use a random number generator (for example a calculator or computer) to select the companies to use.

Stratified random sampling is very similar to the previous method, however the population being investigated contains mutually exclusive groups where differing views may exist. In this method, the sample is drawn randomly in the same proportions as the population, (Ghauri and Gronhaug, 2002, p.116). In this case, the author would identify distinct groups within the FTSE 100 and then use simple random sampling to select companies within these groups. This prevents an unrepresentative sample.

An alternative to these methods that could be used in this study is systematic sampling where the data is assumed to be in random order and every nth unit is selected,” (Ghauri and Gronhaug, 2002, p.115).

Research Method Employed

After considering the alternatives available for selecting a representative and unbiased sample of FTSE 100 companies, the author decided to use the stratified random sampling technique due to the companies listed on the stock exchange being assigned to sectors. These sectors will act as 34

the distinct groups required in this form of sampling. This will ensure the sample is representative of the FTSE 100 population and therefore any impact on the share price caused as a result of the introduction of the IFRSs is not missed due to differing sectors.

For the purpose of this study, the author used secondary research sources only. As well as being immediately available for analysis, the secondary sources provided unbiased information. If primary research techniques had been utilised the data required may not have been available for this study: the information from the companies and the shareholders may have been limited due to commercial sensitivity and ethical implications. It is also highly unlikely that there would have been enough respondents if the author had selected to interview shareholders due to the numbers involved for each company. As the data that will be collected was not designed specifically for the purposes of this study, any information gathered will have to be evaluated for accuracy and appropriateness.

The author focused on companies listed on the FTSE100 as these are the mostly highly capitalised companies listed on the London Stock Exchange. It is therefore expected that any impact from the implementation of the IFRSs would be most noticeable within these companies. A list of these companies was obtained from the website Hemscott (no year), along with their sectors (Appendix B). A stratified random sample of 50 companies was drawn based on the sectors. This ensured that any differences in 35

levels of impact and explanations caused by differing sectors would not bias the results.

Data for the selected companies was then gathered from the company websites regarding the implementation of the IFRSs. Although Guthrie and Parker (1989) argue that “the annual report is the one communication medium to outside parties over which corporate management has complete editorial control” and therefore it is “not subject to the risk of journalistic interpretations and distortions possible through press reporting,” the data collected for this study took the form of any communication made by the company to its shareholders. This included annual reports as well as presentations on the topic, press releases and restatements of previous financial results with explanations for the changes. The decision to include all communication on the topic rather than just the annual report was made to capture all possible reactions from the shareholders. Often the annual report was not the primary source for disclosure on this topic, therefore the research would have been biased as the reactions of the shareholders would not have been as a result of „new‟ news. The group in charge of “editorial control” for each piece of data was considered during the interpretation by the author. The share price for the period of disclosure was plotted to determine the impact of the information. A percentage change was then calculated for each price movement related to the disclosures and used to compare the companies and highlight any sectors or companies where IFRS had a major impact on the 36

share price. The percentage changes were also considered in the context of the previous and future share price movements of each company to ensure the release of information was not exacerbating previous movements. This helped to ensure that the efficient market hypothesis was still in place throughout this study as the potential for overreactions or under reactions, as explained in the literature review, was considered with the results.

Limitations of the Methodology

The methodology used by the author relies upon the assumption that the FTSE 100 has semi-strong form efficiency and therefore the data collected is immediately and rationally reflected in the share price. If the stock market is not efficient, it would be impossible to match any share price movement to a specific piece of news as other historical or privately held future information could cause the impact. This assumption was made after consideration of the relevant academic literature (as outlined in the literature review) concerning the degrees of market efficiency as well as market inefficiency.

Similar to this, the study also assumes that no other news was released that day to impact on the share price. Although the author attempted to reduce this limitation by searching for additional news on each date of disclosure, there could have been an impact on the share price due to news released by a competitor or customer. If this occurred it would be 37

difficult to deduce the influence of both pieces of news. For this reason it is assumed only the information released by the company has caused the movement of the share price.

“Qualitative research is a mixture of the rational, explorative and intuitive, where the skills and experience of the researcher play an important role in the analysis of data,” (Ghauri and Gronhaug, 2002, p.86), therefore the use of a qualitative research method may limit this study due to the authors interpretations. The findings as a result of this study may be interpreted differently by other people.

Ethical Considerations

The author has reviewed the NBS and University guidelines concerning ethical implications of research methods. The research collected during this study consists of secondary data from companies so no people are directly involved. This means there are no ethical implications with regards to the collection of data as consent is implied by making the information publicly available. Despite this the ethical guidelines were still considered by the author throughout the study. 38



Change in share price as a result of IFRS information


0.6% increase

Marks & Spencer

0.5% decrease

1.3% decrease

Rolls Royce Group

1.3% decrease


1.0% increase

1.1% decrease


0.5% decrease

Vodafone Group

0.2% increase

1.1% increase


0.1% decrease

0.5% increase

Carphone Warehouse

1.9% increase


1.4% increase


1.7% decrease

0.9% decrease

Associated British Foods

1.0% increase

Scottish & Newcastle

0.5% decrease

British Sky Broadcasting Group

0.6% decrease

BAE Systems

0.1% increase


1.0% increase


0.1% decrease

Legal and General

1.1% decrease

0.2% increase


0.3% increase


0.7% increase

British Land

0.5% decrease