Deviations from the Mandatory Adoption of IFRS in the European Union: Implementation, Enforcement, Incentives, and Compliance

In this paper, we evaluate the common assumption that European Union (EU) firms began using international financial reporting standards (IFRS) in 2005 when the EU formally adopted IFRS. Although the incidence of firms using local (or some other) GAAP declined between 2005 and 2012, it is still non-trivial. By 2012 the incidence of non-IFRS financial statements was still in excess of 17 percent (87 percent of which were fully consolidated). We estimate a model of the non-adoption of IFRS as a function of implementation features of the IFRS regulation, country-specific enforcement, and firm-specific reporting incentives. As expected, being specifically required by EU-wide and country-specific rules to adopt IFRS is positively associated with IFRS adoption but does not constitute a complete explanation. Proxies for enforcement are significantly associated with non-adoption, but the marginal effects of the enforcement variables are weak. We find that larger firms, firms with foreign operations and more analyst following, and firms that issue new debt and equity were more likely to adopt IFRS, both when the regulation was initially imposed and in subsequent years. We conclude that many EU firms do not use IFRS; that some firms exploited definitions, exemptions, and deferrals to avoid adopting IFRS while some firms simply failed to comply with the regulation; and that firms responded to their incentives in deciding whether to adopt IFRS.