It ain't over till the fat lady sings: The need for enforcement - outcomes of the mandatory adoption of K3 in terms of label adoption, disclosure practices and conservatism

Abstract: Globalisation has created a need for harmonised financial reporting, and adoption of international standards for public firms, IFRS, has been extensive. The same cannot be said about the private counterpart, IFRS for SMEs. This standard has instead been used as a blueprint in the development of national GAAPs. In Sweden, the K3-standard has been developed with point of departure in IFRS for SMEs, and it became mandatory for private firms to adopt the standard for fiscal years beginning in 2014. This thesis analyses the outcome of this mandatory adoption in terms of disclosure, label adoption, and conservatism. 200 private standalone firms are studied, of which 77% increased disclosures, 79% are considered as label adopters and only 21% considered as serious adopters of the standard. The serious adopters increased their shareholders' equity and net profit following the adoption, which indicates that Swedish financial reporting practice has become less conservative following the adoption of K3. The findings in this thesis are that previous research on label adoption can be applied also in a private setting, and that enforcement is needed to ensure serious adoption of K3. The conclusions provide guidance for countries planning on developing their national GAAP towards international harmonisation, and add to the existing research on financial reporting for private firms, an area where more research has been requested.