International Journal of Accounting & Business Finance Vol.7.No.

2 December 2021

THE IMPACT OF IFRS ADOPTION ON FINANCIAL

RATIOS: EVIDENCE FROM LISTED
MANUFACTURING COMPANIES IN SRI LANKA

Rajapaksha R.A.S and Kawshalya M.D.P

University of Kelaniya, Sri Lanka

Abstract

Since the world economy is getting globalized, the pass practices of accounting could
not be able to satisfy the information requirement of global stakeholders. Therefore
the concept of harmonizing the accounting practices has been put forward and
realized by the implementation of International Financial Reporting Standards
(IFRS) issued by International Accounting Standard Board (IASB).The main purpose
of this research is to examine the impact of adopting IFRS on financial ratios in Sri
Lankan listed manufacturing sector companies. The data were collected for the period
of eight years from 2008/2009 to 2015/2016 by using annual report published on listed
manufacturing sector in Colombo Stock Exchange (CSE). The total sample period is
divided to two part as pre IFRS & post IFRS adoption periods for comparison. The
ratios which are selected to the analysis are current ratio, earning per share, debt to
equity ratio & return on equity ratio. The findings of the study suggest that there is no
significant difference between the ratios calculated as per previous local accounting
standards and as per IFRS except earnings per share ratio and current ratio. The
impact was not found to be significant for debt equity ratio and return on equity ratio.
The IFRS adoption is more likely to exhibit a favorable impact on financial statements.
This study adds new knowledge to the existing literature of IFRS adoption since the
data used are more recent than most IFRS studies around the world and the study
focuses on a content of developing country while most of other studies have carried
out in the context of developed countries.

Keywords: Financial Ratios, IFRS Adoption, Listed Manufacturing Companies,

Colombo Stock Exchange

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1. Introduction Before 2012, Sri Lanka had Sri Lankan

1.1 Background of the Study Accounting Standards hereafter called
Accounting standards are a set of SLAS for preparing and reporting
principles and guidelines which should financial information. Although the
be followed by companies in preparing conceptual basis and many of the general
and publishing their financial information principles under SLAS are similar to
periodically. Always shareholders & IFRS in certain respects, many differences
potential investors are looking at still exist. These differences can impact
financial information for getting their figures presented in the financial
investment decision. Therefore, all listed statements hence can reasonably be
entities are legally bounded to prepare expected differences in financial ratios
the financial statements according to the computed under IFRS and SLAS.
given set of accounting standards. The
European Union and more than 120 other The objective of the current study is to
countries around the world are required analyze the impact of IFRS adoption on
or permit the use of International the financial statements and more
Financial Reporting Standards (IFRS) specifically in Sri Lanka and to provide
issued by IASB or a local variant of such evidence of the impact caused by shift in
standards in their financial reporting regimes onto financial ratios. Since Sri
framework. Lankan listed companies required to
apply IFRS from 2012, results of this
IFRS is a single set of accounting study show preliminary evidence of the
standards that the corporate sector should potential influence of IFRS on selected
adopt in preparing and communicating financial ratios in the areas of liquidity,
financial information to the stakeholders leverage, and profitability. This study
across the world. IFRS are designed as a will contribute to the enrichment of both
common global language of business domestic and international literature that
affairs so that the financial statements are relates to the adoption and imple
comparable and understandable across mentation of IFRS.
international boundaries. Financial
statements that are based on common 1.2 Research Problem
universal accounting principles will The adoption of IFRS around the globe
enable the world to exchange and has inspired the researchers to
analyze financial information in a investigate the impact of IFRS adoption
meaningful manner. on financial reporting and capital market

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efficiency. It is argued that application of arise two major changes in financial

single set of high-qualityaccounting statements.
standards around the globe leads to better v Classification changes
functioning of capital markets. v Fair value adjustments.
According to Ball (2006), mandatory When investors taking decisions, they
IFRS adoption has the potential to always compare the financial figures
facilitate cross – border comparability, with last year / past figures. Due to major
increase reporting transparency, decrease changes (IFRS adoption) they were
information cost, and reduce information unable to compare figures. Consequently,
asymmetry, and thereby increase researchers in European countries have
liquidity, competitiveness, and effici investigated that “whether there is any
ency of market. But these benefits could significant difference by adopting IFRS
be achieved thought IFRS adoption only on financial statements”. But their
if IFRS provide superior information for findings may not be applied to a county
market participates than the previous set like SriLanka due to the social, economic
of local standards. and other differences exist between
developed and developing nations.
Most of the studies have reported that Therefore, it would be important to
there is an increase of profitability ratios investigate that whether there is any
(Stent et al., 2010, Black and Maggin, impact of IFRS adoption on financial
2016&Blanchette, 2011). In case of ratios in the SriLankan context as a
developing countries, from the inception, developing nation.
adoption of IFRS was problematic since
there were contradictory arguments for 1.3 Objectives of the Research
and against the adoption of IFRS in those This study examines the impact of IFRS
countries. According to Chebaane and adoption on the financial ratios in the
Othman (2004), the adoption of IFRS by context of developing countries. In order
developing economies was controversial to achieve this purpose, this study
because on one hand, IFRS are attempts to address the following
considered as developed standards, research questions.
which require a high level of economic
development in order to be implemented 1. Is there an immediate impact of
successfully. Due to globalization effect IFRS adoption on financial ratios of
lot of countries have to adopt IFRS in Sri Lankan listed manufacturing
their financial statements. This leads to companies?

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2. Is there a favorable long term impact H1d= There is an immediate effect of

of IFRS adoption on financial IFRS adoption on return on equity ratio.
ratios?
IFRS is a new practice implemented in H2= IFRS adoption more likely to
Sri Lanka. So most of the persons who exhibit a favorable effect on financial
are engaged with the decision making are ratios
not aware on the impact of this new H2a= The adoption of IFRSs is more
adoption on their decision makings. likely to exhibit a favorable impact on
Therefore, this study tries to provide an current ratio
understanding about the significant H2b= The adoption of IFRSs is more
changes in financial statement elements likely to exhibit a favorable impact on
upon IFRS adoption. debt-to-equity ratio
H2c= The adoption of IFRSs is more
1.4 Hypothesis Development likely to exhibit a favorable impact on
As per the review of literature, it is earnings per share ratio
evidente that findings in relation to the H2d= The adoption of IFRSs is more
impact of IFRS adoption on financial likely to exhibit a favorable impact on
ratios are inconclusive. Despite the return on equity ratio
widespread adoption of IFRS adoption
by many countries, yet few empirical 2. Literature Review
studies have examined the effects of 2.1 Ratios Disclosures
mandatory adoption of IFRS on financial Borhan et al. (2014) found whether there
ratios and those studies also present is any impact of financial ratios on the
mixed results (Black and Maggina, 2016; financial performance of a chemical
Stent et al., 2010)&(Iatridis, 2010). company: Lyondell Basell Industries
(LYB). Some selected ratios: current
H1= There is an immediate effect of ratio (CR) and quick ratio (QR) represent
IFRS adoption on financial ratios. the liquidity ratios; debt ratio (DR) and
H1a= There is an immediate effect of debt equity ratio (DTER) represent the
IFRS adoption on current ratio leverage ratios, while operating profit
H1b= There is an immediate effect of margin (OPM) and net profit margin
IFRS adoption on debt to equity ratio (NPM) represent the profitability ratios.
H1c= There is an immediate effect of LYB faced financial problems after its
IFRS adoption on earnings per share ratio merger and the financial performance of

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the company shrank to negative due to design, ratio analysis for a seven-year
the world financial crisis. However, this period (i.e. the fraud year 2 /+ 3 (years)
company has bounced back after a year was conducted on 21 ratios. Overall, 16
and is now the world’s third largest ratios were found to be significant. Of
chemical company based on revenue. these, only three ratios were significant
The financial ratios were measured from for three time periods. Out of the 16
2004 to 2011, quarterly. The results show statistically significant ratios, only five
that CR, QR, DR and NPM have a were significant during the period prior
positive relationship while DTER and to the fraud year. Using discriminate
OPM have a negative relationship with analysis, misclassifications for fraud
the company’s financial performance. firms ranged from 58 percent to 98
Among the six ratios, CR, DR and NPM percent. These results provide empirical
show the highest significant impact on evidence of the limited ability of
the company’s performance. financial ratios to detect and/or predict
fraudulent financial reporting.
2.2 Importance of Financial Ratio
Kaminski et al. (2004), tried to identify 2.3 The Impact of Socio Environment
whether the fraudulent financial Factors on IFRS Adoption in
reporting is a matter of grave social and Different Countries.
economic concern. The Tread way Zeller et al. (2016), found the extent to
Commission recommended that the which the previously identified
Auditing Standards Board requires the relationships have changed, and if
use of analytical procedures to improve appropriate, to establish an entirely new
the detection of fraudulent financial taxonomy of manufacturing industry
reporting. This is an exploratory study to financial ratios. The authors used
determine if financial ratios of fraudulent principal component analysis (PCA) to
companies differ from those of non- identify factor patterns for 58 financial
fraudulent companies. Fraudulent firms ratios over the ten-year period 2004-
were identified by examining the SEC’s 2013. The validity of employing PCA
Accounting and Auditing Enforcement was confirmed using the Kaiser-Meyer-
Releases issued between 1982 and 1999. Olkin measure of sampling adequacy and
The fraudulent firms (n¼79) were then Bartlett’s test of sphericity. This study
matched with no fraudulent firms on the identified four additional financial
basis of firm size, time period, and analysis factors beyond the seven
industry. Using this matched-pairs established by prior research. Notably, a

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separate cash flow factor did not surface Khlif and Achek (2016) identified four
as it was the case in earlier work, but an main topics related to the effect of IFRS
entirely new factor (current position) was adoption on audit fees, audit market and
identified. audit report lag and the influence of
auditor choice on IFRS compliance. For
2.4 Consequences of IFRS Adoption each reviewed stream of research, the
Lin and Yen (2016) examined whether authors presented its theoretical
and how auditors’ and audit clients’ underpinning and summarize its main
IFRS-related experience alter auditors’ results. Based on 26 empirical studies,
pricing decisions in the initial years of the review reveals four main findings.
IFRS adoption in China. The authors First, IFRS adoption is associated with
conducted the analysis by examining increased audit fees. Second, IFRS
audit fees from 4,129 sample obser adoption has had an effect on audit
vations that issued A-shares in the market through auditor choice, audit
Shanghai and Shenzhen stock exchanges switching and audit market concentration.
from 2005 to 2008. The authors Third, IFRS adoption has increased audit
empirically test the association between report lag. Finally, the authors document
audit premiums and auditors’ and that audit quality, as proxied by auditor
auditees’ IFRS experience. The authors type, may play an important role in
found that auditors with IFRS experience enforcing the compliance with IFRS.
charged significantly higher audit
premiums in the initial years of IFRS Okafor et al. (2016) investigated that
adoption. The authors also found that whether financial information prepared
audit clients’ with IFRS experience paid and disclosed under International
significantly lower incremental fees. The Financial Reporting Standards (IFRS)
authors further found that the increased has incremental value relevance vs
fees charged by audit firms with IFRS information prepared under generally
experience are independent of the degree accepted accounting principles (GAAP)
of changes in the financial reporting in Canada. The authors employed a
complexity of their clients. In contrast, difference methodologies and estimate
audit clients with IFRS experience paid value relevance using: first, the adjusted
lower incremental fees only when they R2 of regressions of stock price on book
underwent a high degree of changes in
value and earnings; second, the adjusted
financial reporting complexity.
R2 of regressions of stock returns on
earnings and changes in earnings; and
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third, a time series incremental block holders (both domestic and

association returns estimation. The foreign) invest more heavily in the stocks
authors use multiple models including a of the firms that have committed to IFRS.
model similar to the Ohlson (1995)
model and a modified Balachandran and 2.5 Fair Value Accounting Emphasis by
Mohanram (2011) model to investigate IFRS
value relevance in the period 2008-2013. Fair value accounting represents a
The authors provide empirical evidence, departure from the traditional historical
based on unique Canadian environment, cost principle. IFRS puts a much greater
that accounting information prepared emphasis on fair value than that rendered
and disclosed under IFRS exhibits higher under earlier LKAS. It primarily
price and returns value relevance than responds to the needs of investors which
accounting information prepared previ are given deliberate importance in IFRS
ously under local GAAP. Sensitivity compared to other users (IASB, 2001,
analyses and yearly trends regressions par. 10; Chua and Taylor, 2008). Since
produce collaborating evidence. investors need market-based values to
make decisions regarding buying or
Hessayri and Saihi (2018) addressed the selling stocks, many items in financial
question of whether the commonly statements are required or eligible for fair
documented IFRS benefits are capable of value accounting under IFRS.
influencing inducing shareholders to Estimating fair value involves various
increase their equity investment in degrees of subjectivity depending on the
adopting firms. This study is performed availability of an active market for the
on publicly listed firms in three emerging assets and liabilities in question.
countries, namely, Morocco, South Currently, the IASB and the FASB are
Africa and Turkey. The design of the jointly developing a new Standard to
ownership database allows a panel improve guidance for calculating fair
analysis for the years 2001 through 2011. values and to enhance related disclosure
The findings supported the evidence of (IASB Staff, 2010). In general, fair value
increases in equity holdings following a is mandatory in measuring transactions
firm’s IFRS adoption. More specifically, at initial recognition under IFRS. Table
institutional investors and institutional 2.1 summarized the areas which Fair
Value accounting is emphasis in IFRS.

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Table 2. 1 Fair value requirement & the effect on the informativeness/

type of fair value accounting usefulness of financial statement data for
stock prices in Greece and the effect of
Fair v alue Type of fair the Greek Financial Crisis. The results
requirement value indicate that several financial ratios were
accounting dramatically affected by IFRS adoption
Fair value mandatory Through in Greece. In contrast to other countries,
Impairment (IAS 36) profit & loss IFRS has not resulted in improved
Financial instrument Through
statistical behavior of these ratios in
hold to collect (IFRS profit & loss Greece: the ratios are highly skewed and
9) the normality of their distribution is not
Financial instrument Through
hold collect & sell OCI improved. Additionally, when examining
(IFRS 9) the usefulness of financial statement data
for stock prices in Greece, results
Biological assets (IAS Through
41) profit & loss indicate that IFRS adoption did not
necessarily improve the usefulness of the
Fair value optional Through
Property plant and OCI
financial statements. However, the
equipment (IAS 16) authors do found that since the financial
crisis in Greece, these IFRS financial
Intangible assets (IAS Through
38) OCI statement measures are significant when
regressed on stock prices.
Investment property Through
(IAS 40) profit & loss
Stent et al. (2010) examined the financial
statement impacts of adopting NZ IFRS
2.6 Impact of IFRS Adoption on
during 2005 through 2008. The effects of
Financial Ratios
NZ IFRS on the financial statements and
ratios of first-time adopters of NZ IFRS
Black and Maggina (2016) investigated
for a stratified random sample of 56 listed
that the effects of IFRS adoption on
companies are analyzed. In total, 16 of
financial statement data and their
these were early adopters and 40 of
usefulness in Greece. Additionally, the
which waited until adoption of NZ IFRS
authors examine the effect on the
became mandatory. The analysis of the
informativeness /usefulness of financial
financial statement impact of NZ IFRS is
statement data for stock prices in Greece
conducted in the context of the
and the effect of the Greek Financial
accounting choice literature. The results
Crisis. Additionally, the authors examined
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show that 87 per cent of firms are niqué Series XI, No.: 25 and the financial
affected by NZ IFRS. The median and statements prepared as per the legislation
inter-quartile ranges indicate that for before this communiqué within Istanbul
most firms the impact of NZ IFRS is Stock Exchange (ISE).
small. However, the maximum and
minimum values indicate the impact can Blanchette (2011) provided preliminary
be large for some entities. The impact has evidence of the impact on financial ratios
considerable effects on common caused by the transition to IFRS in
financial ratios. Canada. The effects of IFRS on financial
ratios in the areas of liquidity, leverage,
As the world economy is getting Coverage and profitability are discussed
globalized, the parties using accounting and verified using a sample cohort of
information have faced new problems. early adopters in Canada. The preli
Those problems stem from different minary evidence reveals significantly
accounting practices of countries. Al higher volatility to most of the ratios
though many international organizations under IFRS when compared to those
have carried out studies on the derived under pre-changeover Canadian
harmonization of different accounting GAAP. While the means and medians of
practices, IASB (previously named as IFRS ratios differ from the means and
International Accounting Standards medians of the same ratios under pre-
Committee (IASC)) has been universally changeover Canadian GAAP, the differ
accepted and officially recognized ences are not statistically significant
organization. Therefore the idea of overall. However, important individual
harmonizing the international accou discrepancies are in some cases
nting has been realized by the implemen observed. Naturally, analysts using ratios
tation of standards (International Accoun for analytical purposes during the
ting Standards (IAS) and International transition period need to be vigilant as
Financial Reporting Standards (IFRS)) ratios computed under IFRS are not
issued by IASC/ IASB. Agca and Aktas directly comparable with those derived
(2007) investigated the extent of under pre-changeover Canadian GAAP.
differences between the results of It is recommended that heightened
financial ratios gathered from financial attention be directed to the new feature –
statements prepared as per IAS/IFRS in comprehensive income – which
accor dance with the provisions of incorporates unrealized gains and losses
Turkish Capital Markets Board’s commu that bypass the income statement. The

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suggested analytical tools best suited to 3. Methodology

mitigate the contributing effect include The current study investigates whether
reliance on comprehensive-Return on there is an impact on the financial ratios
Assets (ROA) and comprehensive- of Sri Lankans listed manufacturing
Return on Equity (ROE). companies is experienced due to the
transition to IFRS comparing financial
A number of multi-national companies ratios computed under IFRS with those
are establishing their businesses in obtained under SLAS in order to confirm
various countries with emerging econo whether there is any significant
mies. Different accounting frameworks difference between IFRS and SLAS. To
and guidelines for different countries do this, the ratios before and after the
have created confusion for users of conversion need to be calculated and
financial statements. India, being an eventually a statistical test need to be
emerging economy calls for convergence performed to check whether those
of Indian Accounting Standards (Indian differences are significant. There are two
GAAP) with IFRS, an attempt has been kinds of research philosophies in the
made to assess the impact of IFRS word,as quantitative and qualitative
adoption upon the key financial ratios of approach while current study based on
Indian company namely Wipro Ltd. purely quantitative approach. This study
Gupata et al (2017) conducted from the selected all listed manufacturing
year 2009-10 to 2014-15. Debt Equity companies on Colombo Stock Exchange
ratio, debt to total assets ratio, current (CSE) as a 2014-15. Debt Equity ratio,
ratio, net profit ratio, return on capital debt to total assets ratio, current ratio, net
employed and return on equity ratios profit ratio, return on capital employed
have been used in the study to arrive at an and return on equity ratios have been
empirical conclusion. Empirical analysis used in the study to arrive at an empirical
revealed that the IFRS adoption will conclusion. Empirical analysis revealed
create a significant impact on debt to total that the IFRS adoption will create a
assets ratio, net profit ratio, return on significant impact on debt to total assets
capital employed ratio and return on ratio, net profit ratio, return on capital
equity owing adoption of fair value employed ratio and return on equity
measurement, differential revenue owing adoption of fair value measure
recognition norms, differential valuation ment, differential revenue recognition
of deferred tax asset and liability etc. norms, differential valuation of deferred
tax asset and liability etc.

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3. Methodology 3.1 Conceptual Framework for Testing H1

The current study investigates whether Following conceptual framework is
there is an impact on the financial ratios developed to show the deference
of Sri Lankans listed manufacturing between pre and post IFRS adoption on
companies is experienced due to the financial ratios. Here current ratio, debt
transition to IFRS comparing financial to equity ratio, earnings per share and
ratios computed under IFRS with those return on equity ratio considered as
obtained under SLAS in order to confirm dependent variable.
whether there is any significant Before IFRS adoption

difference between IFRS and SLAS. To Current ratio

do this, the ratios before and after the
Debt to Equity ratio
conversion need to be calculated and
eventually a statistical test need to be
performed to check whether those
differences are significant. There are two
20111 2012 2013
kinds of research philosophies in the
After IFRS adoption
word,as quantitative and qualitative
Current ratio
approach while current study based on
purely quantitative approach. This study Debt to Equity ratio

selected all listed manufacturing

companies on Colombo Stock Exchange 3.2 Conceptual Framework for Testing
(CSE) as a population. Sample consists H2
with 30 manufacturing companies listed The conceptual framework is developed
in CSE. to show the effect of IFRS adoption on
financial ratios. Here current ratio, debt
Table 3. 1 Type of financial ratios to equity ratio, earnings per share and
return on equity ratio considered as
Description Amount
independent variable & IFRS adoption is
No of Listed manufacturing 41 considered as dependent variable.
companies

Incorporate after 2009/ Not 11

available annual report.

No of companies for selected to 30

analysis

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3.Logistic Regression Model for testing 3.3 Variable Selection

H2 Table 3.2interprets the category of
The following logistic regression is used financial ratios. Liquidity ratios,
to identify that whether there is any profitability ratios and leverage ratios
likelihood relationship between IFRS only considered for the current study.
adoption and independent ratios. Current ratio is selected for testing
Descriptive statistics and logistic liquidity level, debt to equity ratio is
regression technique were used as selected for testing leverage of the
analytical tools followingIatridis, 2010. companies and Return on equity ratio
and earnings per share ratio is selected
for testing profitability of thecompanies.
Equation3. 1Financial statement effect
equation 3.3.1 Current Ratio
Where, The current ratio is a liquidity ratio that
RR = dummy variable representing the measures a company's ability to pay
regulatory regime (pre- and post- short-term and long-term obligations. To
adoption period) calculate the ratio, analysts compare
CR = current ratio current assets to current liabilities.
DE = debt to equity ratio Current assets include cash, accounts
EPS= earnings per share receivable, inventory and other assets
ROE = return on equity that are expected to be turned into cash in
less than a year. Current liabilities
Table 3. 2 Type of financial ratios include accounts, wages, taxes payable,
and the current portion of long-term debt.
Rat io Rat io The formula for calculating a company’s
c atego ry current ratio is as follows:
Liquidity Curre nt ratio ÖCurrent Ratio = Current Assets / Current
r atio s Quick ratio ´Liabilities

Profitability Return on a sse ts ratio ´

r atio s Return on e quity ratio Ö3.3.2 Debt to Equity Ratio
Ea rnings per sha re ratio ÖDebt/Equity (D/E) Ratio, calculated by
dividing a company’s total liabilities by
Le vera ge De bt to e quity ratio Öits stockholders' equity, is a debt ratio
r atio De bt to wor th ratio ´
Equity ratio ´used to measure a company's financial
leverage. The D/E ratio indicates how
much debt a company is using to finance

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its assets relative to the value of the study, first of all financial ratios, are
shareholders’ equity. The formula for calculated for each firm under SLAS &
calculating D/E ratios is: IFRS. More specially, current study
Debt/Equity Ratio = Total Liabilities / calculates the differences by subtracting
Shareholders' Equity a mean value of every financial ratios
calculated under local accounting
3.3.3 Earnings per Share standards in 2011/12 financial year from
Earnings per Share (EPS) is the portion the mean value of financial ratios
of a company's profit allocated to each calculated under restated financial
outstanding share of common stock. figures in 2011/12. Further, statistical
Earnings per share serve as an indicator significance of the differences between
of a company's profitability. EPS is pre- and post-adoption effect was tested.
calculated as:
EPS = (Net Income - Dividends on The data obtained from the various
Preferred Stock) / Average Outstanding sources were further analyzed using
Shares Statistical Package for the Social
Sciences (SPSS) & Microsoft Excel. The
3.3.4 Return on Equity average difference between paired
Return on Equity (ROE) is the amount of (matched) samples, tested using Paired t-
net income returned as a percentage of test (if data is normally distributed) or
shareholders equity. Return on equity Mann-Whitney test/ Wilcox on rank sum
(also known as "return on net worth" (if ordinal/ skewed data) test.
[RONW]) measures a corporation's
profitability by revealing how much Eviews software wasused to identify any
profit a company generates with the likelihood relationship between IFRS
money shareholders have invested. adoption and independent ratios.
Descriptive statistics, logistic regression
Return on Equity = Net Income/Share technique & Wald test were used as
holder's Equity analytical tools.

3.4 Data Analysis Techniques 4. Findings and Discussion

Data was collected from audited Under the analysis, it has been examined
financial statements prepared under the initial effect and long term effect of
IFRS and SLAS for the same time / IFRS adoption on financial ratios. To
period and ratios calculated using figures investigate the immediate effect on
from both set of statements. To perform financial ratios upon to IFRS adoption,

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financial data for the financial year The descriptive statistics of financial
2011/12 considered together with the ratios summarized in Table 4.1 are a
financial data for the same year restated collection of descriptive statistics, which
under IFRS in 2011/2012 year and summarized the data set calculated under
presented as comparatives of the pre IFRS adoption period. Descriptive
financial statement of 2012/13. statistics can be divided into measures of
central tendency and measures of
4.1 Testing for H1: The Immediate variability, or spread. Measures of
Impact of IFRS Adoption on central tendency comprise the mean,
Financial Ratios median and mode, whereas measures of
4.1.1Descriptive Statistics of Financial variability comprise the standard
Ratio deviation or variance, the minimum and
This section exhibits the summary of maximum variables.
descriptive statistics for the financial
ratios used to test H1 of current study. The average (mean) of the current ratio of
This section contains the mean, standard listed manufacturing companies in Sri
deviation, minimum and maximum of Lanka is 1.7796 under the local
financial ratios (CA, DE, EPS, ROE) for accounting standards applying period
2011/12 prepared under local standard (2011/2012). It shows effective liquidity
and the same information for the level within the sector. The Simple mean
2011/2012 restated financial statement of squared distance from the mean is
followingIFRS. 1.84. No more spreading area from the
mean value. The maximum current ratio
of data set is 10.60 and minimum one is
0.1349.

The average (mean) of the debt to equity

ratio of listed manufacturing companies
in Sri Lanka is 0.045 the local accounting
standards applying period (2011/2012).
It shows 4.5% of the invested capital
from debt financing. The Simple mean of
squared distance from the mean is 0.444.
The maximum current ratio of data set is
1.42 and minimum one is -1.838.

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The average (mean) of the earning per According to table 4.2 the average
share ratio of listed manufacturing (mean) of the current ratio of listed
companies in Sri Lanka is 5.53 the local manufacturing companies in Sri Lanka is
accounting standards applying period 1.914 under the 2011/2012 restated
(2011/2012). It shows earning power of financial figures. It shows effective
share is Rs.6 pre each. The Simple mean liquidity level within the sector. The
of squared distance from the mean is Simple mean of squared distance from
6.70. The maximum current ratio of data the mean is 1.830. No more spreading
set is 25.17and minimum one is -2.04. area from the mean value. The maximum
current ratio of data set is 10.49 and
The average (mean) of the return on minimum one is 0134.
equity ratio of listed manufacturing
companies in Sri Lanka is 0.166 the local The average (mean) of the debt to equity
accounting standards applying period ratio of listed manufacturing companies
(2011/2012). It interpret when invest one in Sri Lanka is 0.110 under the 2011/2012
rupee in equity capital return may be restated financial figures. It shows 11%
Rs.0.166. The Simple mean of squared of the invested capital from debt
distance from the mean is 0.291. The financing. The Simple mean of squared
maximum current ratio of data set is distance from the mean is 0268. The
0.935and minimum one is -0.4790. maximum current ratio of data set is
1.426 and minimum one is 0.000.

The average (mean) of the earning per

share ratio of listed manufacturing
companies in Sri Lanka is 6.125 under
the 2011/2012 restated financial figures.
It shows earning power of share is Rs.6
pre each. The Simple mean of squared
distance from the mean is 7.354. The
maximum current ratio of data set is
Rs.25.17 and minimum one is Rs.-2.220.
The average (mean) of the return on
equity ratio of listed manufacturing
companies in Sri Lanka is 0.394 under
the 2011/2012 restated financial figures.
It interpret when invest one rupee in

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equity capital return may be Rs.0.39. The distributed. In this study, Kolmogorov -
Simple mean of squared distance from Smimov test and Shapiro- Wilk
the mean is 1.377. The maximum current normality test have been used to test the
ratio of data set is 7.615 and minimum normality of variable.According to the
one is -0.438. results of these two tests, it is suggested
that none of the variable use in the current
study is normally distributed.

4.1.3 Wilcoxon Signed Rank Test

Empirical analysis of the differences
between the ratios calculated from the
two set of financial statement has been
done using Wilcoxon Signed Rank test.
In the current study non parametric
version of t-test is used since data is not
normaly distributed.(Stent et al., 2010).

Table 4.3 illustrates deferences of

descriptive statistics of all four financial
ratios, which were calculated as pre and
post IFRS financial statements. Mean
value of the CR is increased from 1.77 to
1.91. DE ratio’s mean value is increased
by 0.06. Then mean value of EPS
increased from 5.53 to 6.12. ROE’s mean
value is decreased by 0.22.

4.1.2 Testing the Normality Table 4.4 interprets summary of the

Test of normality is applied to decide result of Wilcoxon Signed Rank Test.
whether a set of data is well-modeled by a Null hypothesis is “there is no significant
normal distribution or not, and to impact of IRFS adoption on financial
compute how probable an underlying ratio”. Alternative hypothesis is “there is
random variable is to be normally any significant impact of IFRS adoption
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on financial ratio”. According to the 4.2 Testing for H2: The IFRS adoption is
result; Z statistic for CR is significance. more likely to exhibit a favorable effect
Its leads to conclude that there is on financial ratios
significant impact of IFRS adoption on
current ratio. 4.2.1Logistic regression Model
Logistic regression is the appropriate
Table 4.4indicates Z statistic for DE and regression analysis to conduct when the
ROE are not significant. Its leads to dependent veriable is dichotomous
conclude that there is no significant (binary). Like all regression analyses, the
impact of IFRS adoption on both ratios. logistic regression is a predictive
As per the results of the table 4.4ROE’s analysis. Logistic regressions used to
significant amount showed as 0.191. describe data and to explain the
This is not significant at 95% confidence relationship between one dependent
level. Therefore, null hypothesis cannot binary variable and one or more nominal,
be rejected. Accordingly, it is concluded ordinal, interval or ratio-level indepen
that there is result is there is no any dent variable.
significant effect of IFRS adoption on
ROE ratio.

Table 4.5 shows summary of the logistic

regression output. The results indicate
that H1 holds, implying that IFRS
implementation is more likely to exhibit
a favorable impact on the financial ratios
of firms. The transition to IFRSs does not
appear to adversely affect. Debt to
equity, earning per share & Return on
equity ratio have the positive coefficient.
It means IFRS adoption positively
effected on financial ratios except current
ratio
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4.2.2 Wald Test As presented in table, Wald Test has

The Wald test is a way of testing the been performed and it was concluded
significance of particular explanatory that the null hypothesis should be
variables in a statistical model. In logistic rejected, leads to accept alternative
regression we have a binary outcome hypothesis data set is not equal to zero,
variable and one or more explanatory that means there is a difference between
variables. For each explanatory variable post and pre adoption period data. The
in the model there will be an associated result shows probability value of .0000 in
parameter. percent significant level which will lead
to reject null hypothesis. That means
there is a difference between post and pre
IFRS adoption data.

According to the result of Wald test and

the logistic regression analysis conclude
that the adoption of IFRSs is more likely
to exhibits a favorable impact on firm
financial measures.

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5. Conclusion standard setting bodies such as the IASB

This study attempted to investigate the and the FASB internationally and CA Sri
impact of IFRS adoption on financial Lanka locally. Since it tries to some
ratios of listed manufacturing companies extent answer the relatively unanswered
of Sri Lanka.In case of the first research question of whether or not the current
objectives, based on the result of the IFRS based regulatory framework has
analysis, it can be concluded that there an been fruitful in terms of an increased
immediate impact of IFRS adoption on economic decision usefulness among
financial ratios, such as Current Ratio & financial statement information, which
Earnings Per Share. Other ratios are not facilitate equity investors with resource
significantly affected by IFRS adoption. ful material as well as with valuable
In examining the second hypothesis, the insights on the relevance and reliability
results provide evidence that adoption of of Sri Lanka accounting numbers.
IFRSs is more likely to be exhibit a
favorable impact on firm financial ratios. Further it is expected that the current
When considering each individual study wouldbe useful in regions other
variable, it indicates that Return on than the Sri Lanka, particularly in
Equity, Earnings per share and Debt to countries where developing nations
Equity Ratio have positive coefficients. compulsory to follow and where the
Current ratio has a negative coefficient accounting philosophy is the same. The
value. This led to provide evidence that study might also be of value to emerging
the IFRS adoption exhibits a favorable nations with an investment environment
impact on most of firm’s financial ratios. similar to the Sri Lanka and where IFRS
The results presented in current study are reporting recently have been or will be
pertinent and significant to both Sri adopted.
Lankan investors and to accounting

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