Analysis of Effects of IFRS Adoption on the Comparability of...

Journal of Emerging Issues in Economics, Finance and Banking (JEIEFB)

An Online (Double-Blind) Refereed Research Journal (ISSN: 2306-367X)

2019 Vol: 8 Issue: 1

2698 www.globalbizresearch.org

Analysis of Effects of IFRS Adoption on the Comparability of Financial

Reporting: Evidence from Saudi Listed Companies

Mohammed Faisal Hassan,

School of Business,

King Faisal University, Saudi Arabia.

E-mail: [email protected]

______________________________________________________________________________

Abstract

The accounting consolidation process designed in accordance with the IASB framework to obtain

understandable and comparable information, and increasing the quality of accounting standards

is the main driving force of consolidation. Since the accession of Saudi Arabia to the G20, the

adoption of international financial reporting standards has considered an important event in the

future economic development of Saudi Arabia. Saudi Arabia adopted the International Financial

Reporting Standards on 1 January 2017. Financial statements prepared in accordance with IFRS

will certainly be more useful to users at the international level, but there is uncertainty about their

usefulness at the national level.

This study aims to analyze the impact of the adoption of IFRS on the comparability of the financial

reports of a sample of companies listed on the Saudi Stock Exchange that are expected to differ

significantly from the generally accepted accounting standards in Saudi Arabia. To achieve this

objective, the study measured the quantitative impact of the application of IFRS on income figures

and financial positions. The results of the study indicate that there are statistically significant

differences between the variables resulting from the application of two sets of International

Financial Reporting Standards adopted in Saudi Arabia and the Saudi (GAAPs).

The results of this study are of great importance to those interested in research in the field of

transition to IFRS, as well as to regulatory authorities in the Kingdom.

______________________________________________________________________________

Key Words: Comparability of financial reporting, International Financial Reporting Standards,

Saudi Stock

mailto:[email protected]





1. Introduction

Capital markets have witnessed significant development in the past decades and have become

increasingly important in economic life in both developed and developing countries. Today,

financial markets are facing the challenges of competition that have become global in nature and

have resulted from a range of changes in the international scene, such as the trend towards

liberalization of international trade, towards a market economy, the policy of openness and

economic liberalization, and the accompanying deregulation. These and other variables are the

reasons for the increase in the volume and value of trading on global stock exchanges.

Many factors that explain and understand financial information at the international level,

including diversity and the multiplicity of accounting principles and rules governing reporting from

one country to another. Many accounting bodies, such as the International Accounting Standards

Board (IASB), have made considerable efforts since the 1970s to standardize accounting standards

in various countries to improve the usefulness of financial information.

Convergence defined as the process of enhancing the comparison between international

accounting standards and national standards. This process not intended to reach identical standards,

but aims generally to comparable standards that have become similar over time (Jeanjean and

Stolowy, 2008). Increasing the quality of accounting standards is the main driving force of

convergence (Zeff, 2007), while Smith (2008), argues that enhancing the compatibility of

accounting practices with a limited degree of variation is the main driving force of convergence.

International Financial Reporting Standards (IFRS) described as being base on principles rather

than rules and defined as a set of accounting standards developed by the International Accounting

Standards Board (IASB). The IASB is an independent standards-setting body based in London.

Today, the standard adopted by this body used in more than 160 countries, in addition to the many

countries that are in the process of adopting these standards (Jacob and Madu, 2009).

The Kingdom of Saudi Arabia was one of the countries that initiated the formulation of national

accounting standards to suit the Arab and Islamic environment, which led to the development of

accounting profession in Saudi Arabia. In line with the requirements of the World Trade

Organization, and with the vision of the Kingdom 2030, which seeks to internationalize the Saudi

financial market by improving the transparency of accounting information, there is a need for

adoption of IFRS.

Since Saudi Arabia joined the Group of Twenty Finance Ministers and Central Bank Governors

(G20) in 2009,the adoption of IFRS has been viewed as an important milestone in the country’s

future economic development and has been working towards this end ever since. The convergence





of national GAAP with IFRS promises “transparent, comparable and consistent financial

information to guide investors in making optimal investment decisions” (Rudy and Jacob, 2009).

The Kingdom of Saudi Arabia joined to the 130 countries across the globe in the application of

International Financial Reporting Standards (IFRS). Today, all companies in Saudi Arabia must

follow International Financial Reporting Standards. Banks and insurance companies regulated by

the Saudi Arabian Monetary Authority (SAMA) and are already required to comply with IFRS.

In accordance with the IASB framework, information must be understandable, reliable,

comparable and relevant, thus useful to users. Financial statements prepared under IFRS will be

more useful when used in an international context. However, there is growing concern about the

usefulness of financial reporting in the national context (Callao et al. 2007).

Several studies report that the adoption of IFRS, lead to improve accounting quality (Daske

and Gebhardt, 2006; Callao et al, 2007 and Barth et al., 2008). According to Lantto and Sahlström

(2009), the literature finds that the differences in accounting standards affect financial reporting

quality, but it does not describe what kind of impact. Differences in accounting conservatism in the

international context analyzed in studies such as (Joos and Lang, 1994; Arce and Mora, 2002 and

Lara and Mora, 2004), which reveal that common-law countries are less conservative than code-

law countries. (Callao et al. (2007).

The purpose of this study is to test the impact of adoption of IFRS on the comparison of

financial reports on a sample of companies listed on the Saudi Stock Exchange by measuring the

quantitative impact of new recognition and valuation rules on the financial figures. The study data

includes 12 variables measured under two sets of IFRSs adopted in Saudi Arabia and Saudi GAAPs.

The study seeks to ascertain the validity of hypotheses by looking for statistically significant

differences between the financial figures, which compared with the same companies in different

circumstances. The Kolmogorov-Smirnoff test used to test the reliability of data for normal

distribution.

The results of this study will be of great importance to those interested in research in the field

of compatibility between national and international standards and the regulatory authorities in the

Kingdom (Capital Market Authority, Saudi Accounting Association and Saudi Organization for

Certified Public Accountants).

2. Literature Review

Several studies test the impact of the adoption of international standards in different countries

and the financial markets of these countries. These studies have yielded numerous results on the

impact of the adoption of international standards. The following are some of the recent studies that

have examined the impact of the adoption of international standards.





Nurunnabi (2014) examined the experiences of implementing IFRS for emerging economies. It

sought to find out the effect of the balance between accounting regulation and policy implications

in the implementation of IFRS. The study found that significant differences between national

standards and IFRS standards as well as the multiplicity of standards setting and non-involvement

of stakeholders in standard setting and other issues have hindered the effective implementation of

IFRS.

Clarkson et al. (2011) sought to verify the impact of the adoption of IFRS in Europe and

Australia on the importance of book value and earnings in the valuation of shares. Using a sample

of companies, IFRS adopted in 2005. The study found that there was no significant change in

the stability of prices for companies because of the use of IFRS standards. Therefore, the use of

IFRS standards enhances the comparability of financial reports.

Iatridis and Rouvolis (2010) sought to know the effects of transition from Greek accounting

standards to IFRS standards on the financial statements of Greek listed companies. The results

showed that the application of IFRS led to fluctuations in the main income statement and the

financial position of Greek companies. The study also found that the effects of the adoption of IFRS

in the first year of adoption appeared to be unfavorable because of costs, as corporate financial

measures improved significantly in the periods following the adoption period. The study provides

evidence that the adoption of IFRS will lead to more value accounting measures.

Unlike other research, Lantto and Sahlström (2009) sought to know the effect of IFRS on financial

ratios in Finland. The results of this study show that the adoption of IFRS led to a change in the

basic financial ratios. The study attributed the change to the adoption of fair value standards and

called for stricter procedures for their use.

Hung and Subramanyam (2007) used a sample of German companies to investigate the

implications of the adoption of the IAS standards during the period 1998-2002. The study found

that the total assets, book value of shares, book value and income increased under IAS criteria

compared to German standards. The study recommended that the adoption of the IAS criteria be

facilitate.

Callao et al. (2007) examined the impact of IFRS adoption on the importance and comparability

of financial reporting in Spain, as required by the EU Regulation. The results show that the

comparison adversely affected if both IFRS and Spanish national standards applied at the same

time. The financial reporting of the users has not improved, and the application of IFRS has

increased the gap between the market and market values. Improves the usefulness of financial

reports in the short-term.





Several studies have conducted in KSA on the application of International Financial Reporting

Standards (IFRS). Alnodel (2018) sought to see if the adoption of the IFRS standards increases the

importance of accounting information for insurers listed on the Saudi stock market. The study found

that the book value of the shares becomes less valuable when using the IFRS standards compared

to Saudi standards and that profits become the largest value. It also found that the increase in the

importance of the value of accounting information affected by the characteristics of companies.

Nurunnabi (2017) sought to verify the differences between the IFRS and the Saudi GAAP standards

issued by SOCPA. The study found that there are significant differences between Saudi GAAP and

IFRS. The results of this study are a valuable contribution to accounting literature as the first study

to discuss differences between IFRS and Saudi GAAP. The study recommends intensifying the

training of professionals in the preparation of reports in accordance with IFRS.

The study of AlMotairy and Stainbank (2014) aims to determine compliance with International

Education Standards (IES) Saudi Arabia, which plans to move to IFRS standards. The study found

that Saudi Arabia does not comply with the International Education Standards (IES) in its entirety.

The study noted gaps in professional skills, ethics and values. The study recommended that all

stakeholders are involved in the work plan so that the transition to IFRS would be successful.

Alsuhaibani (2012) reviews the expected impact of IFRS on Saudi companies with a particular

focus on the telecom sector. The study suggests that the experience of countries in adopting IFRS

has affected many aspects, including regulations, regulatory bodies, regulations, processes,

financial results, education, and people. The sector expected to be one of the most affected by the

adoption of IFRS. For the sector's engagement with partnerships with international telecom

operators. The study notes that adoption of these IFRS standards will improve the efficiency of the

stock market and enhance the value of financial reporting and its ability to assist in decision-

making. The study recommended reviewing the accounting programs in Saudi universities and

redesigning the Saudi SOCPA approach to assist in the transition to IFRS standards.

The foregoing studies give an idea of the impact of adoption of IFRS on both developed and

developing countries and the impact of accounting information in terms of relevance and

comparability. This study try to understand the impact of IFRS adoption on the comparability of

financial reporting by applying a sample of companies listed on the Saudi Stock Exchange during

the transition from Saudi standards to international standards.

3. Differences between IFRS and Saudi GAABs

A review of Saudi GAABs indicates that there are Saudi standards that have no counterpart in

international accounting standards (administrative and marketing expenses, zakat and income tax).

There are many international accounting standards have no equivalent in Saudi standards, and many





Saudi Standards have no equivalent in international standards. Nurunnabi (2017) points out that

there are differences between the Saudi accounting standards and the IFRS, as follows:-

- Presentation of financial statements (IAS 1).

- Statement of Cash Flows (IAS 7).

- Zakat and income tax (IAS 12).

- Property facilities and equipment (IAS 16).

- Accounting policies and changes in accounting estimates and errors (IAS 8).

- Leases (IFRS 16) Is mandatory on 1 January 2018.

- Employee benefits (Accounting Standard 19).

- Effects of changes in foreign exchange rates (IAS 21).

- Related party disclosures (IAS 24).

- Interim Financial Reporting (IAS 34).

- Impairment of assets (IAS 36).

- Intangible assets (IAS 38).

- Real estate investment (IAS 40).

- Agriculture (IAS 41).

- Financial Instruments (IFRS 9) Is mandatory on 1 January 2018.

The most important international accounting standards that do not exist within Saudi accounting

standards include the following:

- Noncurrent assets acquired for the purpose of sale and non-continuing transactions (IFRS 5)

- Events subsequent to the balance sheet date (IAS 10).

- Accounting and Reporting on Retirement Benefit Plans (IAS 26).

- Financial reports under the economics of hyperinflation (IAS 29) -

- Financial Instruments: Presentation and Disclosure (IAS 32)

- Business Integration (FIRS 3).

- Investments in Associates (IAS 28).

- Shares in joint ventures (IAS 31).

4. Methodology

The purpose of this research is to test the impact of adoption of IFRS on the comparison of

financial reports, on a sample of companies listed on the Saudi Stock Exchange by measuring the

quantitative impact of new recognition and valuation rules on the financial figures. During the

study period, which includes published financial statements for the year 2016 according to Saudi

GAAPs and IFRS. This section of the study discusses data, sample, study hypotheses and statistical

study tools.





4.1 Data Set

The study uses the information contained in the annual financial statements published on the

Saudi Stock Exchange website for the years 2016-2017. The annual financial statements for 2016

were prepared in accordance with Saudi GAAPs, while the annual financial statements for 2017

were prepared in accordance with IFRS, with the preparation of the 2016 financial statements in

accordance with IFRS as comparative figures. The study will compare the figures for the 2016

financial statements prepared by the Saudi GAAPs (published financial statements 2016) and the

same items prepared by IFRS (published financial statements 2017).

4.2 Study Sample

The study data collected from the Saudi Stock Exchange (Tadawul) and the published financial

statements of listed companies in the Saudi Stock Exchange during the period of the study. The

study data for 173 companies listed in 20 sectors. The study excluded the financial sectors (banks

and insurance) because of the different characteristics of these sectors from the rest of the market.

In addition, sectors with fewer than four companies excluded.

The sample used in this study based on the financial data of 40 Saudi companies listed on the

Saudi Stock Exchange (Tadawul). The sample covers 13 non-financial sectors in the Saudi stock

Exchange, representing 31% of the non-financial sector (Table1).

Table 1: Study Sample

Sector Number of

listed

companies

The sample

%

Banks 21 Excluded 0

Basic Industries 21 21 1..2%

Energy 2 2 12%

Healthcare 2 1 33.3%

Long-term goods 2 1 20%

Food fragmentation 2 2 12%

Consumer Services 2 1 .333%

Public utility 1 Excluded 0

Food production 21 2 22.4%

Business and professional services 1 Excluded 0

Telecommunications 2 2 12%

Insurance 33 Excluded 0

Investment and Finance 2 2 12%

Capital goods 21 2 22.4%

Transportation 2 1 20%

Wages 2 Excluded 0

Real estate development 20 2 20%

Media 1 Excluded 0

Boxes 2 Excluded 0

Retailing luxury goods 2 1 33.3%

Total 243 20 13.2%





4.3 Study Variables and Hypotheses

The data includes 11 variables measured under two sets of IFRSs adopted in Saudi Arabia and

Saudi GAAPs (Appendix 1 and2). Five of the study variables taken from the income statement.

Seven of the variables taken from the financial position statement (Tables 2 and 3). The relationship

between the variables tested by the following hypotheses:

H1: There are statistically significant differences in the value taken in the statement of income

items in accordance with Saudi GAAPs and the IFRS.

H2. There are significant differences in the value of the statement of financial position items in

accordance with Saudi GAAPs and the IFRS.

Table 2: Elements of Income Statement (H1)

- Total income.

- Operating income (operating profit).

- Income before tax and Zakat.

- Net income.

- Profit (loss) per share.

Table 3: Elements of Financial Position Statement (H2)

- Non-current assets.

- Current assets.

- Total assets.

- Shareholders' equity.

- Non-current liabilities.

- Current liabilities.

- Total liabilities.

4.4 Statistical Tools

The study seeks to ascertain the validity of hypotheses by looking for statistically significant

differences between the variables, which compared with the same companies in different

circumstances. The One-Sample Kolmogorov-Smirnov Test procedure compares the observed

cumulative distribution function for a variable with specified theoretical distribution, which may

be normal, uniform, Poisson, or exponential. The Kolmogorov-Smirnov computed from the largest

difference (in absolute value) between the observed and theoretical cumulative distribution

functions.

Table (4) shows that the value of SIG for the study variables is less than 0.05; the weights are

not subjected to normal distribution. Therefore, one non-parametric test (the Wilcoxon test ranking

site) used for unusual variables.





Table 4: One-Sample Kolmogorov-Smirnov Test

Study

variables N Mean

Std.

Deviation Absolute Positive Negative

Kolmogorov-

Smirnov Z

Asymp. Sig.

(2-tailed)

Total income

GAAB 40 5291.305 1.591324 0.421 0.421 -.370- 2.665 0.000

IFRS 40 4.38633 1.337904 0.407 0.407 -.372- 2.576 0.000

Operating

income

(operating

profit).

GAAB 40 3652.035 11785.86 0.463 0.463 -.379- 2.925 0.000

IFRS 40 3420.25 11126 0.457 0.457 -.379- 2.893 0.000

Income before

tax and Zakat.

GAAB 40 4462 1.663414 0.473 0.473 -.394- 2.993 0.000

IFRS 40 3.4023 1.471454 0.451 0.451 -.409- 2.853 0.000

Net income.

GAAB 40 3.3033 1.5044 0.452 0.452 -.413- 2.856 0.000

IFRS 40 3.91433 1.800004 0.461 0.461 -.414- 2.917 0.000

Profit (loss)

per share

GAAB 40 2.8493 4.92451 0.284 0.226 -.284- 1.797 0.003

IFRS 40 2.1232 2.18272 0.214 0.214 -.170- 1.353 0.048

Non-current

assets

GAAB 40 7.7904 2.9705 0.439 0.439 -.397- 2.779 0.000

IFRS 40 7.2304 3.1505 0.455 0.455 -.409- 2.878 0.000

Current assets

GAAB 40 2.5704 9.0604 0.462 0.462 -.388- 2.922 0.000

IFRS 40 2.4204 9.0504 0.489 0.489 -.395- 3.094 0.000

Total assets

GAAB 40 1.0405 3.8605 0.445 0.445 -.394- 2.817 0.000

IFRS 40 9.6504 4.0305 0.463 0.463 -.405- 2.927 0.000

Shareholders'

equity

GAAB 40 5.3504 2.1105 0.473 0.473 -.400- 2.989 0.000

IFRS 40 5.8304 2.2805 0.475 0.475 -.399- 3.007 0.000

Non-current

liabilities

GAAB 40 2.9204 1.5005 0.442 0.442 -.423- 2.796 0.000

IFRS 40 2.8804 1.4805 0.449 0.449 -.423- 2.837 0.000

Current

liabilities

GAAB 40 9.1803 3.7804 0.404 0.402 -.404- 2.555 0.000

IFRS 40 9.1303 3.7704 0.404 0.403 -.404- 2.558 0.000

Total

liabilities

GAAB 40 3.8404 1.8805 0.426 0.426 -.419- 2.693 0.000

IFRS 40 3.8004 1.8505 0.434 0.434 -.419- 2.748 0.000





The Wilcoxon signed rank test is a non-parametric test. When the word “non-parametric”

used in stats, it does not quite mean that you know nothing about the data. It usually means that

you know the data does not have a normal distribution. The Wilcoxon signed rank test should be

use if the differences between pairs of data are non-normally distributed.

Table 5 shows significant differences at the level of 0.05 between the value of elements of

Income Statement in the tribal and remote indices in favor of the post-measurement. The table

shows that using the Wilcoxon equation to calculate the Z value was (-3.615) of Gross profit, (-

4,573) of operations profit, (-4.831) of Profit before Zakat and income tax, (-2.146) for Net profit.

In addition, the table shows that there are no significant differences at the level of 0.05 between the

value of Earnings per share in the tribal and remote.

Table 5: Test of Elements of Income Statement

Ties Positive

Ranks

Negative

Ranks

Sig. Z Statistic Elements of financial statements

3 33 4 0.00 -3.615 - Total income.

4 3 33 0.00 -4.573 - Operating income (operating profit)

6 2 32 0.00 -4.831 - Income before tax and Zakat.

5 8 27 0.031 -2.146 - Net income.

8 12 20 0.121 -1.122 - Profit (loss) per share.

a. Based on positive ranks.

b. Wilcoxon Signed Ranks Test

Table 6 shows significant differences at the level of 0.05 between the value of elements of

financial position statement in the tribal and remote indices in favor of the post-measurement. The

table shows that using the Wilcoxon equation to calculate the Z value was (-2.671) of Current

assets, (-2.847) of Total assets, (-.303) of Shareholders’ equity, and (-2.860) for Current liabilities.

In addition, the table shows that there are no significant differences at the level of 0.05 between the

Non-current assets, Non-current liabilities and Total liabilities in the tribal and remote.

Table 6: Test of Elements of Financial Position Statement

Ties Positive

Ranks

Negative

Ranks

Sig. Z Statistic Elements of financial

statements

5 15 20 0.322 -1.007 - Non-current assets.

4 6 30 0.00. -2.671 - Current assets.

1 8 31 0.002 -2.847 - Total assets.

5 14 21 0.421 -.303 - Shareholders' equity.

3 29 8 0.420 -1.780 - Non-current liabilities.

7 7 26 0.002 -2.860 - Current liabilities.

2 22 16 0.441 -0.290 - Total liabilities.

a. Based on positive ranks.

b. Wilcoxon Signed Ranks Test





5. Results and Discussion

In this section, the study analyzes the effects of IFRS adoption on the variables of the study.

5.1 Effect of IFRS Adoption on the Financial Statements

This section describes the results obtained through previous analysis of study hypotheses. The

results of the analysis show that seven variables out of twelve reflect significant differences, due to

the application of two sets of (IFRS) adopted in Saudi Arabia and Saudi (GAAPs). These variables

are Total income, Operating income (operating profit), Income before tax and Zakat, Net income,

Current assets, Total assets and Current liabilities (at 5%). While the application of two sets of

(IFRS) adopted in Saudi Arabia and Saudi (GAAPs), did not reflect significant differences on a

five variables out of twelve. These variables are Profit (loss) per share, Non-current assets,

Shareholders' equity, Non-current liabilities and Total liabilities.

The study concludes that the preparation of the financial statements of listed companies in the

Saudi Stock Exchange, which based on (IFRS) adopted in Saudi Arabia, reflects the following:

- Increase in Total Income.

- Decrease in Operating Profit, Profit before Zakat and income tax and Net profit for the year.

- Decrease in Current assets and Current liabilities.

- Decrease in Total assets and Shareholders' equity.

5.2 Analysis of Effects of IFRS Adoption on the Income Statement

This part analyzed the effects of IFRS adoption on the income statement in detail:

- In accordance with (IFRS) adopted in Saudi Arabia, revenue recognized when it is probable that

future economic benefits will flow to the Company and these benefits measured reliably, resulting

in changes in Total income.

- Under Saudi (GAAPs), the companies acquired certain spare parts and equipment as inventory.

As part of the process of transition to (IFRS) adopted in Saudi Arabia, the companies have applied

the principle of recording assets by their components and accounting for the impact on their useful

lives and on their depreciation expenses. These assets reclassify from Current assets to plant and

equipment, and the depreciation expense of these assets has been establish, resulting in changes in

Net income.

- In accordance with Saudi (GAAPs), the cost of repairs and maintenance treated in the same period

as incurred and included in current assets. In accordance with IFRS, companies have re-evaluated

the repairs and maintenance to determine whether future economic benefits are likely to be included

in the plant, plant and equipment items and to demonstrate the depreciation expense of these assets,

resulting in changes in Net income.





- In accordance with Saudi (GAAPs), income tax and Zakat are the liability of the partners and

therefore recognized as an expense charged to equity. Under (IFRS) adopted in Saudi Arabia, Zakat

and income tax charged to the Company and charged to the consolidated statement of profit or loss,

resulting in changes in Net income.

- Under Saudi (GAAPs), end of service benefits accounted without taking into account future

benefits. In accordance with (IFRS) adopted in Saudi Arabia, after-service benefits, post-

employment medical benefits, continuing service benefits and other benefits should be calculated

using actuarial valuations. This resulted in a change in retained earnings and retained earnings in

the statement of income.

- In addition to the above adjustments arising from the (IFRS) adopted in Saudi Arabia, certain

items have been reclassified in the consolidated statement of income to meet the presentation and

disclosure requirements of the standards in accordance with (IFRS) adopted in KSA, which have

not resulted in any additional effects on income statement.

5.3 Analysis of Effects of IFRS Adoption on the Financial Position Statement

In this part, the study analyzed of effects of IFRS adoption on the financial position statement

in detail:

- In accordance with Saudi (GAAPs), the costs of repairs and maintenance handled in the same

period as incurred. As part of the transition to IFRS, some companies have re-evaluated reforms

and maintenance to see if future economic benefits are likely to realize to be capitalize. Certain

items have been reclassify in the financial position statement, resulting in changes in Current assets,

Total assets and Current liabilities.

- Under Saudi (GAAPs), the companies acquired certain spare parts and equipment as inventory.

As part of the process of transition to (IFRS) adopted in Saudi Arabia, the companies have applied

the principle of recording assets by their components and accounting for the impact on their useful

lives and on their depreciation expenses. These assets have been reclassify from Current assets to

plant and equipment, resulting in changes in Current assets and Total assets.

- In accordance with the requirements of the International Financial Reporting Standards adopted

in the Kingdom of Saudi Arabia, the present value of assets is determined because of discounted

cash flows, which, when applied, results in impairment when compared to the net carrying amount

of the asset under evaluation, resulting in changes in Current assets, Total assets and Current

liabilities.

- In addition to the above adjustments, resulting from the application of IFRS, certain items have

been reclassify in the financial position statement, to meet the presentation and disclosure

requirements of the standards in accordance with the International Financial Reporting Standards





adopted in the KSA and which have not resulted in any additional effects on financial position

statement.

6. Conclusions

The objective of this study was to analyze the effects of the adoption of IFRS on the income

statement and statement of financial position. To achieve this objective, the study measured the

quantitative impact of the application of IFRS on income statement and financial position statement

figures. By examining the existence of statistically significant differences between financial

information prepared according to Saudi and international accounting standards. The results of the

study indicate that there are statistically significant differences between the variables resulting from

the application of two sets of IFRS adopted in Saudi Arabia and Saudi (GAAPs).

Based on an analysis of the effects of the adoption of IFRS, the study concluded the following:

- There are differences between Saudi (GAAPs) and IFRS in asset registration, classification and

age of production (spare parts, repairs, maintenance costs, etc.). The application of IFRS lead to

the capitalization of certain expenses and the increase in depreciation expenses due to

reclassification of certain assets from inventory to plant. These changes resulted in a difference in

Total income, net income and total assets.

- There are differences between Saudi (GAAPs) and IFRS in addressing the costs of repairs and

maintenance. The adoption of IFRS has led companies to reclassify certain items in the statement

of financial position. These changes have resulted in changes in current assets, total assets and

Current liabilities.

- There are differences between Saudi (GAAPs) and IFRS in the recording of components of assets

and impact. These assets have reclassified from current assets to plant and equipment in accordance

with IFRS. These changes have resulted in changes in the values of current assets and total assets.

- There are differences between Saudi (GAAPs) and international recognition criteria. Revenue

recognized when the future economic benefits are likely to flow in accordance with IFRS. These

changes have resulted in a difference in gross and net income.

- There are differences between Saudi accounting standards and international standards in

addressing the costs of repairs and maintenance. The companies have re-evaluated the repairs and

maintenance to determine whether future economic benefits are likely to be included in the plant,

plant and equipment items in accordance with IFRS. Difference in Total income and net income.

- There are differences between Saudi (GAAPs) and IFRS in the treatment of income tax and zakat,

which recognized as an expense charged to equity under IFRS. These changes have resulted in a

difference in net income.





- There are differences between Saudi accounting Saudi (GAAPs) and IFRS in the treatment of

end-of-service benefits. The calculation of after-service benefits, post-employment benefits,

continuing service benefits and other benefits using actuarial valuations under IFRS has resulted in

a change in profit held and retained earnings recognized in the income statement.

- In addition to the above amendments arising from the adoption of IFRS, certain items have

reclassified in the income statement and statement of financial position to meet the presentation

and disclosure requirements of the standards in accordance with IFRS adopted in the KSA. This

did not have any additional impact on the income statement figures and the financial position to

obtain comparative figures.

This study analyzed the content of the statement of income and the financial position in relation

to the transition to IFRS that have applied to the listed companies to achieve the objectives of the

study. First, the analysis of the disclosed information contributed to the comparison objective.

Second, this study identified the most problematic areas in the transition to IFRS, by comparing

the expected transition effects and expected impacts.

The results of this study will be important for supervisors such as the Capital Market Authority, the

Saudi Society of Certified Public Accountants and others to take the necessary precautions for the

effects of adoption of IFRS. It also benefits users of accounting information because it analyzes the

effects of adoption of IFRS.

7. Study Limitations

The analysis period is short and it will be important to extend the time scale. The study did not

analyze the effects of adoption of IFRS on all financial statements, nor on financial ratios.

Appendix 1: Income Statement Variables

earnings per

share

Net profit

Profit before

Zakat and

income tax

Operating Profit Total income.

Companies

IFRS S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB

1.16 0.843 112835 94247 91387 93503 53753 56557 15141 68546 1

0.83 0.85 391 406 777 828 987 1004 1608 1597 2

5.87 5.95 13377 17838 20158 20838 25870 26778 47239 40910 3

2.49 2.53 1035 1055 1058 1078 974 980 1366 1049 4

0.15 31 308 308 382 1032 747 1656 9017 3472 5

1.67 1.63 115 112 116 218 114 288 512 367 6

6.31 6.51 767 837 800 826 787 833 758 705 7

0.18 1.11 469 499 698 1160 928 1328 1608 1597 8

0.98 0.93 433 409 311 535 77 357 117 547 9

4.17 4.09 2281 2301 2438 2447 2422 2486 2881 2697 10

0.12 0.19 49 70 164 186 416 416 861 690 11

3.71 3.71 1016 730 674 714 701 714 858 758 12

0.04 0.04 34 36 75 108 105 108 1107 1107 13

3.93 3.93 359 361 353 358 358 362 838 827 14

5.14 5.12 275 255 295 295 288 286 576 574 15

0.34 0.13 18016 7077 11599 48913 41444 44852 71583 67331 16





1.67 1.68 71 72 87 90 64 66 244 243 17

5.25 5.11 224 230 231 236 235 235 1308 1271 18

0.06 0.06 2 2 2 4 20 23 589 584 19

0.48 0.48 25 26 29 29 19 19 58 58 20

1.05 1.09 42 43 44 45 49 50 148 146 21

3.36 4.71 217 217 221 221 221 225 347 347 22

1.01 1.01 20 20 18 18 12 13 15 26 23

2.08 2.52 2010 2080 2008 2157 2517 2541 5978 5833 24

1.82 1.82 51 52 55 55 128 134 330 328 25

0.48 0.85 145 624 85 176 472 832 4652 4436 26

1.11 1.18 94 100 100 106 167 178 837 958 27

4.45 4.27 9.1 8.5 9.8 9 9.9 9.9 28.6 28 28

0.09 0.14 333 509 226 577 1260 989 1388 1345 29

1.11 1.35 136 142 145 148 153 161 299 297 30

3.65 3.65 685 685 719 719 675 702 935 924 31

1.51 1.47 82 87 87 89 114 116 263 260 32

1.31 1.44 91 100 92 102 99 107 81.9 81 33

0.61 0.72 72 86 90 104 162 174 223 216 34

1.55 1.66 238 250 281 289 233 240 299 290 35

0.73 0.63 27.1 28 9.3 10.2 7.4 8.4 48.2 46 36

1.17 0.57 86 45 53 54 9.1 12 780 661 37

10.28 5.9 1 6 11 4 5.7 6 4.9 3.1 38

1.91 1.98 111 119 140 145 167 171 367 354 39

1.1 1.12 41 50 55 56 66 64 158 143 40

Appendix 2: Financial Position Statement Variables

Firms

Non- current assets Current assets Total assets Shareholders’ equity

Non- current

liabilities Current liabilities Total liabilities

S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB IFRS

S-

GAAB IFRS

1 1801318 1950082 509231 509231 2310549 2459313 1121687 1284665 952088 938457 236772 236189 1188860 1174646

2 17041 17007 5032 5019 22073 22026 9012 9014 10514 10698 3547 2547 14061 13245

3 316892 206238 108507 107635 425399 313873 106566 202079 65455 70395 41110 41380 106565 111775

4 6814 6787 1559 1440 8373 8227 6980 6667 546 682 846 821 1392 1503

5 31733 34110 11602 8474 43335 42584 13515 10544 22783 15486 7037 6455 29820 21941

6 2250 111 980 56 3230 167 1970 1159 744 411 516 483 1260 894

7 1339 1318 296 292 1635 1610 302 278 464 471 868 868 1332 1339

8 211006 19481 5501 5720 216507 25201 7587 11952 10384 10568 2680 2672 13064 13240

9 6404 4498 2682 1421 9086 5919 5690 5252 2142 1522 684 155 2826 1677

10 13781 13815 6411 6369 20192 20184 16245 16055 1424 1391 2532 2531 3956 3922

11 13163 12493 3306 3274 16469 15767 5843 5264 6909 7022 2090 2095 8999 9117

12 3331 3361 1061 1023 4392 4384 3028 3036 1069 1091 294 294 1363 1385

13 48534 48651 9595 9594 58129 58245 8377 8395 38419 38517 11333 11333 49752 49850

14 1076 1114 1432 1428 2508 2542 1540 1540 344 327 565 559 909 886

15 1481 1469 622 619 2103 2088 1277 1354 380 388 356 356 736 744

16 538061 468982 267878 267878 805939 736860 757848 687292 18844 20098 29470 29470 48314 49568

17 68 68 1470 1443 1538 1511 403 402 32 32 1103 1103 1135 1135

18 2209 1952 1268 1397 3477 3349 1397 1263 494 495 1685 1591 2179 2086

19 480 496 770 749 1250 1245 532 527 83 87 635 631 718 718

20 1099 1182 1339 1492 2438 2674 728 728 345 345 364 361 709 706

21 737 850 411 404 1148 1254 527 566 278 302 332 318 610 620

22 1038 1040 313 301 1351 1341 812 802 298 315 241 241 539 556

23 154 154 91 85 245 239 181 181 37 37 27 23 64 60

24 23717 23218 5304 5381 29021 28599 11335 13478 10772 10800 4793 4915 15565 15715

25 603 613 389 387 992 1000 529 529 177 179 285 278 462 457





26 16093 16555 8030 6653 24123 23208 9117 9707 5081 5631 9924 10406 15005 16037

27 3000 3003 1000 965 4000 3968 1425 1418 1247 1283 1328 1338 2575 2621

28 60 60 40 36.5 100 96.5 59 59 10 10.6 30 29.8 40 40.4

29 33489 35702 5561 6022 39050 41724 28330 29324 10985 11022 1378 1298 12363 12320

30 2332 2318 350 340 2682 2658 1507 1485 914 921 260 245 1174 1166

31 3831 1501 2342 2320 6173 3821 3049 2976 781 383 465 455 1246 838

32 888 826 665 656 1553 1482 1003 927 189 193 360 355 549 548

33 1124 1090 58514 4719 59638 5809 943 889 119 129 119 118 238 247

34 5945 6168 914 804 6859 6972 3408 3515 3127 3139 324 318 3451 3457

35 3929 3873 492 488 4421 4361 4140 4074 13 19 268 267 281 286

36 428 428 215 201 643 629 583 575 21 29 38 32 59 61

37 1393 1249 1946 2086 3339 3335 1096 1259 1127 774 1116 1090 2243 1864

38 51.7 44 72.5 71 124.2 115 112 105 2 2.5 9.3 9.5 11.3 12

39 656 654 1281 1281 1937 1935 814 896 106 110 931 930 1037 1040

40 320 320 861 861 1181 1181 653 623 88 97 460 461 548 558

References

AlMotairy, O. S., and Stainbank, L. J. 2014. Compliance with international education standards in Saudi

Arabia: Policy and educational implications. Journal of Business Studies Quarterly, 5(4), 5.

Alnodel, A. A. 2018. The Impact of IFRS Adoption on the Value Relevance of Accounting Information:

Evidence from the Insurance Sector. International Journal of Business and Management, 13(4), 138.

Alsuhaibani, A. 2012. The expected impact of IFRS adoption on Saudi Arabia based on lessons from other

countries: A focus on the telecommunication Business. Procedia-Social and Behavioral Sciences, 62, 1190-

1198.

Arce, M., and Mora, A. 2002. Empirical evidence of the effect of European accounting differences on the

stock market valuation of earnings and book value. European Accounting Review, 11(3), 573-599.

Barth, M. E., W. Landsman, and M. Lang, 2008, International Accounting Standards and accounting quality,

Journal of Accounting Research 46, 467–498.

Callao, S., Jarne, J. I., and Laínez, J. A. 2007. Adoption of IFRS in Spain: Effect on the comparability and

relevance of financial reporting. Journal of International Accounting, Auditing and Taxation, 16(2), 148-178.

Clarkson, P., Hanna, J. D., Richardson, G. D., and Thompson, R. 2011. The impact of IFRS adoption on the

value relevance of book value and earnings. Journal of Contemporary Accounting & Economics, 7(1), 1-17.

Daske, H., and G. Gebhardt, 2006, International financial reporting standards and experts’ perceptions of

disclosure quality, Abacus 42, 461–498.

Hung, M., and Subramanyam, K. R. 2007. Financial statement effects of adopting international accounting

standards: the case of Germany. Review of accounting studies, 12(4), 623-657.

Iatridis, G., and Rouvolis, S. 2010. The post-adoption effects of the implementation of International Financial

Reporting Standards in Greece. Journal of international accounting, auditing and taxation, 19(1), 55-65.

Fontes, A., Rodrigues, L. L., and Craig, R. (2005, December). Measuring convergence of national accounting

standards with international financial reporting standards. In Accounting forum (Vol. 29, No. 4, pp. 415-

436). Elsevier.

Jacob, R. A., and Madu, C. N. (2009). International financial reporting standards: an indicator of high quality?

International Journal of Quality & Reliability Management, 26(7), 712-722.





Jeanjean، T.، and Stolowy، H. (2008). Do accounting standards matter? An exploratory analysis of earnings

management before and after IFRS adoption. Journal of accounting and public policy, 27(6), 480-494.

Joos, P., and Lang, M. 1994. The effects of accounting diversity: Evidence from the European Union. Journal

of Accounting Research, 141-168

Lantto, A. M., and Sahlström, P. 2009. Impact of International Financial Reporting Standard adoption on key

financial ratios. Accounting & Finance, 49(2), 341-361.

Lara, J. M. G., and Mora, A. 2004. Balance sheet versus earnings conservatism in Europe. European

Accounting Review, 13(2), 261-292.

Nurunnabi, M. 2014. ‘Does accounting regulation matter?’ An experience of international financial reporting

standards implementation in an emerging country. Research in Accounting Regulation, 26(2), 230-238.

Nurunnabi, M. 2017. IFRS and Saudi accounting standards: a critical investigation. International Journal of

Disclosure and Governance, 14(3), 191-206.

Smith, M. (2008). Are international financial reporting standards (IFRS) an unstoppable juggernaut for US

and global financial reporting? .The Business Review, Cambridge, 10(1) , 25-31.

Zeff, S. A. (2007). Some obstacles to global financial reporting comparability and convergence at a high

level of quality. The British Accounting Review, 39(4), 290-302.

Analysis of Effects of IFRS Adoption on the Comparability of...

Documents

Transcript of Analysis of Effects of IFRS Adoption on the Comparability of...