Hellman Ifrs

JOURNAL OF INTERNATIONAL ACCOUNTING RESEARCH
Vol. 10, No. 1

2011
pp. 6183
American Accounting Association

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 Swedish-listed companies, 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, pre-2005, 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 discretion 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 that evaluates the transition to International Financial
Reporting Standards IFRS around the world. Empirical research suggests that the quality
of the international accounting standards is high Barth et al. 2008 and that 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
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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 fully
correspond to IFRS as issued by the International Accounting Standards Board IASB.1 Second,
the existence and functioning of enforcement institutions vary across jurisdictions. The importance
of this is indicated by the results of Daske et al. 2008, 1089, which suggest that 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
prevailing IFRS into Swedish GAAP during 19912004.2 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 Swedish standards were comply or explain recommendations with weak legal
enforcement. This relates to Ordelheide 1990, who 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 influence by government and tax regulation, but the country has become more capital
market-oriented over time as pointed out by, for example, Aisbitt 2001 and dArcy 2001. In the
study by Burgstahler et al. 2006, 1000, 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 in more standardized ways, leaving out some of the country-specific details. For example, in the study by Burgstahler et al. 2006, 999, Sweden receives the highest possible score
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

Volume 10, No. 1, 2011
The Impact of IFRS on Financial Statements in Sweden
63
Sweden had actually adopted almost the entire prevailing IFRS during 19912004. The purpose of
providing the two examples is not to criticize these well-cited studies, but merely to illustrate the
need for studying IFRS adoption in specific institutional contexts.
The empirical results display material increases of net profit and balance sheet numbers in
connection with the hard adoption of IFRS in 2005. These increases were primarily explained by
the new IFRS that were issued at this time and three fair value standards IAS 39, IAS 40, and IAS
41 not voluntarily adopted in Sweden pre-2005, which could be attributed to forces at the national
level working in order to preserve the Swedish accounting tradition of conservative valuation of
balance sheet items. With regard to the movement from soft to hard adoption of the same standards, the empirical results showed significant decreases in net profit and, to a lesser extent,
shareholders equity. A more detailed analysis revealed that the average decreases in net profit and
equity pertained to many different standards, and for most of them the direction of change varied
across firms. This indicates that the soft adoption gave discretion to preparers for both increases
and decreases of net profit, depending on firm-specific reporting incentives. However, the dominance of firms that reported higher net income under the soft adoption regime suggests that
tax-related incentives were less important compared to incentives in line with managing earnings
upwards. Moreover, the dominance of equity-increasing observations suggests that firms reporting
incentives do not, on average, correspond with the Swedish accounting tradition of balance sheet
conservatism. Further analyses indicated that firms that had greater earnings management opportunities were found to also report significantly higher earnings under the soft adoption regime.
These firms were also characterized by being significantly smaller than other firms.
The remainder of the paper is organized as follows. The next section describes the Swedish
case and the soft adoption of IFRS. Section III presents the research design and hypotheses.
Section IV describes the sample and the applied methodology. Empirical results are presented and
discussed in Section V, and concluding remarks are provided in Section VI.
II. ADOPTION OF IFRS: THE SWEDISH CASE
The Swedish Institutional Context and the Voluntary Adoption of IFRS
Sweden has traditionally been characterized by strong protection of creditors e.g., La Porta et
al. 2000 and subject to influence of German law Monsen and Wallace 1995. The Company Act
in force during large parts of the 20th century included dividend restrictions and mandatory
retention of profits in order to protect the company from shareholders that could threaten the
existence of the company Jnsson 1991, 529. Nobes 1983 characterized Sweden as
government-driven and tax-oriented, and there is indeed a long history of strong linkage between
accounting and taxation e.g., Davidson and Kohlmeier 1966 and examples of government interference Zeff and Johansson 1984. Since more prudent valuation of assets and liabilities is
associated with lower taxable income, the tax-accounting link has given Swedish firms a strong
incentive to employ balance sheet conservatism, i.e., to choose accounting methods and estimates
that keep book values of net assets relatively low Penman and Zhang 2002, 238. The demand for
IAS in Sweden originated from a need to ensure a satisfactory development of accounting practice
in the multinational firms. Prior literature has linked voluntary adoption of international standards
to the obtaining of foreign debt and equity capital El-Gazzar et al. 1999; Tarca 2004, and Sweden
has a disproportionate number of multinational firms who rely on financing outside Sweden
Cooke 1989. During the 1980s, many Swedish multinationals took part in the mergers and
acquisition boom, but the subsequent accounting for goodwill was inconsistent and flexible e.g.,
Hellman 1993. At this time, Swedish accounting legislation left most specific issues for accounting practice to resolve, by prescribing accounts to be prepared in accordance with god redovisningssed good accounting practice. Guidance was provided by Freningen Auktoriserade Revisorer the professional body of certified accountants and Bokfringsnmnden the Swedish
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Accounting Standards Board, a governmental body, but these bodies were not fully able to deal
with the increasing flexibility in practice during the 1980s Jnsson 1991. In addition, the use of
the items untaxed reserves in the balance sheet and appropriations to untaxed reserves in the
income statement was considered ambiguous for foreign users, and the multinational firms exerted
pressure for international accounting harmonization in this area Jnsson 1994.
In 1989, the Swedish Financial Accounting Standards Council SFASC was jointly founded
by the accounting profession, the government, and the preparers and became a new standardsetting body for public companies. On the basis of IAS 22, the SFASC issued its first recommendation in 1991, which introduced deferred tax accounting ended the use of the concept of untaxed
reserves and prescribed straight-line amortization of goodwill for a maximum period of 20 years.
In the years to come, SFASC began its long journey of adopting all IAS and IFRS, as described on
SFASCs homepage SFASC 2007:
The Financial Accounting Standards Councils recommendations have been formulated on the
body of rules and regulations of the IASB. The intention is that the Councils recommendations
shall follow IFRS/IAS and that deviations from these standards shall be permitted only if Swedish
law prohibits the preparation of accounts according to IFRS/IAS or if there are other strong
reasons.
During 1991 to 2004, the SFASC issued 34 recommendations, and in 2004 only three of the
relevant standards had not yet been adopted: IAS 39, IAS 40, and IAS 41. During this period,
Sweden also joined the EU in 1995 and this led to changes in the presentation of Swedish
financial statements, but not to any material changes with regard to measurement issues.
Why was it a Soft Adoption?
The SFASCs strategy to selectively harmonize and converge over a long period of time is
described by Godfrey and Chalmers 2007 as an incremental approach to IFRS adoption. This
approach has also been taken by, for example, Australia and South Africa. The Swedish decision
in 1989 to start adopting IAS was initially a way to solve the acute problems regarding goodwill
and accounting for untaxed reserves, where the capital market-based arguments were strong.
However, the prevailing Swedish accounting tradition and legislation emphasized conservative
accounting for the benefit of creditor protection and because of the tax-accounting link. The clash
with the more capital market-oriented international standards led to a lengthy standard-setting
process, referred to in the SFASCs policy statement as adjustments of IFRS due to Swedish law
prohibitions and other strong reasons.3 With regard to taxation, the solution was to require the
SFASC recommendations to be applied in the consolidated accounts, but they were either optional
or not permitted for legal entities tax subjects. The process of dealing with the link to taxation
took time, partly because of some fear that less-conservative accounting in the consolidated
accounts would be passed on to taxation.4
The Swedish adoption of IFRS during 19912004 can be characterized as a soft adoption.
First, it was a national version of IFRS that was selective and included deviations from IFRS when
necessary due to Swedish law compliance or when there were other strong reasons. According
to Ordelheide 1990, nations tend to resist changes imposed from outside by transforming the
3
With regard to Swedish law, the prohibition against reporting financial instruments at fair value was an obstacle for an
earlier adoption of IAS 39. One example of other strong reasons is that the Swedish version of IAS 12 required the
deferred tax liability in a pure substance acquisition for example, the acquisition of a company owning only real estate
to be valued on the basis of the purchase price discounted value of the deferred tax liability; no goodwill, whereas IAS
12 prescribed the use of the nominal amount.
For example, with regard to IAS 17 Leases, the industry feared that business would be negatively influenced by the
SFASC recommendation. The final recommendation became optional for legal entities tax subjects.

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65
new accounting rules in a way that allows traditional national accounting practices to be maintained. This is referred to as soft-transformation.5 Second, the enforcement institutions in Sweden
were weak. The IFRS adoption via SFASC recommendations took place within the limits of
Swedish accounting legislation, which was flexible with regard to consolidated accounts, implying
that firms could obey the law without complying with the SFASC recommendations. Therefore,
the issue of compliance was solved by requiring the recommendations to be followed when firms
signed the listing contract with the Stockholm Stock Exchange SSX. However, this system was
soft in the sense that listed firms only had to either comply with, or explain deviations from, the
SFASC recommendations. For many years, compliance with SFASC recommendations was monitored primarily by auditors. In prior research, auditors have been criticized for providing clean
audit opinions despite clear deviations from IFRS e.g., Ali 2005, 31, and it has been questioned
whether local auditors and regulators are fully able to secure the enforcement of international
standards Quinn 2004. In response to demands from the EU to improve the enforcement, Panelen fr vervakning av Finansiell Rapportering the Swedish Panel for Monitoring Financial
Reporting SPMFR was founded in April 2003. However, the panel had limited resources and
was a private body acting within a system of self-regulation. An examination of the annual reports
for 2004 showed several cases of noncompliance, and the SPMFR stated: Deficient reporting of
deviations from SFASC recommendations is quite common SPMFR 2005, 23, translated from
Swedish. Similarly, a report ordered by the SSX, covering annual reports for 2003, concluded: It
seems like the firms have adopted a view which implies that certain deviations from the SFASC
recommendations can be made without explicitly describing this in the annual report Grundvall
et al. 2004, 10, translated from Swedish. Overall, this is in line with prior research, which reports
significant noncompliance with IAS Street and Gray 2001.
Reporting Incentives and the SFASC Accounting Regime
The soft adoption, as described in the preceding section, is likely to have given managers
increased room for earnings management. For example, Stolowy and Ding 2003 report that
French companies seemed subject to a certain degree of opportunism when they were given
flexibility with regard to the choice of standards to use for consolidated accounts. Ball 2006
argues that despite the more widespread use of one set of financial reporting standards IFRS
around the world, this may not lead to convergence in actual financial reporting because the
institutional context may not support the implementation of standards aimed to satisfy investor
needs for information. This proposition goes back to the general distinction between standards and
incentives outlined by Ball et al. 2003, suggesting that the implementation and compliance with
standards are influenced by preparers incentives, which in turn are formed by market and political
forces. Since these forces differ across jurisdictions, preparer incentives will differ and, as a
consequence, implementation and compliance will vary. Othman and Zeghal 2006 compared the
incentives for earnings management in the Anglo-American and the Euro-Continental accounting
models and found empirical support for earnings management linked to contractual debt cost and
effective tax rate in France, whereas issuing equity was found to be a strong incentive for earnings
management in Canadian firms. The pre-2005 adoption of IFRS made Swedish accounting more
capital market-oriented Aisbitt 2001; Artsberg and Schwenke 2003, and at the time of the hard
IFRS adoption in 2005, the Swedish accounting model would seem to fall somewhere in between
Germanys adoption of the accounting rules in the 4th directive was used as the basis for Ordelheides 1990 theory of
how accounting change initiated at an international level was prevented within a national context. In connection with the
EU adoption of IFRS in 2005, national versions of IFRS were avoided by directly issuing a regulation at the EU level
instead of letting every EU country interpret directives to be implemented in national legislation, as in the case of the
4th and 7th directives.
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the Anglo-American and the Euro-Continental accounting models e.g., dArcy 2001. With regard
to reporting incentives within such an institutional context, the findings of Burgstahler et al. 2006,
985 provide some guidance:
capital market forces, by and large, improve the informativeness of earnings. We document that
stronger tax alignment is associated with more earnings management, but this effect is mitigated for
public firms.
Thus, in an institutional context where stock market incentives are strong, the level of earnings management can be expected to be low. According to the study by Burgstahler et al. 2006,
who based their results on an empirical study of both public and private firms in many countries,
firms with Scandinavian legal origin showed the lowest score of earnings management, together
with U.K. firms. It is considered to be an empirical issue to evaluate in what direction, if any,
preparers deviated from IFRS under SFASC recommendations. The empirical study will evaluate
if and how Swedish firms used the flexibility offered by the soft adoption of IFRS in order to
manage profits and shareholders equity.
III. RESEARCH DESIGN AND HYPOTHESES
For the purpose of the empirical study, it is necessary to analytically distinguish between
some different types of effects at the time of the EU-regulated adoption of IFRS:
1.
2.
New standards: Effects related to the EU-regulated adoption of new IFRS, applied for the
first time in 2005; denoted IFRSNEW.6
Old standards:
a.
Effects related to the EU-regulated adoption of prevailing IFRS not voluntarily

adopted by the SFASC before 2005; denoted IFRSOLD NONADOPTED.7
b. Effects related to the EU-regulated adoption of IFRS adopted voluntarily via the
SFASC before 2005; denoted IFRSOLD ADOPTED.8
IFRS is generally regarded as originating from the Anglo-Saxon model of accounting Aisbitt
2006, which is not distinguished by conservatism related to creditor protection and taxation.
Nobes 1998 suggests that financial reporting systems start out from either the Anglo-Saxon
common law or the European code law system, depending on to what extent the classic finance
literature setting exists in the country; e.g., important equity markets with a large number of
outsider shareholders. If strong equity markets are introduced, Nobes 1998 predicts that European firms and countries will move toward the Anglo-Saxon model. The adoption of EU-endorsed
IFRS in 2005 was a step in this direction for Sweden. Accordingly, the standards not adopted in
Sweden pre-2005 are expected to lead to a lower level of balance sheet conservatism compared to
the prevailing Swedish accounting practice at the time, whereas there is no predicted direction of
change regarding the impact of the hard EU-regulated adoption of IFRS already adopted via
SFASC recommendations before 2005 the soft adoption on the level of balance sheet conservatism. The degree of balance sheet conservatism is measured by comparing shareholders equity
under Swedish GAAP and IFRS. The following hypothesis can be stated:9
H1: EquityIFRS EquitySWGAAP.
6
7
8
9
IFRS 1, IFRS 2, IFRS 3, IFRS 4, IFRS 5, and IFRS 6.

IAS 39, IAS 40, and IAS 41.
IAS 2, IAS 11, IAS 12, IAS 16, IAS 17, IAS 18, IAS 19, IAS 21, IAS 23, IAS 27, IAS 28, IAS 31, IAS 36, IAS 37,
and IAS 38.
Please note that at the time of the hard EU-regulated adoption of IFRS, Swedish GAAP already covered the complete
IFRS except for three standards IAS 39, IAS 40, and IAS 41.

Volume 10, No. 1, 2011
67
With regard to IFRSNEW, IFRS 2 share-based payment does not change the valuation of
balance sheet items compared to Swedish GAAP, whereas IFRS 3 business combinations is
expected to lead to a lower level of balance sheet conservatism. In particular, the change with
regard to goodwill treatment should be emphasized impairment tests instead of systematic amortization. Ding et al. 2008 examined the development of goodwill accounting in four countries
Great Britain, United States, Germany, France over more than a century, and argue that all four
countries have gone through a shift from a stakeholder model to a shareholder model, resulting in
a preference for short-term rather than long-term profit. This development also applies to Sweden,
where the adoption of IFRS 3 took Swedish accounting further away from traditional conservative
thinking, since the standard implied that a greater share of the acquisition cost of goodwill would
remain on the balance sheet, e.g., a higher valuation of net assets compared to Swedish GAAP.
The following hypothesis is stated:
H2: EquityIFRSNEW EquitySWGAAP.
All standards in the category IFRSOLD NONADOPTED involve fair value accounting IAS
39, IAS 40, and IAS 41. The adoption of fair value accounting would clearly break with the prior
accounting tradition in Sweden and, thus, it is not surprising that these particular standards were
not voluntarily adopted before 2005. Fair value accounting leads to less conservative valuation of
assets, which increases the reported values of assets and shareholders equity.10 The following
hypothesis is stated:
H3: EquityIFRSOLD
NONADOPTED
EquitySWGAAP.
With regard to IFRSOLD ADOPTED, the soft adoption is likely to have given managers
increased room for manipulation of earnings and shareholders equity in accordance with their
reporting incentives see the Reporting Incentives and the SFASC Accounting Regime section.
It is hypothesized that the hard adoption will change net profit and shareholders equity, but it is
considered to be an empirical issue to evaluate in what direction. Accordingly, the hypotheses are
stated as follows:
H4: Net profitIFRSOLD
ADOPTED
Net profitSWGAAP.
H5: EquityIFRSOLD ADOPTED EquitySWGAAP.

A supplementary analysis was performed with regard to IFRSOLD ADOPTED in order to
evaluate whether firms that had greater earnings management opportunities took advantage of the
soft adoption regime in any systematic way. The literature on earnings management is vast e.g.,
Healy and Wahlen 1999 and this supplementary analysis is limited in scope. At the time of the
EU-regulated IFRS adoption, Sweden was classified in between the Anglo-American and the
Euro-Continental accounting models see the Reporting Incentives and the SFASC Accounting
Regime section. Following the reasoning of Othman and Zeghal 2006, who studied Canadian
and French firms, Swedish firms would thus be likely to exhibit earnings management in line with
various reporting incentives, but without dominance for either equity-related incentives as in
Canada or debt- and tax-related incentives as in France. According to Othman and Zeghal
2006, firms who have a high variation in operating earnings over time have an increased opportunity to smooth earnings. This potential to smooth earnings is measured as the standard deviation
of operating income during 20012004 compared to the mean operating income during the same
10
IAS 40 may be implemented by choosing the cost model instead of the fair value model. All listed Swedish real estate
companies opted for the fair value model.
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period.11 As a further test related to H4 and H5, the 132 firms were ranked on the basis of their
potential to smooth earnings.12 The sample was divided into quartiles on the basis of each firms
potential to smooth earnings, and it is hypothesized that for the highest-ranked companies quartile
1, net profit and shareholders equity for IFRSOLD ADOPTED under soft adoption will deviate
from the corresponding numbers under hard adoption. Given the suggested absence of dominance
of any reporting incentives at the time, no direction is hypothesized. The two hypotheses for
quartile 1 are stated below:
H6: Net profitIFRSOLD ADOPTED Net profitSWGAAP.
H7: EquityIFRSOLD ADOPTED EquitySWGAAP.
The tests of all hypotheses except H1 require that the effects of separate standards can be
distinguished. However, companies do not provide information on the deferred tax effect related to
each IFRS adjustment. Instead, they provide an aggregate deferred tax adjustment related to all
IFRS adjustments. As a consequence, the empirical tests of H2 to H7 were conducted on a pretax
basis.
IV. METHODOLOGY AND DATA
Gray 1980 developed a method for measuring accounting differences across financial reporting regimes. He designed an index of comparability IC, where U.S. GAAP was used as a
yardstick for measuring differences in profit for firms reporting both in accordance with national
GAAP and U.S. GAAP. The index can be used to estimate the impact of differences in accounting
standards on various measures of firm performance Baker and Barbu 2007, 280. This characterizes the way the index is applied in the current paper in order to measure differences between
Swedish GAAP and IFRS in connection with the Swedish adoption of EU-endorsed IFRS in 2005.
In addition to differences in net profit, differences in the value of shareholders equity, assets, and
liabilities are examined. The indices are calculated as follows:
ICNETPROFIT = 1
ICEQUITY = 1
ICASSETS = 1
NetprofitSWGAAP NetprofitIFRS
.
NetprofitSWGAAP
EquitySWGAAP EquityIFRS
.
EquitySWGAAP
AssetsSWGAAP AssetsIFRS
.
AssetsSWGAAP
ICLIABILITIES = 1
LiabilitiesSWGAAP LiabilitiesIFRS
.
LiabilitiesSWGAAP
An index value greater than 1 means that IFRS net profit equity, assets, liabilities is higher than
net profit equity, assets, liabilities according to Swedish GAAP. An index value less than 1 means
that IFRS net profit equity, assets, liabilities is lower than net profit equity, assets, liabilities
11
12
Othman and Zeghal 2006 used the same measure, but based on the variation over two years. The variation over four
years is considered to be a better indicator of the potential to smooth since it captures potential income shifting between
more than just two periods.
Another considered variable was the reporting of a small profit, which could indicate that a firm had managed earnings
by turning a small loss into a small profit see, for example, Jeanjean and Stolowy 2008. However, this variable could
not be used for empirical analysis because of too few observations.

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69
according to Swedish GAAP. An index value of exactly 1 implies that the net profit equity, assets,
and liabilities has not been affected by the transition to IFRS.
In contrast to some of the prior studies using this methodology Hellman 1993; Adams et al.
1999, the index is not only calculated for net profit, but also for assets, liabilities, and shareholders equity. The reason for including assets and liabilities is that the balance sheet approach applied
by the IASB implies that off-balance sheet items such as derivatives are recognized on the balance
sheet regardless of whether they have any historical cost. Thus, even if IFRS would have little
impact on net profit and shareholders equity, assets and/or liabilities may increase. One reason for
examining differences with regard to shareholders equity is that the balance sheet approach
increases the relevance of this number. In addition, shareholders equity is used for measuring the
degree of balance sheet conservatism.
For the purpose of more detailed analyses, partial indices of comparability PIC are calculated, following the methodology originally outlined by Weetman and Gray 1991:
PICNETPROFIT = 1 +
PICEQUITY = 1 +
Partial IFRS Adjustment

.
NetprofitSWGAAP
Partial IFRS Adjustment

.
EquitySWGAAP
The partial index shows the relative impact of a specific adjustment item. Swedish GAAP is used
as the yardstick, since the transition is made from this accounting regime.
The sample consists of 132 Swedish-listed companies see Table 1. It is based on the 160
largest companies listed on the SSX per December 31, 2005. The companies excluded were
companies not applying Swedish GAAP in 2004 due to the parent company being non-Swedish,
companies in their IPO year, and one company not preparing consolidated accounts.
All firms provided reconciliations between Swedish GAAP and IFRS. The reconciliation data
were hand-collected. The best data source was typically the 2005 annual report, but in some cases
interim reports, the annual report 2004, or a separate IFRS transition document turned out to be a
TABLE 1
Sample of Listed Companies
Classification
Companies listed on the
Stockholm Stock Exchange
per December 31, 2005, with
a market capitalization
exceeding 1 billion SEK
equivalent to about 125
million USD.
Less
Companies in their IPO year
Companies not applying
Swedish GAAP
Companies not preparing
consolidated accounts
Final sample
Frequency
160
8
19
1
132
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Hellman
better source. Asset and liability information was often excluded from the reconciliations and then,
instead, collected from the reported balance sheets in the annual reports for 2004 and 2005.
Market capitalizations were obtained from the SSX. All other data were hand-collected from
annual reports.
V. ANALYSIS AND RESULTS
Overall Impact of the 2005 IFRS Adoption on Net Profit and Balance Sheet Numbers
In total, the 132 companies in the sample made 425 adjustments 3.2 adjustments per company of net profit due to the 2005 transition from Swedish GAAP to IFRS. The shareholders
equity counterpart was 501 adjustments 3.8 adjustments per company.
The results presented in Table 2 Panel A show that the IFRS net profit was 24.1 percent
higher than net profit measured in accordance with Swedish GAAP.13 Panel B shows that this
significant increase was primarily related to IFRSNEW, 18.1 percent, and to a lesser extent to
the adoption of IFRSOLD NONADOPTED, 3.3 percent. The mandatory adoption of IFRS also
caused an average shareholders equity increase of 9.1 percent, which is significant at the 1 percent
level and provides support for H1. Moreover, Panel A of Table 2 shows average increases of assets
5.2 percent and liabilities 2.0 percent, both significant at the 1 percent level.14 Given the
argument of more balance sheet conservatism under Swedish GAAP, it is logical that assets are
valued higher under IFRS. With regard to liabilities, less conservatism would theoretically imply
lower values. However, the liability increase was primarily caused by deferred tax liabilities linked
to the higher asset values. Panel B of Table 2 shows that shareholders equity increased primarily
due to the adoption of IFRSOLD NONADOPTED, 9.9 percent, and to a lesser extent because
of the adoption of IFRSNEW, 3.2 percent. Both effects were statistically significant at the 1
percent level and provide support for H2 and H3. The material increases in book values caused by
adoption of IAS 39, IAS 40, and IAS 41 indicate that considerable balance sheet conservatism had
prevailed under Swedish GAAP. Panel C of Table 2 shows that the material increases in net profit
and shareholders equity were not caused by the hard adoption of IFRSOLD ADOPTED. Instead,
this adoption had opposite effects, i.e., led to decreases in net profit and shareholders equity. This
is further analyzed in the Did Swedish-Listed Firms Take Advantage of the Soft Adoption?
section.
Panel A of Table 3 shows that IFRS 3 was the standard causing adjustments most frequently:
103 net profit adjustments, which corresponds to 78 percent of the firms. IFRS 3 also caused the
most material effects significant increase of net profit at the 1 percent level. In most cases, the
IFRS 3 adjustments only referred to the discontinuation of goodwill amortization, but a number of
the observations also involved reclassification of intangibles, reversal of restructuring reserves,
and negative goodwill. The observed effects are in line with Ding et al. 2008, who suggested that
the treatment of goodwill under IFRS 3 will lead to an increased emphasis on short-term profit,
i.e., goodwill impairment charges are expected to be lower than the discontinued goodwill amortizations during the first years after implementation. This is particularly likely to have happened in
Sweden, where an SFASC recommendation based on IAS 36 Impairment was in force 2002
2004. Indications of goodwill impairment during this period should already have led to impairment testing and write-downs. Only 24 out of 132 companies 18 percent made IFRS 2 adjustments Table 3, Panel A. This may be explained by the dominance of the stakeholder model of
corporate governance and the low income dispersion in Sweden, making high remuneration to top
13
14
Observations more than two standard deviations from the mean have been excluded when performing the t-tests reported
in Table 2. Please note that with this definition of outliers, sample size will vary across the measures.
Taking the decrease in liabilities caused by the classification of minority interests as equity instead of liabilities IFRS
1 into account, liabilities only increased by 0.9 percent, which is not significant t 1.50; p 0.137.

Volume 10, No. 1, 2011
Panel A: Total Effects

Index of Comparability
Hypothesis
ICNETPROFIT
ICEQUITY
ICASSETS
ICLIABILITIES
H1
Mean
Std. Dev.
t-statistic
p-value
Median
Wilcoxon
statistic
p-value
125
128
127
129
1.241
1.091
1.052
1.020
0.48
0.21
0.11
0.06
5.66
4.86
5.46
4.34
0.000
0.000
0.000
0.000
132
132
132
132
1.110
1.036
1.016
1.004
7.55a
8.05a
8.72a
6.62a
0.000
0.000
0.000
0.000
Panel B: Effects Related to the Adoption of Standards Not Adopted Pre-2005 Via the Swedish Standard Setter, SFASC
Hypothesis
ICNETPROFITIFRSNEW
ICNETPROFITIFRSOLD NONADOPTED
ICEQUITYIFRSNEW
ICEQUITYIFRSOLD NONADOPTED
n
127
127
129
130
H2
H3
Mean
1.181
1.033
1.032
1.099
Std. Dev.
0.378
0.138
0.037
0.284
t-statistic
5.39
2.68
9.81
3.98
p-value
0.000
0.008
0.000
0.000
n
132
132
132
132
Median
Wilcoxon
statistic
a
p-value
1.087
1.000
1.019
1.000
7.73
2.76a
8.46a
5.36a
0.000
0.006
0.000
0.000
Median
Wilcoxon
statistic
p-value
TABLE 2
Effects of Mandatory and Hard (EU-Regulated) IFRS Adoption
Descriptive Statistics and Tests for Net Profit and Balance Sheet Numbers
Panel C: Effects Related to the Adoption of Standards Adopted Via the Swedish Standard Setter, SFASC, Pre-2005
H4
H5
n
132
126
Mean
0.974
0.998
Std. Dev.
0.120
0.020
t-statistic
2.49
1.24
p-value
0.014
0.219
n
132
132
1.000
1.000
2.99
2.10b
0.003
0.036
Both the t-tests and the Wilcoxon tests refer to paired tests, e.g., the observed index value for a firm is compared to an index value of 1.00. Given the way the index is constructed,
this comparison captures the effect of the change in accounting standards by using the original standards Swedish GAAP as the yardstick.
a
Based on negative ranks.
b
Based on positive ranks.
Variable Definitions:
(continued on next page)
71
Volume 10, No. 1, 2011

ICNETPROFITIFRSOLD ADOPTED
ICEQUITYIFRSOLD ADOPTED
Hypothesis
72

IFRSNEW effects related to the hard and mandatory EU-regulated adoption of new IFRS, applied for the first time in 2005;
IFRSOLD NONADOPTED effects related to the hard and mandatory EU-regulated adoption of prevailing IFRS not voluntarily adopted by the SFASC before 2005;
and
IFRSOLD ADOPTED effects related to the hard and mandatory EU-regulated adoption of IFRS adopted voluntarily by the SFASC before 2005.
Hellman
Volume 10, No. 1, 2011
Panel A: Effects Related to Net Profit

Mean
Std. Dev.
Median
Max.
Min.
14
1.094
1.520
1.013
4.898
2.742
14
5
71
1.791**
0.899
1.055**
1.171
0.330
0.212
1.299***
1.050
1.005***
4.814
1.069
2.269
0.884
0.310
0.911
0.973
0.973
0.973
0.987***
1.129***
1.005
1.107
1.011
9.457
1.006
1.107
0.547
0.720
0.148
1.107
1
24
103
3
1
0.953**
1.467***
0.621
1.107
NA
0.095
1.194
0.666
NA
0.811
NA
0.811
0.811
0.811
86
0.981
0.206
0.998
1.838
0.069
1.001
0.014
0.999
1.029
0.985
Mean
Std. Dev.
Median
Panel B: Effects Related To Shareholders Equity

n
IAS 39 IAS 32 Financial
instruments
IAS 40 Investment property
IAS 41 Agriculture
0.973
Max.
Min.
93
1.081***
0.270
1.002***
2.448
0.894
15
6
1.958*
1.095*
1.870
0.097
1.282***
1.095***
8.263
1.192
0.999
1.001

73
Volume 10, No. 1, 2011

IAS 39 IAS 32 Financial

instruments
IAS 40 Investment property
IAS 41 Agriculture
IFRS 1: First-time adoption
reclassification of minority
interests
other adjustments
IFRS 2 Share-based payment
IFRS 3 Business combinations
IFRS 4 Insurance contracts
IFRS 5 Non-curr. assets held
for sale and discont. oper.
IFRS 6 Exploration for and
eval. of mineral resources
Deferred tax on IAS/IFRS
adjustments
Other IAS/IFRS adjustments
not specified net profit
TABLE 3
Partial Indices of Comparability for Separate Standards
IFRS(OLD NONADOPTED) and IFRS(NEW)

reclassification of minority
interests
other adjustments
IFRS 2 Share-based payment
IFRS 3 Business
combinations
IFRS 4 Insurance contracts
IFRS 5 Non-curr. assets held
for sale and discont. oper.
IFRS 6 Exploration for and
eval. of mineral resources
Deferred tax on IAS/IFRS
adjustments
Other IAS/IFRS adjustments
not specified equity
Mean
Std. Dev.
Median
Max.
Min.
1.031**
0.124
1.006***
2.022
1.000
1.000
0.002
1.000
1.001
0.999
0.999
1.030***
0.005
0.031
1.000
1.023***
1.003
1.164
0.984
0.981
3
1
0.900
1.008
0.167
NA
0.996
1.008
0.998
1.008
0.707
1.008
1.066
NA
1.066
1.066
1.066
74
2
10
103
86
8
0.950**
0.236
0.996***
1.063
1.032
0.999
0.003
0.999
1.004
0.993
74


n
*, **, *** Indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively refer to two-tailed t-tests for means and two-tailed Wilcoxon tests for medians.
The full sample consists of 132 firms.
IFRSNEW effects related to the hard and mandatory EU-regulated adoption of new IFRS, applied for the first time in 2005; and
IFRSOLD NONADOPTED effects related to the hard and mandatory EU-regulated adoption of prevailing IFRS not voluntarily adopted by the SFASC before 2005.
Hellman
Volume 10, No. 1, 2011
75
executives a very sensitive issue. In recent years, Sweden has moved toward the shareholder
model of corporate governance, but the level of CEO remuneration is still among the lowest in
Europe, which in turn is well below the level in the U.S. Sderstrm et al. 2003, 1719. Still, in
the 24 firms adjusting for IFRS 2, net profit decreased by, on average, 4.7 percent significant at
the 5 percent level and the maximum decrease was 45.3 percent. With regard to IAS 39, IAS 40,
and IAS 41, standard deviations are high and there are big spans between maximum and minimum
values Table 3, Panel A. This is an indication of increased net profit variation across firms caused
by fair value accounting.
Panel B of Table 3 shows the impact of IFRSNEW and IFRSOLD NONADOPTED on
shareholders equity in more detail. Most of the IFRSNEW observations refer to IFRS 3 and the
reclassification of minority interests IFRS 1. Both items caused significant increases of shareholders equity. With regard to IFRSOLD NONADOPTED, IAS 39, IAS 40, and IAS 41 all
significantly increased shareholders equity. This shows that financial assets, real estate, and forestry were, on average, conservatively measured under Swedish GAAP.
Did Swedish-Listed Firms Take Advantage of the Soft Adoption?
As reported in Panel C of Table 2, there was a significant change in net profit 5 percent level
related to IFRSOLD ADOPTED, despite the fact that the same standards had already been
adopted pre-2005 via SFASC recommendations Table 2, Panel C. The change in shareholders
equity was only significant according to the nonparametric test 5 percent level. There is thus
some support for H4, but only very weak support for H5. In terms of the direction of the change,
the hard adoption caused an average decrease of net profit by 2.6 percent
ICNETPROFITIFRSOLD ADOPTED = 0.974 whereas shareholders equity decreased by 0.2 percent
ICEQUITYIFRSOLD ADOPTED = 0.998. Below, separate standards are examined in order to learn in
more detail how the Swedish firms behaved under the soft adoption regime.
Panel A of Table 4 shows that the differences in net profit under the soft versus the hard
regimes for IFRSOLD ADOPTED pertained to 15 different standards. In total, there were 95
such net profit adjustments 0.7 per company. With regard to three standards IAS 28, IAS 36,
IAS 38, the firms, on average, reported a significantly higher net profit under the soft adoption
regime. Panel A displays much variation in terms of the direction of change. For nine standards,
net profit was higher under the soft adoption regime, but lower for the remaining six standards. In
addition, the direction of change varied across firms with regard to nine of the 15 standards for
which net profit adjustments were observed IAS 11, IAS 16, IAS 17, IAS 19, IAS 21, IAS 23,
IAS 28, IAS 31, IAS 38. Expressed in terms of the number of observations, 72 of the 95
adjustments referred to standards where the direction of change varied across firms. In sum, the
large number of standards involved, and the varying direction of change, indicate that the soft
adoption gave room for preparers for both increases and decreases of net profit. This also indicates
varying reporting incentives among the firms.
Panel B of Table 4 shows that the differences in shareholders equity for IFRSOLD
ADOPTED pertained to 14 different standards. In total, there were 99 such equity adjustments
0.8 per company. With regard to four of the standards IAS 11, IAS 18, IAS 21, IAS 36, the
firms, on average, reported significantly higher shareholders equity under the soft adoption regime. For two standards, the opposite applied IAS 16, IAS 38. Similar to the adjustments of net
profit, Panel B displays much variation in terms of the direction of change. For nine standards,
shareholders equity was, on average, higher under the soft adoption regime, but lower for the
remaining five standards. With regard to specific standards, the direction of change varied across
firms for nine of the 14 standards for which equity adjustments were observed IAS 12, IAS 16,
IAS 17, IAS 19, IAS 21, IAS 23, IAS 28, IAS 31, IAS 38, comprising 74 of the 99 observations.
The high variation in the direction of change may indicate a coexistence of firms aligning to the
Volume 10, No. 1, 2011

76

TABLE 4
Partial Indices of Comparability for Separate Standards
IFRS(OLD ADOPTED)
Panel A: Effects Related To Net Profit
IAS 2 Inventories
IAS 11 Construction contracts
IAS 12 Income taxes
IAS 16 Property, plant, and
equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee benefits
IAS 21 The effects of changes
in for. exchange rates
IAS 23 Borrowing costs
IAS 27 Consolidated financial
statements
IAS 28 Investments in
associates
IAS 31 Interests in joint
ventures
IAS 36 Impairment of assets
IAS 37 Provisions, contingent
liab. and cont. assets
IAS 38 Intangible assets
Mean
Std. Dev.
Median
Max.
Min.
1
4
3
21
0.946
1.060
0.916
1.011
NA
0.170
0.120
0.037
0.946
0.986
0.983
0.998
0.946
1.314
0.989
1.133
0.946
0.952
0.778
0.974
9
3
6
7
1.006
0.746
1.008
0.988
0.010
0.399
0.041
0.100
1.001
0.953
1.002
1.030
1.023
0.998
1.079
1.088
0.998
0.286
0.951
0.818
2
2
1.003
1.013
0.014
0.003
1.003
1.013
1.013
1.015
0.992
1.011
12
0.886
0.253
0.984**
1.132
0.163
0.993
0.019
0.993
1.007
0.980
13
1
0.918*
0.996
0.138
NA
0.965***
0.996
0.999
0.996
0.480
0.996
0.954*
0.068
0.994**
1.007
0.818
Max.
Min.
0.851
0.996
1.081
0.851
0.940
0.985

n
Mean
IAS 2 Inventories
IAS 11 Construction contracts
IAS 12 Income taxes
0.851
0.977*
1.023
1
5
4
Std. Dev.
NA
0.023
0.041
Median
0.851
0.982***
1.013
Hellman
Volume 10, No. 1, 2011
IAS 16 Property, plant and

equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee benefits
IAS 21 The effects of
changes in for. exchange
rates
IAS 23 Borrowing costs
IAS 28 Investments in
associates
IAS 31 Interests in joint
ventures
IAS 36 Impairment of assets
IAS 37 Provisions, contingent
liab., and cont. assets
IAS 38 Intangible assets
Mean
Std. Dev.
Median
Max.
Min.
21
1.010*
0.023
1.000
1.063
0.979
11
4
12
5
0.968
0.950
0.994
0.956
0.108
0.081
0.027
0.058
1.000
0.986**
0.999
0.990**
1.009
1.000
1.025
1.001
0.830
0.830
0.917
0.867
3
4
1.003
0.770
0.009
0.282
1.001
0.826
1.012
1.002
0.995
0.426
1.001
0.003
1.001
1.003
0.998
14
1
0.977
1.000
0.065
NA
0.995***
1.000
1.000
1.000
0.754
1.000
12
1.032
0.082
1.002***
1.287
0.996

n
*, **, *** Indicate significance at the 10 percent, 5 percent, and 1 percent levels, respectively refer to two-tailed t-tests for means and two-tailed Wilcoxon tests for medians.
The full sample consists of 132 firms.
Variable Definition:
IFRSOLD ADOPTED effects related to the hard and mandatory EU-regulated adoption of IFRS adopted voluntarily by the SFASC before 2005.
77
Volume 10, No. 1, 2011

78
Hellman
conservative accounting tradition and firms deemphasizing balance sheet conservatism in their
financial reporting.
Although the detailed results display variation in the direction of change, the overall result for
IFRSOLD ADOPTED is that firms reported higher earnings and, but to a lesser extent, higher
shareholders equity under the soft adoption regime compared to the hard adoption regime. In the
next analysis, Swedish firms who had greater opportunities for earnings management than other
firms are distinguished.
The 132 firms were ranked on the basis of the variable POTENTIAL TO SMOOTH EARNINGS. Panel A of Table 5 indicates that the quartile of firms who had the greatest opportunity to
manage earnings according to this variable Q1 were also particularly inclined to take advantage
of the soft adoption in order to increase earnings. With regard to IFRSOLD ADOPTED, their
earnings were, on average, 6.8 percent lower when reporting under the hard instead of the soft
adoption regime ICNETPROFITIFRSOLD ADOPTED = 0.932. The change is significant at the 5 percent level and there is thus some support for H6. Moreover, there is a pattern of decreasing net
profit differences between the adoption regimes as the firm opportunities for earnings management
decrease from Q1 down to Q4. The pattern is similar, but less material, with regard to shareholders equity. H7 is not supported according to the t-test.
How firms use the discretion provided by a particular accounting regime is likely to depend
on their reporting incentives Daske et al. 2008, 1092. Accordingly, a number of firm-specific
reporting incentives used in previous research e.g., Othman and Zeghal 2006 were evaluated for
the firms in Q1 compared to the firms in other quartiles Table 5, Panel B. Two of the variables
in Panel B are associated with incentives to increase earnings: NEW ISSUES and DEBT-TOEQUITY. Equity offerings create an incentive for managers to increase earnings Teoh et al. 1998.
This was measured on the basis of whether the firm issued new shares in 2004 or 2005. There is
a tendency of an increased proportion of firms issuing new shares when moving from Q4 toward
Q1, but the difference between Q1 and the other three quartiles is not significant. Firms with high
financial leverage, measured here by the debt-to-equity ratio, have incentives to increase earnings
in order to avoid an increase in the cost of capital DeFond and Jiambalvo 1994. As seen in Panel
B of Table 5, no systematic pattern emerges with regard to this variable. Two of the variables in
Panel B have been associated with incentives to decrease earnings: FIRM SIZE and EFFECTIVE
TAX RATE. Larger firms may try to decrease earnings in order to avoid government intervention
Zimmerman 1983. This variable is significant on the 5 percent level and the results suggest that
smaller firms were more inclined to manage earnings upwards compared to larger firms.15 One
possible reason may be that smaller firms are less transparent to financial analysts and investors,
which makes it possible to maintain a lower level of accounting quality. Firms with higher
effective tax rate are expected to be more inclined to decrease earnings, especially in countries
with a strong tax-accounting link Othman and Zeghal 2006, 413. Sweden does have a strong
tax-accounting link for legal entities, but not for the consolidated accounts. The results show no
systematic pattern across the quartiles with regard to the effective tax rate.16
The remaining variables in Panel B of Table 5 that have been associated with reporting
incentives are EXECUTIVE OWNERSHIP, FOREIGN STOCK EXCHANGE, and BIG 4 AUDIT
FIRM. Executive ownership was measured as the sum of equity percentage held by top executives
according to the annual report 2004. Executive ownership implies incentives for management to
15
16
Firm size was measured as the natural logarithm of total assets.

The effective tax rate was measured as total income tax in the income statement Swedish GAAP over pretax income
Swedish GAAP. An alternative measure was also evaluated: current income tax in the income statement Swedish
GAAP over pretax income Swedish GAAP. The results were very similar not significant.

Volume 10, No. 1, 2011
Panel A: Effects Related to Net Profit and Shareholders Equity

Mean
ICNETPROFITIFRSOLD ADOPTED
ICEQUITYIFRSOLD ADOPTED
Median
Q1
Q2
Q3
Q4
Total
Q1
Q2
Q3
Q4
Total
Hypothesis (n 33) (n 33) (n 33) (n 33) (n 132) (n 33) (n 33) (n 33) (n 33) (n 132)
0.932**
0.993
H6
H7
0.976
0.958*
0.985
0.998
1.004
1.000
0.974**
0.987*
1.000*** 1.000
1.000*
1.000*
1.000*** 1.000
1.000
1.000
1.000***
1.000**
Panel B: Statistics For Firm-Specific Variables

Mean
(Proportion for Discrete Variables)
Variable
Q2
(n 33)
Q3
(n 33)
Q4
(n 33)
0.975
0.346
0.164
1.404
8.495
7.961**
1.636
1.828
1.647
0.566
0.108
1.118
0.017
0.045
0.576
0.455
0.152
0.121
8.157
1.808
1.415
0.212
0.051
0.485
0.000
9.602
1.618
2.848
0.234
0.030
0.364
0.152
8.554
1.722
1.619
0.195
0.036
0.470
0.106
0.909
1.000
0.970
4.132***
0.970
1.000
Total
(n 132)
Q1
(n 33)
Q2
(n 33)
Q3
(n 33)
Q4
(n 33)
Total
(n 132)
3.268***
1.023
0.322
0.179
0.513
7.366**
1.370
0.424
0.279
0.002
1.000
0.000
8.194
1.323
0.313
0.239
0.001
0.000
0.000
7.756
1.553
0.410
0.271
0.003
0.000
0.000
9.440
1.450
0.558
0.278
0.001
0.000
0.000
8.274
1.430
0.420
0.273
0.002
0.000
0.000
1.000
1.000
1.000
1.000
1.000
For Panel A, *, **, *** indicate that the mean and median values for the index of comparability in the quartiles are significantly different from 1.00 two-tailed tests at the 10
percent, 5 percent, and 1 percent levels, respectively. The tests used for Panel A were the t-test mean values and the Wilcoxon test median values.

79
Volume 10, No. 1, 2011

POTENTIAL TO SMOOTH
EARNINGS
FIRM SIZE
TOBINS Q
DEBT-TO-EQUITY
EFFECTIVE TAX RATE
EXECUTIVE OWNERSHIP
NEW ISSUESa
FOREIGN STOCK
EXCHANGEa
BIG 4 AUDIT FIRMa
Q1
(n 33)
Median
TABLE 5
Effects of Mandatory and Hard (EU-Regulated) IFRS Adoption
IFRS(OLD ADOPTED) for Quartiles of Firms Ranked on POTENTIAL TO SMOOTH EARNINGS
80

For Panel B, *, **, *** indicate that the mean values proportions for discrete variables and median values only tested for continuing variables in quartile 1 are significantly
different two-tailed tests from the mean values proportions for discrete variables and median values in quartiles 2-4 at the 10 percent, 5 percent, and 1 percent levels, respectively.
The tests used for Panel B were the mean comparison test of independent samples mean values of continuing variables, the proportion comparison test of independent samples
mean values, e.g., proportions, for discrete variables, and the Mann-Whitney U test median values for continuing variables.
All significant results for the Wilcoxon test refer to positive ranks, e.g., index values below 1.00.
In Table 5, firms have been ranked on the basis of the variable POTENTIAL TO SMOOTH EARNINGS. The 33 most highly ranked firms have been allocated to quartile 1, the next
33 firms to quartile 2, and so on.
a
Discrete variable.
POTENTIAL
TO
SMOOTH
EARNINGS calculated as the standard deviation of operating income for the period 20012004 over the average of operating income for the same
period. Annual observations of operating income were used and operating income was measured according to Swedish GAAP;
IFRSOLD ADOPTED effects related to the hard and mandatory EU-regulated adoption of IFRS adopted voluntarily by the SFASC before 2005;
FIRM SIZE measured as the natural logarithm of total assets according to EU-endorsed IFRS per December 31, 2004;
TOBINS Q measured per December 31, 2004, as total assetsshareholders equity market capitalization scaled by total assets. All accounting
numbers were measured according to EU-endorsed IFRS;
DEBT-TO-EQUITY calculated as total interest-bearing debt over shareholders equity per December 31, 2004. Interest-bearing debt and shareholders equity
were measured according to EU-endorsed IFRS;
EFFECTIVE TAX RATE effective tax rate of the firm, measured as the total income tax in the income statement over pretax income. Total income tax and pretax
income were measured according to Swedish GAAP;
EXECUTIVE OWNERSHIP sum of equity percentage held by top executives. Calculations were based on the number of shares owned by top executives according to
the annual report 2004;
NEW ISSUESa takes the value 1 if the company issued new shares in 2004 or 2005 excluding bonus issues, 0 otherwise;
FOREIGN STOCK EXCHANGEa takes the value 1 if the company is listed on a foreign stock exchange, 0 otherwise. Secondary listings of ADRs in the U.S. have been
coded as foreign stock exchange listing; and
BIG 4 AUDIT FIRMa takes the value 1 if the company has a Big 4 auditor. In cases where the company had appointed auditors from more than one firm, this
was coded as Big 4 if more than 50 percent of the audit fee pertained to a Big 4 firm.
Hellman
Volume 10, No. 1, 2011
81
increase earnings, for example, because the higher earnings give a more positive image of the
company, but a high concentration of executive ownership may also lessen the incentive to increase earnings Othman and Zeghal 2006, 413. Executive ownership is somewhat lower in Q1
compared to the other quartiles, but the difference is not significant. Firms being listed on a
foreign stock exchange are expected to be more transparent and therefore less inclined to try to
increase or decrease net income. The firms in Q1 did not differ significantly from other firms with
regard to this variable. On the basis of the idea that Big 4 firms are perceived as more competent
and independent than other firms DeFond and Jiambalvo 1993, firms audited by Big 4 firms are
expected to be less inclined to try to increase or decrease net income. No systematic pattern
emerged with regard to this variable. Finally, TOBINS Q was included as a control variable in
order to check the equity valuation of the firms across the quartiles, but no significant difference
between Q1 and Q2Q4 was detected.
VI. CONCLUDING REMARKS
Swedens IFRS adoption created a research opportunity for observing net profit and balance
sheet numbers under both a soft and a hard adoption regime for the same standards and the same
firms during the same time period. This constitutes a unique institutional context for evaluating the
impact of reporting incentives when firms apply international accounting standards. According to
the study by Burgstahler et al. 2006, firms with Scandinavian legal origin showed the lowest
score of earnings management, together with U.K. firms. The strong legal enforcement in the
Scandinavian countries was part of their explanation, and although tax alignment, which has been
very strong in Sweden, was associated with more earnings management, this effect was mitigated
for public firms. However, although Sweden is classified as a country with very high quality of its
legal system and enforcement in general, the Swedish adoption of IFRS during 19912004 was in
fact soft. Ordelheide 1990 provides an explanation why a country with strong legal enforcement,
in general, might act in this way. In line with Ordelheides 1990 theory, various forces defended
the Swedish accounting tradition and contributed to delays, exceptions, and weak enforcement. As
the enforcement became weak instead of strong, it gave firms discretion that appears to have been
used for earnings management purposes according to the empirical results reported in this paper.
It should be noted here that the empirical study is subject to some important limitations. The
firm sample is relatively small and the research design has been adapted to this condition. In
particular, the analysis of variables related to reporting incentives Table 5, Panel B is univariate,
and thus the interaction between these variables has not been taken into account.
In the literature, the benefits of IFRS have been debated in the context of voluntary versus
mandatory adoption e.g., Li 2010. Swedens adoption of IFRS pre-2005 was voluntary, but only
at the country level, not at the firm level. The listed firms had to apply Swedish GAAP as
prescribed by the SFASC. Ball 2006, Daske et al. 2008, and others have argued that the
potential benefits of mandatory IFRS adoption will rely on whether the institutional context is
adapted to such standards in terms of emphasizing the information needs of capital markets and
strongly enforcing high-quality accounting standards. The results of the current study provide
some support for this view, e.g., that with weak enforcement of IFRS, the change in standards will
not lead to the same implementation across firms in accounting practice. However, the current
study also shows that although legal enforcement in general was strong in Sweden, the mechanisms outlined by Ordelheide 1990 contributed to a soft adoption of IFRS at the national level,
which de facto implied an institutional context insufficiently adapted to the international standards.
The outcome appears to have been a coexistence of the conservative accounting tradition and an
accounting model adapted to capital-market requirements, rather than the latter simply replacing
the former.
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Hellman
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American Accounting Association

Soft Adoption and Reporting Incentives: A

Niclas Hellman is an Associate Professor at the Stockholm School of Economics.

Published Online: February 2011

Journal of International Accounting Research

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The Impact of IFRS on Financial Statements in Sweden

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The Impact of IFRS on Financial Statements in Sweden

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Effects related to the EU-regulated adoption of prevailing IFRS not voluntarily

IFRS 1, IFRS 2, IFRS 3, IFRS 4, IFRS 5, and IFRS 6.

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The Impact of IFRS on Financial Statements in Sweden

H5: EquityIFRSOLD ADOPTED EquitySWGAAP.

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The Impact of IFRS on Financial Statements in Sweden

Partial IFRS Adjustment

Partial IFRS Adjustment

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Panel A: Total Effects

The Impact of IFRS on Financial Statements in Sweden

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Panel A: Effects Related to Net Profit

Panel B: Effects Related To Shareholders Equity

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IAS 39 IAS 32 Financial

The Impact of IFRS on Financial Statements in Sweden

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IFRS 1: First-time adoption

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Panel B: Effects Related To Shareholders Equity

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IAS 16 Property, plant and

The Impact of IFRS on Financial Statements in Sweden

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Panel B: Effects Related To Shareholders Equity

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