The Impact of Turning Away from IFRS on Earnings Quality of U.K. Private Firms

Abstract

New U.K. GAAP follows the design of IFRS and IFRS for Small and Medium-Sized Entities (SMEs) and was introduced from 2015 to improve the comparability and quality in financial reporting and to reduce disclosure costs. This new standard heavily affected the financial reporting of private firms. To help assess whether the goal of Financial Reporting Council is achieved, this study examines whether switching from IFRS to new U.K. GAAP is associated with private companies’ earnings quality. We use U.K. private firm data during 2015–2018 to conduct difference-in-differences and regression analyses. Overall, the results suggest that the switch from IFRS to new U.K. GAAP does not have significant impact on accruals quality, but reduces the timely loss recognition. This study contributes to the ongoing debate over the design of financial reporting standards for private firms and SMEs and provides useful evidence for evaluating new U.K. GAAP and IFRS for SMEs. JEL Classifications: M4; M41; M48.