Abstract/Summary

Under IASB’s initiatives of developing International Financial Reporting Standards (IFRS) for Small and Medium-sized Entities (SMEs), UK has played an important role in this by rolling out the new UK GAAP – FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland (FRS 102 thereafter). It’s widely acknowledged that FRS 102 is broadly based on the IFRS for SMEs. This research sets out to examine the determinants and consequences of FRS 102 adoption by UK SMEs, with a manually collected dataset of UK SMEs from 2009 to 2019. This PhD thesis consists of three empirical papers. The first paper focuses on the factors driving the UK SMEs towards adopting FRS 102. Our results show that SMEs with a higher level of leverage are less likely to adopt FRS 102, suggesting that SMEs with a higher level of long-term debt would have already established their private communication channel with the creditors, and their financial reports are less relied upon by the creditors. Further, the adoption of FRS 102 is significantly associated with firms’ growth prospect, audit quality, and industry classifications. The second paper examines the impact of FRS 102 on financial reporting quality, and also on the relationship between earnings management and leverage. We find that the adoption of FRS 102 by UK SMEs increases the quality of their financial statements. Further, before FRS 102 adoption, SMEs’ managers seek to manipulate earnings to avoid the prospect of violating debt covenants, while the adoption of FRS 102 has facilitated more intense monitoring from creditors. The third paper investigates the moderating impact of FRS 102 adoption on the relationship between trade credit and bank credit. Our results show that bank finance substitutes trade credit received, where FRS 102 adoption has weakened this relationship. This suggests that the adoption of FRS 102 has facilitated better financial information disclosure and alleviated the level of information asymmetry, and consequently, creditors such as banks would be better at assessing the financial risk associated with lending to the UK SMEs. To some extent, the adoption of FRS 102 has attracted more intense monitoring from the creditors. Further, despite that UK SMEs play the role of financial intermediaries by financing their sales activities via extending short-term bank credit to their customers, as recipients of trade credit, their customers would be indifferent to whether the UK SMEs adopted FRS 102 or not.