Tax and non-tax incentives for voluntary IFRS adoption: Evidence from the UK

This paper examines the potential regulatory consequences of voluntary IFRS adoption at the statutory level, focusing on tax consequences and the tradeoff between tax costs and non-tax costs and benefits. I consider a wide range of costs and benefits that relate to the adoption of IFRS for statutory financial reporting. These include tax costs (and benefits), reporting costs, and restrictions on distributable reserves. Results indicate that all of these factors affect managers' decision to adopt IFRS for statutory reporting in sample firms. In particular, I find that firms which are likely to pay more taxes under IFRS are less likely to adopt IFRS in the statutory accounts. Firms that received a greater proportion of dividends are also less likely to adopt IFRS. Results on reporting cost savings are mixed with some evidence suggesting that adopting IFRS for statutory reporting results in reporting cost savings and other evidence suggesting IFRS results in higher reporting costs. Further analysis indicates that relative to non-adopting firms, firms that adopt IFRS for statutory reporting experience a marginal reduction in the amount of cash taxes they pay, although this is likely due to differences in profitability across firms. Finally, mandating IFRS for statutory reporting is estimated to increase the tax burden of sample firms by an aggregate of £2.2 billion in present value. My overall findings indicate that there is substantial heterogeneity in the consequences of IFRS adoption and are consistent with some firms trading off the added tax cost of IFRS adoption with the reporting cost savings from conforming the accounting method used in the consolidated and statutory accounts.