Tax and Non-Tax Incentives for Voluntary IFRS Adoption: Evidence from the UK

This paper investigates UK managers' decision to voluntarily adopt International Financial Reporting Standards (IFRS) at the statutory level due to regulatory incentives. Descriptive evidence indicates that only a small proportion of UK companies (34% of sample firms, 24.6% of non-financial firms) adopt IFRS in their statutory accounts even though all have the option to do so. I identify factors that are expected to affect this accounting choice and test which ones dominate. The results indicate that tax costs (and benefits), reporting costs and, distributable reserves restrictions all influence managers' decision to adopt (or not adopt) IFRS. Firms are more likely to voluntarily adopt IFRS when more of their sales are generated domestically, when the accounting benefits tend to be greatest. Firms are less likely to adopt IFRS when doing so tends to lead to increases in taxes or when a relatively larger proportion of income is derived from dividends. 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. Finally, mandating IFRS for statutory reporting is estimated to increase the tax burden of sample firms by an aggregate of 2.2 billion pound in present value.