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The preparedness to adopt new accounting standards: a study of European companies on the pre-adoption phase of IFRS 15

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Abstract

The mandatory introduction of IFRS 15—“Revenues from Contracts with Customers”—provides a relevant innovation in revenue recognition. It introduces a single comprehensive model of accounting for revenues arising from contracts with customers. This exploratory study provides evidence on the preparedness of European companies to adopt IFRS 15 by analyzing information on the expected impact disclosed in the pre-adoption phase. To this aim, the analysis groups companies according to the similarity in the content of the information disclosed in their 2017 financial statements. It then aims to identify the determinants of membership in each segment or informative group by applying an ordinal logistic regression model. Results suggest that several firm-level factors influence the disclosures on the expected impact provided in the pre-adoption phase. Results confirm that the profitability and the company size are significant determinants of the quality of disclosure on expected impact. In addition, the complexity of the business measured by the number of business segments is associated with better disclosures in the pre-adoption phase.

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Notes

  1. The five steps are:

    (1) Identify the contract(s) with a customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contract; (5) Recognize revenue when (or as) the entity satisfies a performance obligation.

  2. There are exceptions for revenues from leases, financial instruments and insurance contracts.

  3. The main issues raised regarding IFRS 15 implementation included high costs for little benefits, concerns about the perceived “abandoning” of the percentage of completion method, and measuring performance between milestones (IFASS, 2017: 2).

  4. According to paragraph 30 of IAS 8, “when an entity has not applied a new IFRS that has been issued but is not yet effective, the entity shall disclose: (a) this fact; and (b) known or reasonably estimable information relevant to assessing the possible impact that application of the new IFRS will have on the entity’s financial statements in the period of initial application.”.

    In particular, according to paragraph 31, the company shall disclose: “(a) the title of the new IFRS; (b) the nature of the impending change or changes in accounting policy; (c) the date by which application of the IFRS is required; (d) the date as at which it plans to apply the IFRS initially; and (e) either: (i) a discussion of the impact that initial application of the IFRS is expected to have on the entity’s financial statements; or (ii) if that impact is not known or reasonably estimable, a statement to that effect.”

  5. To test the robustness of our classification, we also performed a cluster analysis with the dummy variables that consider the disclosure on the expected impact, the application method, the significance of the impact, and the status of the analysis. The k-means clustering was performed by using STATA13 and created three different groups (untabulated). By comparing the results of the two clustering procedures we find that about 72% of observations are classified at the same informative level. This confirms the robustness of our methodology.

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  1. Department of Economics and Business Studies, University of Genoa, Via Vivaldi 5, 16126, Genova, Italy

    Alberto Quagli, Elisa Roncagliolo & Gabriele D’Alauro

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  1. Alberto Quagli
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Quagli, A., Roncagliolo, E. & D’Alauro, G. The preparedness to adopt new accounting standards: a study of European companies on the pre-adoption phase of IFRS 15. Int J Discl Gov 18, 290–303 (2021). https://doi.org/10.1057/s41310-021-00116-2

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