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Voluntary application of IFRS by unlisted companies: evidence from the Italian context

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Abstract

This paper tackles the issue of which firm-level factors are associated with the application of IFRS by unlisted companies and focuses on the Italian setting, where they can choose between preparing unconsolidated financial statements under either national GAAP or IFRS. Prior literature has focused on specific national settings providing mixed evidence on the characteristics that explain unlisted companies’ voluntary adoption. Analysing a sample of 2915 companies, this paper extends previous research by providing evidence confirming the significance of firm size, foreign ownership, and capital intensity. Results also indicate that in Italy leveraged companies are more likely to apply IFRS in their financial statements, differently from the UK setting and similar to the German one. Additionally, this study explores the counterintuitive issue of companies adopting IFRS when they are in a situation of distress. Findings suggest that in case of independent companies voluntary IFRS adoption can be explained by financial and economic distress. This paper provides implications to regulators interested in the current debate on financial reporting for unlisted companies. The findings can also be of interest for a broad array of practitioners, and especially for managers of firms currently evaluating the opportunity to switch to IFRS.

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Notes

  1. Although not unanimous (Cascino and Gassen 2010; Kvaal and Nobes 2010; Lang et al. 2010; Mohammadrezaei et al. 2015), prior research documents benefits caused by IFRS adoption and provides evidence that it increases comparability and users’ understanding of financial information, while reducing information asymmetries, as revealed by lower cost of capital and high liquidity (Wu and Zhang 2010; DeFond et al. 2011; Barth et al. 2012; Brochet et al. 2013). Recently, based on a sample of 1642 IFRS adopters from Greece, Ireland, Italy, Poland, and the UK, Cameran and Campa (2017) investigate the impact of voluntary IFRS adoption on private companies’ earnings quality. They document that IFRS affect earnings quality in countries characterised by weak legal regimes.

  2. In Belgium, only real estate companies are required to apply IFRS in their separate financial statements. For a comprehensive review of national legislative provisions concerning the adoption of IFRS in companies’ separate financial statements, see the guide issued by the IFRS Foundation (Pacter 2017). In Denmark, IFRS are mandatory if a company does not issue consolidated financial statements due to the absence of subsidiaries, while IFRS are allowed in other separate company financial statements. In Finland, Norway, and Portugal, IFRS are required if a publicly listed company does not issue consolidated financial statements due to the absence of subsidiaries, while IFRS are allowed in other separate listed company financial statements.

  3. On the contrary, companies are mandatorily required to apply IFRS in their unconsolidated accounts in Bulgaria, Croatia, Cyprus, Czech Republic, Estonia, Hungary (where companies are allowed to prepare the unconsolidated financial statements in accordance with IFRS in addition to accounts prepared under Hungarian GAAP), Lithuania, Malta, and Romania.

  4. The Decree-Law 38/2005 mandates the application of IFRS not only in the consolidated and unconsolidated financial statements of publicly listed companies, but also in both unconsolidated and consolidated financial statements of banks, financial institutions, and issuers of financial instruments that are widely diffused among the public. Insurance companies are required to apply IFRS only in their consolidated financial statements or, in case they have no subsidiaries, in their unconsolidated ones.

  5. Indeed, when considering listed companies, IFRS adoption represents the effect of a regulatory requirement (Ball and Shivakumar 2005).

  6. Their sample encompasses both countries where unlisted firms have to report under IFRS and countries where the use of IFRS by private companies is not allowed by national law (Nobes 2010).

  7. For instance, while the ownership structure does not affect UK unlisted companies’ decision to adopt IFRS (André et al. 2012) and UK adopters exhibit a leverage lower than non-adopters, studies on German samples provide evidence that ownership and high leverage (Bassemir 2018) matter as IFRS adoption’s determinants.

  8. In the following section, potential issues arising due to outliers are addressed by winsorising continuous variables.

  9. Additionally, potential heteroscedasticity issues have been considered. Indeed, these issues could arise from the measurement scale of the variable measuring employee productivity. Accordingly, the ratio of revenues to the number of employees has been substituted with its natural logarithm. Observations available are 2826. The coefficients of SIZE, LEV, FOR_OWN, ASS_GR, and Cap_Int are still statistically significant.

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  1. Department of Economics and Business Studies, University of Genoa, Genoa, Italy

    Costanza Di Fabio

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Di Fabio, C. Voluntary application of IFRS by unlisted companies: evidence from the Italian context. Int J Discl Gov 15, 73–86 (2018). https://doi.org/10.1057/s41310-018-0037-z

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