The impact of adopting IFRS on profitability and stock performance in listed firms at Abu Dhabi and

439 Pages·2014·48.49 MB·English

The impact of adopting IFRS on profitability
and stock performance in listed firms at Abu
Dhabi and Dubai stock exchanges
Ihab Alsaqqa
A thesis submitted in part fulfilment of the requirements
for the degree of Doctor of Philosophy at Liverpool
Business School, John Moores University
PhD November 2012
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Author's declaration
I declare that this thesis has been done completely through my own work unless
there is a quotation or citation which has been acknowledged to the specific
author/so I also declare that this thesis has not been submitted for any other
degree.
Signature
Acknowledgements
First of all, I would like to thank my Almighty God, who gave me strength and
patience during my studies. I would also like to thank my supervisors, Mr Roger
Pegum for his great support and efficient supervision during my study and Dr
KarimMenacerefor constructive feedback.
I would like alsoto thank everyonewho hasprovided mewith support, assistance,
help or advice during my studies, especially those who helped me during the
collection of my primary data.
Finally, I am sincerely thankful for the moral and financial support from my
parentsand brothers whilst I was doing my study. Mywarm loveand thanks go to
my friends for their encouragementsduring my PhDjourney.
ABSTRACT
This study aimed to investigate the main impact of adopting the International Financial Report
Standards (IFRSs) on the users of financial reports in both the Dubai Financial Market (DFM) and
the Abu Dhabi stock exchange (ADX). The study has also examined the impact of adopting the
IFRS on profitability of firms and stock performance in the two stock markets. In addition, the
study has investigated the different challenges that adopting the IFRS had in both Dubai and Abu
Dhabi markets following the compulsory adoption of IFRS and whether the implementation of
IFRS would have different impacts on the DFM from those in the ADX.
One of the most important developments in the literature related to accounting and finance at the
beginning of this century is concerned with the compulsory adoption of International Financial
Reporting Standards (IFRSs) in Europe. With the introduction oflFRSs, there is the promise of the
provision of financial statements that are more accurate and transparent and, therefore, the
expectation of more value-relevance to investors when compared to local GAAP. Following the
announcement that IFRSs were to be adopted by listed firms in the European Union in 2005, the
accounting systems in developing countries have been affected, with countries, such as the United
Arab Emirates (UAE), also announcing their desire to adopt the IFRS. However, as the nature of
the business environment in the UAE is significantly different from that in western countries,
serious argument arose between the users of financial reports in the UAE over whether the
adoption of IFRSs was appropriate for their financial statements.
The study has used two main methods to collect and analyse the primary data. Firstly,
questionnaires were used to gauge how the preparers and users of financial reports view the
adoption of IFRSs, in both DFM and ADX, and how this transition to IFRSs has affected their
decision making. SPSS was used to analyse the collected data of the questionnaires using different
tests such as t-test, ANOVA test, and Correlation test. Secondly, this study used the secondary data
analysis to investigate the primary effects of adopting IFRS upon share performance and
profitability of listed firms in the two stock exchanges. For the second data collection method,
several multiple regression models were used based on the Ohlson and modified Ohlson models.
The main findings of the study from the questionnaire indicate that most of users of the financial
reports were in favour of the adoption ofIFRSs in the UAE, however many of the users argued that
the transition to IFRSs ought to be given careful consideration as it had negative effects on the
accounting system of companies and raised the issue of lack of readiness and lack of competence of
employees who are illprepared for IFRSs. The findings of the questionnaire have also showed that
the preparers at the banking sector were more satisfied with the adoption of IFRSs than was the
case in other sectors. The results from the analysis of secondary data showed that the adoption of
IFRSs had value-relevance for both the DFM and the ADX, with the greater relative impact being
at the former. In addition, the analysis of results showed that the adoption of IFRSs had an impact
on some financial indicators and this impact was higher in the ADX than it was in the DFM. The
analysis also indicated that the adoption of IFRSs had a great impact on the trading volume of
shares in both of the stock markets, with the impact being significantly higher inthe ADX.
In conclusion, as the main focus of the study was to examine the challenges and the impact of the
recent adoption of IFRSs in one of the countries of the Middle East, this study has made a
contribution to the literature on value-relevance in terms of stock performance and financial
indicators. It has also shed light on an area of research which has been overlooked particularly in
the Middle East.
Abbreviations
IASC International Accounting Standards Committee
IASB International Accounting Standards Board
10SCO International Organisation of Securities Commissions
IFAC International Federation of Accounting
lASs International Accounting Standards
IFRSs International Financial Reporting Standards
GAAP General Accepted Accounting Principles
USGAAP United States General Accepted Accounting Principles
SEC Securities and Exchange Commission
EU European Union
FRS Financial Reporting Standards
MVPS Market Value Per Share
EPS Earnings Per Share
APB Accounting Principles Board
FASB Financial Accounting Standards Board
FIFO First In First Out
LIFO Last In First Out
CR Current Ratio
DTER Debt To Equity Ratio
GP% Gross Profit Ratio
ROE Return On Equity
ROIC Return On Invested Capital
ADX Abu Dhabi Stock Exchange
DFM Dubai Financial Market
UAE United Arab Emirates
GCC Gulf Cooperation Council
FDI Foreign Direct Investment
ADSM Abu Dhabi Securities Market
DIFX Dubai International Financial Exchange
CESR Commission of European Securities Regulators
GAIT General Agreement on Tariffs and Trade
CGA-Canada Certified General Accountants Association of Canada
NPV Net Present Value
IMF International Monetary Fund
OECD Organization for Economic Co-operation and Development
DIFX Dubai International Foreign Exchange
DFSA Dubai Financial Services Authority
DIG Derivatives Implementation Group
AOCI Accumulated Other Comprehensive Income
Table of Contents
Author's declaration II
Acknowledgements 111
ABSTRACT .IV
Abbreviations V
Table of Contents VI
List of Figures: XII
List of Tables: XIII
Chapter 1 : Introduction 1
1.1. Purpose of the study 1
1.2. Background of the study 1
1.2.1. Background of the UAE 5
1.2.2. Recent performance of the UAE economy 7
1.2.3. Industrialization in the UAE 8
1.2.4. The growth of accounting standards in the UAE over the period 9
1.2.5. The history of the stock exchange in the UAE 10
1.3. Statement of the problem 12
1.4. Justification of this study 13
1.5. Importance of the study 14
1.6. Objectives of the study ...............................................................•............. 15
1.7. Research questions 16
1.8. Research Hypotheses ...........................•.................•................................. 17
1.9. Structure of the study ...........................................................•.................• 21
Chapter 2 : International Financial Reporting Standards (IFRSs): An
overview 24
2.1 Introduction 24
2.2. The lASe and IOSCO .•......................•....•......................•.........................• 27
2.3. Motivation for IASs..••.••..............•.....•...•.•.....•....••......•..............•..........•...• 33
2.4. Worldwide acceptance of lASs 34
2.5. The lASe's and standard setting bodies 36
2.6. Advantages of IFRSs (Investors side) 38
2.6.1. Direct advantages of IFRSs 40
2.6.2. Indirect Advantages of IFRSs..............•..............................•............... 41
2.7. Disadvantages of IFRSs adoption (Investors' side) 43
2.8. IFRSs in United Arab Emirates 44
2.9. Summary ..•.........•..•....•••..•............•.•.•..•..•...•..•.......•.•.....•................•...•...• 47
Chapter 3 : Major Differences between US GAAP and IFRSs 49
3.1 Introduction ....••...•..•...•..•.........••..•...•..•..•.....•...•............•........................... 49
3.2 The main differences between IFRSs and US GAAP 54
3.2.1. Differences according to disclosure 55
3.2.1.1. Presentation of the financial statements 55
3.2.1.2 Investment in associates " 58
11•••
3.2.1.3 Income taxes 60
11•••••••••••••••••••••••••••••••••••••••••••••••••••
3.2.1.4 Leases 62
3.2.1.5 Segment reporting 63
3.2.1.6 Non-current assets (Held for sale and discontinued operations) 64
3.2.2. Differences based on Measurement 65
3.2.2.1 Investment in subsidiaries 65
3.2.2.2 Intangibles 67
3.2.2.3 Accounting treatment for foreign exchange rate 68
3.2.2.4 Fixed assets transactions 70
3.2.2.5 Investment property 71
3.2.2.6 Financial instruments 72
3.2.2.7 Inventories 75
3.2.2.8 Impairment of tangible and intangible assets 75
3.2.2.9 Employee benefits 76
3.2.2.10. Share-based payments to employees 78
3.3 Summary 79
Chapter 4: Literature Review 82
4.1. Introduction 82
4.2. The value-relevance studies 87
4.2.1 Relative association studies 87
4.2.2 Measurement (incremental) studies 88
4.2.3 Marginal Information content studies 91
4.3. Models of valuation 91
4.3.1 The balance sheet model 92
4.3.2 The earnings model (return model) 92
4.3.3 The price model (Ohlson model) 98
4.4 Models of Price and return 102
4.5. The use of modified Ohlson's model 109
4.6 The impact of IFRSs on financial indicators 123
4.7. Summary 125
Chapter 5: Research Methodology and Methods 129
5.1. Introduction 129
5.1.1 The nature of research 130
5.1.2. Methodology and Methods 131
5.1.3. Definition of research methodology 131
VII
5.1.4. Purpose of the research 132
5.2. Research philosophy 132
5.2.1. Justification of the selected research philosophy of this study 136
5.3. Research approach 137
5.4. Research strategy 139
5.5. Triangulation 140
5.6. Data collection methods 141
5.6.1. Archival records 142
5.6.2. The questionnaire 146
5.7. Developing the hypotheses 154
5.8. Data analysis 160
5.8.1. Validity and reliability of the data 161
5.9. Assessing the Financial Consequences of Adopting IFRSs 164
5.9.1. Company Size and IFRSs disclosure 165
5.9.2. Profitability analysis and IFRSs disclosure 168
5.9.3. Archival Records data analysis 170
5.10. The identification and specification of key variables 171
5.10.1. The share price models 171
5.10.2. Performance measures 172
5.10.3. Trading volume 173
5.11. The specification of the models 173
5.11.1. Ohlson's model 173
5.11.2. Modified Ohlson's Model 174
5.11.3. The impact of IFRSs on performance measures 174
5.12. Ethical issues 177
5.13. Summary 181
Chapter 6 Findings and discussion of questionnaire results 182
6.1. Introduction 182
6.1.1. Reliability of data 182
6.2. Respondents' Backgrounds 184
6.3. Perceptions for the main users of FR 186
6.3.1 Banking Sector 186
6.3.2 Other Listed Company 190
6.4 perception about the effectiveness of IFRSs 193
6.4.1. Users' perception 193
6.4.2. External Auditors 194
6.5. The Comparison between US GAAPand IFRSs 195
6.6 Difficulties and Problems related to the Transition to IFRSs 198
VIII