JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH

Association Vol. 10, No. 1

2011
pp. 6183

American Accounting
DOI: 10.2308/jiar.2011.10.1.61

Soft Adoption and Reporting Incentives: A

Study of the Impact of IFRS on Financial
Statements in Sweden
Niclas Hellman
ABSTRACT: This paper is based on the research opportunity created by the Swedish
voluntary adoption of IFRS during 19912004. In connection with the mandatory EU
adoption of IFRS in 2005, the preceding voluntary adoption made it possible to
observe income statement and balance sheet numbers under two different accounting
regimes for the same standards and the same firms during the same time period. The
Swedish pre-2005 adoption was, arguably, soft, involving national deviations from
IFRS and weak enforcement institutions. For a sample of the 132 largest Swedishlisted compa- nies, the hard (EU-regulated) adoption caused material increases of
both net profit and balance sheet numbers, but these increases were caused by
standards not previously adopted via the Swedish standard setter. The increase in
the valuation of net assets was attributed to the forces at the national level which, pre2005, had worked in order to preserve the Swedish accounting tradition of balance
sheet conservatism. With regard to the international standards voluntarily adopted
before 2005, the results indicated that firms, on average, used the flexibility offered
by the soft adoption regime to manage earnings and shareholders equity upwards.
Swedens ambition to voluntarily move toward more capital market-oriented financial
reporting was delayed and hindered by forces defending the conservative accounting
tradition and, accordingly, a soft IFRS adoption policy was chosen. However, in line
with recent research on standards and incentives, the empirical results of the current
paper indicate that this gave firms dis- cretion that was used for earnings
management purposes.
Keywords: IFRS adoption; financial reporting; reporting incentives; IFRS; Sweden;
earnings management; soft adoption; mandatory adoption; voluntary
adoption.

I. INTRODUCTION

here
is a growing
research
literature
thatworld.
evaluates
the transition
to International
Financial
Reporting
Standards
(IFRS)
around
the
research
of
the international
accounting
standards
is Empirical
high (Barth
et al.suggests
2008) that
and the
thatquality
IFRS
adoption
is associated with capital market-related economic benefits, including increases in the stocks

Niclas Hellman is an Associate Professor at the Stockholm School of

Economics.

Helpful and valuable comments from David Alexander, Sid Gray, Sigvard Heurlin, and Richard Morris are gratefully
acknowledged.

Published Online: February 2011

61

62

Hellman

market value, increases in market liquidity, and a lower cost of capital (Daske et al. 2008; Li
2010). However, the widespread adoption of IFRS may not lead to adequate and consistent
changes in local accounting practice. First, the legally enforceable versions of IFRS may not fully1
correspond to IFRS as issued by the International Accounting Standards Board (IASB).
Second,
the
existence
and functioning
of enforcement
vary
acrosswhich
jurisdictions.
of
this
is indicated
by the results
of Daske institutions
et al. (2008,
1089),
suggest The
that importance
firms with
major
differences between local accounting standards and IFRS benefit more when supported by a
strong regulatory environment. Third, within a certain jurisdiction, firms incentives to report
informative profit numbers to capital providers will vary due to firm-specific factors and the
institutional
context (Burgstahler et al. 2006, 984).
Swedish-listed companies adopted IFRS 2005 in response to EU regulation 1606/2002. This
was not expected to cause any dramatic change since Sweden had already adopted almost all
2
prevailing IFRS into Swedish GAAP during 19912004. However, an important difference between the Swedish pre-2005 adoption and the EU adoption was that the former was a soft
adoption,
i.e., the This
Swedish
standards
were comply
explain
recommendations
with weak legal
enforcement.
relates
to Ordelheide
(1990),orwho
introduced
the term soft-transformation
to
describe a nations tendency to resist the transition to international regulation by adopting it in a
way that allows traditional national accounting practices to be maintained. The Swedish adoption
in 2005 represents a case where a national soft adoption of IFRS can be empirically compared
with the EU-regulated adoption of IFRS, which has no comply or explain option and strong legal
enforcement. Accordingly, the paper aims to investigate the impact of the hard (EU-regulated)
IFRS adoption on net profits and balance sheet numbers. The empirical data comprise the 132
largest Swedish-listed firms.
The paper aims to contribute to the literature in three ways. First, the Swedish case constitutes
a unique empirical context for evaluating the impact of reporting incentives when firms apply
IFRS, since net profit and shareholders equity numbers are observable both under a soft and a
hard adoption regime of IFRS for the same firms during the same time period. Second, Sweden is
an interesting country to study because of the diverse classifications of the country in the
literature.
In the classification by Nobes (1983), Swedish accounting received an extreme position in terms
of
high influenceover
by time
government
and taxby,
regulation,
but the
country
hasand
become
more
capital
market-oriented
pointed
example,
Aisbitt
(2001)
dArcy
(2001).
In
the
study by Burgstahler
etasal.
(2006,out
1000),for
firms
with Scandinavian
legal origin
showed
the
lowest
score of earnings management, together with U.K. firms, which indicates that Sweden would now
be considerably less influenced by tax alignment and more by capital market forces. Third, the
paper aims to contribute with enhanced understanding of how the adoption of international accounting standards interacts with the conditions that apply in a particular context. One reason why
a study of a single country can add to the literature is that large empirical studies need to classify
countries
ways,
some
of thereceives
country-specific
Forscore
example, in in
themore
studystandardized
by Burgstahler
et al.leaving
(2006,out
999),
Sweden
the highestdetails.
possible
for legal enforcement, although a system with weak monitoring of financial reporting based on
IFRS recommendations prevailed. Thus, although the legal enforcement in Sweden may be high
in general, the enforcement of voluntarily adopted IFRS was, in practice, low. Hope et al. (2006)
offer a similar example: Sweden is classified as a jurisdiction adopting IFRS in 2005, although
1
2

For example, listed companies in the European Union (EU) must apply the EU-endorsed version of IFRS.
For convenience, the term IFRS refers both to International Accounting Standards (IAS) and to IFRS. The term IAS
is used when reference is made either to specific IAS or specifically to the set of international accounting standards in
force before the founding of the IASB.

Journal of International Accounting Research

American Accounting Association

Volume 10, No. 1, 2011

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