Implications of the enforcement of the international accounting standards over the financial and economic information of the Spanish companies

Abstract

Accounting information has to be useful to enable different end-users (mainly investors and shareholders) to make informed decisions. It is for this reason that the analysis through ratios linking the balance sheet and the profit and loss accounts is a key tool for studying the economic and financial situation of companies. As a result, a clear objective of the International Financial Reporting Standards (henceforth IFRS) is to establish parameters of recognition, measurement, and representation of the financial information that improve the usefulness of these indicators. This paper demonstrates how the process of harmonization of the accounting rules has affected the results of Spanish companies and whether the regulatory changes have influenced the companies’ performance. We revisit IFRS accounting principles related to assets and liabilities of the balance sheets (in particular, related to tangible and intangible fixed assets, leases, and financial instruments) in order to ascertain if the changes have an impact on key management accounting ratios, such as capital adequacy ratio, liquidity ratio, debt ratio, return on assets (ROA), or return on equity (ROE). We assess the major implications of the enforcement of international standards on the Spanish accounting system in general, and on management ratios in particular. The main conclusion is that the requirement to use of fair value in financial instruments with mandatory accounting revaluations, caused solvency to move in the same direction as the change in valuation. In addition, the application of the amortized cost for debts improves the company’s autonomy by reducing its indebtedness because deferred interest are not considered as debt. Concerning the other assets, the international regulation moves the ‘non-current assets held for sale’ from non-current assets to current assets, thereby improving the companies’ solvency and liquidity. Although there are no significant changes in valuations applied to ‘financial lease’, because of the principle of ‘substance over form’, certain contracts that should have been considered as operational (and recorded in the profit and loss account) must now be treated as a ‘financial lease’, while the non- current asset and short and long term debt are recorded in the accounting. This change in turn worsens the solvency situation. In sum, regulatory change that affects the concept of result and the valuation assumptions based on fair value will have a significant and positive impact on the image of the company, thus improving the ROA and ROE indicators.