As the capital financial market is globalized and capital flows freely across borders, the necessity for unified international accounting standards has constantly increased. To meet this need, the International Financial Accounting Standards (IFRS) was born on the European Union nations' initiative, and now it is taking the position of the global accounting standards firmly and expeditiously. In an effort to keep pace with the international trend for unified accounting standards as well as to enhance accounting transparency and quality of our firms in the world, our country also announced the road map to adopt the IFRS on March 15, 2007. Thus, the IFRS is the generally accepted accounting standards which all the listed firms should abide by in our country in the near future. 

Adoption of the IFRS is expected not only to affect preparation and reporting of financial statements, but also to influence firms' operating activities in general such as operating process, information system, and personnel organization significantly. It also necessitates the revision of related laws on the part of regulatory bodies and preparatory actions on the part of concerned firms. For that, it is important to figure out the potential impact of IFRS adoption on financial statements most of all. At present, since few firms in our country prepare their financial statements ba\sed on the IFRS, it is not possible to examine the actual impact of IFRS adoption. An alternative way to estimate such impact would be to prepare pro-forma financial statements with the IFRS applied for some representative firms selected across different industries, and then analyze the differences between their formal financial statements based on the current accounting standards (K-GAAP) and the IFRS-applied pro-forma financial statements. This alternative, however, is not  realistic. The IFRS is principle-based, and so tends to allow alternative accounting methods, for example, both the cost method and the fair value method allowed in asset recognition. While firms' preference between possible alternative accounting methods is not known, it would not be meaningful to prepare pro-forma financial statements assuming that a firm chose a particular accounting method. Besides the results derived from the pro-forma financial statements would be hardly generalizable.

Although our country formalized IFRS adoption, there are few studies at present empirically analyzing its potential impact. This study attempts to infer the potential impact of IFRS adoption on our firms' financial statements and accounting transparency from analyzing comprehensively the financial statement data of other countries which already adopted the IFRS.

This study investigates the listed firms in the U.K. and Australia which adopted the IFRS from January 1, 2005. In order to analyze the impact of IFRS adoption, we need two different financial statements simultaneously for the same accounting year, one based on the existing local GAAP and the other based on the IFRS. In the first year (year 2005) of IFRS adoption in the U.K. and Australia, the financial statements reported on the basis of the local GAAP for the previous year (year 2004) are restated in accordance with the IFRS for comparison purpose. Thus the year 2004 is the only year in which both the financial statements in accordance with the local GAAP and the IFRS are available. Thus, the impact of IFRS adoption on the financial statements can be analyzed directly by comparing the two financial statement for year 2004.

The sample consists of the firms in the U.K. and Australia which adopted the IFRS in year 2005 for the first time and for which annual financial statement data are compiled in the OSIRIS database. The U.K. sample firms are confined to those with the fiscal year ending December 31 or March 31, and Australian sample firms with the fiscal year ending June 30. Financial institutions such as banks and insurance companies are excluded from the sample due to their industry peculiarities. The final sample includes 170 U.K. firms and 432 Australian firms. In some analyses, the sample size is slightly reduced to the extent that essential financial data are not available.

In order to utilize the experience of U.K. or Australian firms in figuring out the potential impact of IFRS adoption in our country, it is prerequisite to know whether IFRS adoption causes similar changes in accounting standards between our country and the U.K. or Australia. Review of the differences between the local GAAP and the IFRS in the U.K. and Australia tells that major changes in accounting standards in those countries seem to be largely applied to our country. Thus, it is possible that the experience of U.K. or Australian firms from IFRS adoption might be generally repeated in our country. on the other hand, in consideration of flexibility allowed in accounting method choices under the IFRS, there can be systematic differences in firms' accounting choices due to differences in accounting environment and sociological culture across nations. This factor would weaken the extent that the experience of U.K. or Australian firms is replicated in our country.

The results of this study show that the effect of IFRS adoption on financial items such as assets, liabilities, equity, and income varied a lot across firms in the U.K. and Australia. In these financial items, some firms experienced more than 25% change while quite a few firms reported no change. The majority of firms had change within 25%. The frequency and the extent of change were higher in large firms than small firms in general.

First, regarding change in assets upon IFRS adoption in the U.K. and Australia, property, plant and equipment decreased, probably due to more rigorous impairment evaluation, and more frequent change in depreciation estimates following periodic review on the validity of depreciation under the IFRS. Intangible assets, on the other hand, increased substantially since their recognition criteria is less rigorous and goodwill amortization is prohibited under the IFRS. Further, other fixed assets increased as recognition of deferred tax assets is broadened and fair value can be applied to investment properties under the IFRS. on the whole, total assets increased by 1% to 5% in the U.K., and 0% to 1% in Australia.

Second, regarding change in liabilities, increase in liabilities is expected in general since the possibility of resource outflows, an important criterion in liability recognition is interpreted more broadly under the IFRS. Consistent with this expectation, both current and noncurrent liabilities increased in Australia. But the increase was very small, resulting in overall increase of 0% to 1% in liabilities. In the U.K., provisions including pension liabilities decreased substantially on the contrary. This peculiar result is because the existing U.K. GAAP is more stringent in recognizing pension liabilities than the IFRS. Albeit so, total liabilities increased approximately 5% on the whole in the U.K., which is much higher than in Australia.

Third, regarding change in equity, rigorous impairment evaluation of tangible assets and broad recognition of provisions under the IFRS would have the effect of decreasing retained earnings. on the other hand, broad recognition of intangible assets and prohibition of goodwill would cause increase in retained earnings. Thus,  the effect of IFRS adoption on equity change is expected to be mixed. In fact, total equity is found not to have changed noticeably in the U.K. and Australia.

Finally, regarding change in income, IFRS adoption in the U.K. increased net income by 0% to 5% overall. In Australia also, net income also increased, but only slightly by 0% to 1% on the whole.

In this study, whether IFRS adoption enhanced accounting transparency is tested by whether earnings management decreased significantly under the IFRS in the U.K. and Australia. The magnitude of earnings management is measured with discretionary accruals. The results show that discretionary accruals significantly decreased in the U.K., but did not change noticeably in Australia, under the IFRS. Decrease in discretionary accruals found in the U.K. is significant only in large firms. Further, change in discretionary accruals under the IFRS exhibited a wide variation across industries both in the U.K. and Australia.  Thus, it can be said that the effect of IFRS adoption on the magnitude of earnings management differs across nations, across firm sizes, and across industries. The results of this study based on the U.K. and Australia are consistent with those of Ball et al. (2003) which document that the effect of adoption of a high quality accounting standards on accounting transparency is different across Asian countries.

The sample of this study is not confined to large firms, but includes a number of small and medium-sized firms across various industries. Thus, the results of this study can be useful for our firms and regulatory agencies to take necessary actions in preparation for the IFRS soon to be adopted. As previously mentioned, adoption of the IFRS is expected not only to affect preparation and reporting of financial statements, but also to influence firms' operating activities in general such as operating process, information system, and personnel organization significantly. Unless we do not fully recognize and are not well prepared for such impact and implications of IFRS adoption, our firms, further our country on the whole would notice our accounting transparency impaired and consequently suffer a great deal of economic loss in the global market.