IFRS and the Cost of new equity capital

ACCA Study on the cost of equity capital on adoption of IFRS



The ACCA (the Association of Chartered Certified Accountants) has recently issued a study on the costs of equity on adoption of IFRS - Mandating IFRS: its impact on the cost of equity capital in Europe.

According to the ACCA:

The results show that IFRS has already brought significant effects, that they are not uniform across Europe, and variations are not in the direction which some expected. The major positive effects are in those countries, such as the UK, where an equity investor-friendly environment already exists.

The main findings of the research are:

· In countries which have low financial reporting incentives and enforcement – such as Greece and Austria, the findings revealed limited and mixed evidence of a cost of equity capital reduction from pre- to post-IFRS periods
· In stark contrast, in countries where all five indicators are above the pan-European median – such as the UK – researchers found a significant reduction in the cost of equity capital following the implementation of IFRS
· Similarly, companies that are based in the UK, where previously domestic GAAP was considered to be roughly equivalent in disclosure quality to IFRS, the change should have limited impact. Findings however show that UK companies enjoy a greater cost of equity capital reduction following IFRS than other European countries
· In countries where equity-based financing dominates, and corporate disclosure quality is already high, the implementation of IFRS appears to be more effective – for example in Ireland, Switzerland and the UK. This has important implications for regulators and auditors, as well as users of financial statements. Imposing on debt-based capital markets accounting standards developed for equity-based markets may not be effective, at least in the short-run
· Accounting standards that are designed for equity-based capital markets bring the most benefits to stock-market-based economies
· The benefit of IFRS for smaller countries with lower financial reporting incentives and enforcement may only be revealed over a longer period

Here's a link to the full report:

http://www.accaglobal.com/pubs/publicinterest/activities/research/research_archive/rr-105-001.pdf


The Overview can be found here:
http://www.accaglobal.com/publicinterest/activities/research/reports/global_integration/rr_105