Anticipating the Impact of IFRS on the Management of German Manufacturing Companies: Some Observations from a British Perspective

The introduction of International Financial Reporting Standards (IFRS) in 2005 marked a significant departure from Germany's traditional financial accounting practices. This paper questions whether this change may have consequential effects on the distinctive traditional management accounting practices in the field of Controlling. We examine the possible impact on manufacturing companies drawing upon perceptions and expectations of managers in three Bavarian companies and two management consultancy firms. We consider whether financial accounting will assume an increased importance within firms, and whether this may lead to abandonment of some traditional management accounting practices and the adoption of different techniques in internal reporting compatible with the new IFRS regime for external reporting. This prompts consideration of whether such changes would lead to financial accounting domination of management accounting in Germany analogous to that argued by Johnson and Kaplan in 1987 in their ‘Relevance Lost’ thesis. We conclude that, at this juncture in the development of their information systems, German managers face an important choice between integrating external and internal reporting in ways that might fundamentally change established Controlling practices, or of continuing to operate dual accounting systems in much the same way as in the past so that adoption of IFRS is restricted to external reporting.     

Analyst Following and Forecast Accuracy After Mandated IFRS Adoptions

This study investigates how accounting harmonization affects one particular group of financial statement users—financial analysts. We find that mandatory International Financial Reporting Standards (IFRS) adoption attracts foreign analysts, particularly those from countries that are simultaneously adopting IFRS along with the covered firm's country and those with prior IFRS experience. We also find that mandatory IFRS adoption improves foreign analysts’ forecast accuracy. The change in analyst following increases with the distance between prior local Generally Accepted Accounting Principles (GAAP) and IFRS and with the extent to which IFRS adoption eliminates GAAP differences between the firm's country and the analyst's country. IFRS adoption also attracts more local analysts, particularly those with prior IFRS experience and with an international portfolio prior to mandated IFRS adoption in their home country. Local analysts’ forecast accuracy is not affected by IFRS adoption. Overall, our results suggest that accounting harmonization brings comparability benefits that enhance the usefulness of accounting data.     

The Nature and Rationale of a Conceptual Framework for Financial Reporting by Islamic Banks

Islamic banks have to abide by the revealed doctrines in Islam in conducting their business and financial transactions. They employ in-house religious advisers—often referred to as Shari'a Supervisory Board (SSB)—who issue a special report to inform users of financial statements whether or not the bank has adhered to the Islamic principles. Recently, a private standard-setting body—the Financial Accounting Organization for Islamic Banks and Financial Institutions (FAOIBFI)—has been set up to externally regulate the financial reporting by Islamic banks. The FAOIBFI has published two statements on the objectives and concepts of financial reporting to act as a framework in setting accounting standards for Islamic banks. This paper examines the FAOIBFI's approach for developing objectives and concepts of financial accounting and investigates its need for such a theoretical framework. It is argued that the FAOIBFI's objectives and concepts would not be useful in mandating accounting standards on issues that are affected by religious ruling. This does not necessarily mean that such a framework may not be useful in legitimating the FAOIBFI's role and in setting accounting standards for issues that are not governed by revealed moral doctrines although it will be subject to similar limitations to those found by other standard-setting bodies in utilising and applying their framework. However, it implies that the more the FAOIBFI sets accounting standards that incorporate religious ruling, the less it would tend to find its own objectives and concepts useful. The ambiguities that may arise from different interpretations of the religious rules will require resolutions primarily by reference to religious rather than accounting authority.     

The Effect of Reversibility on a Manager's Decision to Record Asset Impairments

Over time, accounting standards have moved toward presenting more items at fair value on the balance sheet. Consistent with this trend, IAS No. 36 permits an impairment loss on a long‐lived asset to be reversed if the economic value of the asset recovers. This article uses empirical data from an experiment conducted with 118 managers to explore the implication of allowing impairment reversals on a manager's decision to record the loss. Results suggest that permitting reversals significantly increases the likelihood that a manager will record the impairment, especially if the manager has a bonus plan. The bonus plan effect is not caused by the manager's intention to smooth income through impairment reversals, but by his disutility from a bonus forgone if the value of the asset recovers but accounting rules prohibit him from reversing the loss.     

Accounting Discretion in Fair Value Estimates: An Examination of SFAS 142 Goodwill Impairments

This study examines Statement of Financial Accounting Standards 142 adoption decisions, focusing on the trade‐off between recording certain current goodwill impairment charges below the line and uncertain future impairment charges included in income from continuing operations. We examine several potentially important economic incentives that firms face when making this accounting choice. We find evidence suggesting that firms' equity market concerns affect their preference for above‐the‐line vs. below‐the‐line accounting treatment, and firms' debt contracting, bonus, turnover, and exchange delisting incentives affect their decisions to accelerate or delay expense recognition. Our study contributes to the accounting choice literature by examining managers' use of discretion when adopting a mandatory accounting change and by developing and testing explicit cross‐sectional hypotheses of the determinants of firms' preferences for immediate below‐the‐line versus delayed above‐the‐line expense recognition.     

Accounting for promises: The impact of SFAS No. 116 on charities

SFAS No. 116, Accounting for contributions made and contributions received, issued in 1993, requires that nongovernmental organizations, both proprietary and nonprofit, recognize unconditional promises to give as current period revenue. This study examines whether charities—organizations that rely heavily upon contributions—are affected by SFAS No. 116 adoption along two dimensions: whether an accounting effect exists, and whether a subsequent economic, or behavioral impact is felt by charities reporting positive adjustments to net assets when adopting SFAS No. 116.First, this study documents the effect of SFAS No. 116 adoption on receivables, and considers whether increases in pledges that result from adoption persist in post-adoption periods. The evidence suggests that the accounting effect of SFAS No. 116—that is, the recognition of unconditional pledges—persists in the post-adoption regime.Second, the economic effect of SFAS No. 116 is considered by examining, for charities affected by adoption, whether cash contributions decline in post-adoption periods, whether fundraising increases, and whether reliance on cash contributions decreases in post-adoption periods. Results indicate that cash contributions decrease, that fundraising increases, and that reliance on cash contributions decreases for these organizations.     

Capital Allowances and the Incentive to Invest

In recent years many organisations have moved towards a total quality management (TQM) path in their quest for quality. Accounting researchers have become interested in understanding how accounting systems are implicated within a TQM environment. This paper reports on a case study of TQM adoption and changes in management accounting systems (MAS) within a New Zealand construction company. It evaluates organizational approaches to implement TQM as a strategic option and the subsequent change in MAS. The paper suggests that an organisation may initiate TQM practices to promote ‘institutional’ and ‘quality’ culture rather than for purely technical reasons. It also suggests that when an organisation adopts new management practices such as TQM, it may lead to changes in the organisation's internal control mechanisms, such as management accounting and reporting processes.     

Voluntary IAS 1 accounting disclosures prior to official IAS adoption: An empirical investigation of UK firms

This paper focuses on firms’ voluntary compliance with the reporting requirements of the International Accounting Standard (IAS) 1 before the official adoption of IASs. The paper seeks to identify the motives for the voluntary adoption of IAS 1 and investigates the relation to the provision of voluntary accounting disclosures, the increase in equity capital, managers’ remuneration and firms’ stock returns. The study shows that the decision-making process of firms is significantly influenced by the intention to improve key financial measures, such as leverage, profitability and growth. Firms would tend to adopt an accounting policy or regulation when they feel that adoption would favourably impact on their financial situation. For example, the study indicates that firms voluntarily adopted IAS 1 before the official IAS adoption date in order to provide evidence of superior managerial ability and high quality reported accounting information. It is found that firms that perform well are more motivated to voluntarily abide by IAS 1. The study also reports that firms that provide voluntary accounting disclosures and perform increases in their equity capital appear to voluntarily adopt IAS 1. Similar findings are obtained for firms that display higher management remuneration and stock returns.     

Agenda Entrance Complexity in International Accounting Standard Setting: The Case of IFRS for SMEs

Features of rational decision making (such as agenda entrance criteria and statement of jurisdiction) barely conceal the complexity of international accounting standard setting. In 2003, when the International Financial Reporting Standard for Small and Medium‐sized Entities (IFRS for SMEs) project achieved agenda entrance, the International Accounting Standards Board's (IASB) jurisdiction was to develop, ‘a single set of … accounting standards … to help participants in the world's capital markets’. Drawing on interviewees' recollections and other material, this study of how the project achieved agenda entrance finds within‐IASB opposition to the project, arguing it was outside the IASB's jurisdiction that dissolved with the realisation that the IASB's jurisdiction would be changed to encompass the project.     

Equity Financial Assets: A Tool for Earnings Management—A Case Study of a Chinese Corporation

With China’s adoption of principles-based international accounting standards and its convergence with International Accounting Standard 39 (IAS 39), Chinese companies have discretion under the original Accounting Standards for Enterprises 22 (CAS 22) as to how they account for the initial measurement, sale, and subsequent reclassification of financial assets. We use a Chinese company (‘Company A’) as a case study to illustrate how earnings are managed to exploit this discretion. We document that the company re-classifies its available for sale equity investments as long-term equity investments to decrease the volatility of the company’s apparent profits. We also make some predictions regarding how the company will handle its financial assets under the new standard, which is the same as IFRS 9. Our research contributes to the continuous improvement of China’s accounting standards and has implications for regulators of the capital market.     

Evaluating Constructive Lease Capitalization and Off‐Balance‐Sheet Financing: An Instructional Case with FedEx and UPS

This case illustrates the effects of the proposed new lease standard by the Financial Accounting Standards Board and the International Accounting Standards Board on existing outstanding operating leases. Specifically, the case examines the effects of the proposal that all firms report existing operating leases as capital leases upon the initial adoption of the proposed standard. By applying a constructive capitalization model to two firms who rely on operating leases for financing, FedEx and UPS, we found that both companies would have to record billions of dollars of liabilities that had only appeared in the footnotes of their financial statements under the current lease standards. In addition, the firms would experience a decline in retained earnings and key financial ratios, such as the debt‐to‐equity, return‐on‐assets, and interest coverage ratios, by reporting operating leases as capital leases under the new proposed standard. Furthermore, the magnitude of the lease capitalization impact is much smaller for UPS than for FedEx.     

Market Perception of Goodwill: Some Empirical Evidence

Accounting and reporting for goodwill has been on the agenda of the Financial Accounting Standards Board, the International Accounting Standards Committee, the UK's Accounting Standards Board, and the US Congress. Goodwill has also been the subject of Securities Exchange Commission rulings directed at specific companies. The attention directed towards goodwill would suggest that it is a material asset for a large number of firms. This article analyses the market perception of goodwill as an asset in the determination of the firm's valuation. Also explored is whether the market values goodwill to the same degree as it values other assets. The results of this study found that the market perceives goodwill as an asset and incorporates the information in the valuation of a firm. The findings of this study could be of importance to those involved in and affected by standard-setting deliberations involving goodwill.     

Assessing Conformity with Generally Accepted Accounting Principles Using Expert Accounting Witness Evidence and the Conceptual Framework

To enhance understanding of the status of the Financial Accounting Standards Board's Conceptual Framework for Financial Reporting, we analyse important rules of evidence in United States (US) courts regarding the presentation of expert accounting witness testimony. We draw on this analysis to recommend the relocation of the Conceptual Framework in the US Generally Accepted Accounting Principles (GAAP) hierarchy. For empirical support, we explore how rules of evidence in the criminal trial in 2006 of Enron's two most senior executives affected assessment of whether Enron's financial reports conformed with the FASB's GAAP. We recommend that the FASB's Conceptual Framework should be included in authoritative literature as the uppermost authority, and that it be grounded closely in user needs and the ethical principles associated with meeting those needs. Further, we recommend that accounting expert witnesses adopt an overriding concern for objectivity and impartiality in assisting courts to understand complex accounting matters within the Conceptual Framework.     

Timeliness of impairment recognition: Evidence from the initial adoption of SFAS 142

This research investigates the timeliness of impairment recognition from the initial adoption of Statement of Financial Accounting Standards no. 142, Goodwill and Other Intangible Assets (SFAS 142). Using a sample of firms reporting goodwill at yearend 2001, we examine the lag between incorporation in returns and recognition in earnings of 2002 goodwill impairments to provide market-based evidence on the timeliness of goodwill impairments upon the adoption of the new rule. First, our results indicate that the market anticipated the initial adoption write-offs. Second, while the concurrent association between stock returns and newly incurred impairment losses indicates timely recognition of impairments after the new standard, the market also anticipated the new impairment losses subsequent to initial adoption. This indicates that timeliness can be improved further after the adoption of SFAS 142.     

‘Old Hens Make the Best Soup’: Accounting for the Earning Process and the IASB/FASB Attempts to Reform Revenue Recognition Accounting Standards

Abstract

By developing a synthesis of documents that have been released officially under the revenue recognition project jointly run by the International Accounting Standards Board and Financial Accounting Standards Board, this article points out that the earning generation and realization process over time (that is to say, the traditional accounting model) is in reality still playing an important role without losing its raison d'être. Although this model is supposed to have been consistently rejected since the outset on the premise of the adoption of the assets and liabilities approach amid the Boards' attempt to establish a new revenue recognition model, this article aims to reconfirm the significance and validity of this earning process – that is, the corporate process of generating and realizing earnings over time – as the representational focus of accounting for revenue recognition. Through an internal critique, our article summarizes and discusses successive Boards' proposals under the same asset–liability approach that they have been advocating for revenue recognition. Through a comprehensive comparative analysis (external critique), our article further criticizes the usefulness and feasibility of this approach, especially the transfer-of-control basis of revenue recognition which the Boards propose. It argues then for an alternative approach that combines asset–liability with revenue–expense accounting while re-establishing focus upon the earning process over time.     

The recognition and measurement guidelines of FASB concepts no. 5

In making recognition and measurement decisions, accountants often encounter complex and controversial issues. They must decide what events to record, when to record the events, and how to properly measure the financial effects. A framework that could provide guidance for those difficult decisions would be helpful.In 1984 the FASB issued Statement of Financial Accounting Concepts No. 5 (SFAC No. 5) titled “Recognition and Measurement in Financial Statements of Business Enterprises” to meet this need for guidance. The document bears special significance because it may be the “end of the line,” representing the culmination of the efforts of the FASB to develop a theoretical basis for accounting [Kirk, 1984, p. 20]. In this article we review the recognition criteria established in SFAC No. 5 and present a flowchart that may be helpful to accounting educators as a portrayal of those criteria. The article also may be useful in classroom discussions of theory formulation since it indicates that the adoption of SFAC No. 5 took into consideration the diverse views of accountants, statement users, and reporting firms.     

An Empirical Evaluation of the Costs of Harmonizing Romanian Accounting with International Regulations (EU Directives and IAS/IFRS)

After the fall of communism, Romanian accounting has undergone several waves of reform. The first began with the 1991 Accounting Law and its 1993 Regulations implementing a French-inspired accounting chart and guidelines. The second wave of reform produced Regulations (in 1999 and 2001) for the harmonization of large entities' accounting with EU accounting directives and International Accounting Standards/International Financial Reporting Standards (IAS/IFRS). An interesting feature was the inclusion of IASB's conceptual framework into the text of these Regulations. Our study seeks to identify and evaluate the costs of harmonizing Romanian accounting with international regulations (EU Directives and IAS/IFRS). We hypothesize that three types of costs are prevalent: personnel training costs, consultants' fees and costs to adjust existing information systems. We also hypothesize that harmonization benefits are noticeable for those entities that make frequent use of foreign finance and for those entities with majority foreign shareholders. To collect data, we sent out questionnaires to the finance directors of listed Romanian companies. As full application of IAS/IFRS by non-financial companies has recently been postponed until 2007, we also comment on the benefits and costs of gradual reforms as opposite to a one-step adoption of IAS/IFRS.     

The Ex‐Ante Monitoring Role of Accounting Covenants in Public Debt

In contrast to what is known about accounting covenants in private debt, little empirical evidence on the role of accounting covenants in public debt exists. Diffuse ownership, arm's length monitoring, and collective action problems are unique to the public debt setting and raise the question of whether these covenants serve their intended role. As such, this study investigates whether including covenants reliant upon accounting inputs influences borrowers’ actions to prevent adverse credit events. Accounting covenants in the public debt setting provide firms with a disciplining mechanism to renegotiate ahead of costly technical default – a stark contrast to the ex‐post renegotiation ‘trip wire’ role covenants play in private debt. In particular, the results show that including accounting covenants in public debt is associated with an increased probability of ex‐ante renegotiation, that is, negotiation through consent solicitations ahead of covenant violation. This ex‐ante renegotiation, in turn, is associated with decreased adverse credit events. Cross‐sectional results support these findings as the ex‐ante renegotiation role of accounting covenants varies with bondholders’ and trustees’ monitoring ability.     

Extractive industries accounting and economic consequences: Past,present and future

Accounting for the extractive industries has been a contested issue for decades as a result of a choice of different methods of costing available and the economic impacts of these methods on companies’ financial results. When the International Accounting Standards Board (IASB) embarked on its extractive industries project in 1998, it attempted to create uniform accounting practices. An archival study of constituent responses to the IASB's Issues Paper revealed that the economic consequences argument was relied upon again to argue for retaining choice. The IASB's international accounting standard, IFRS 6, issued in 2004, once again permitted choice between methods, illustrating the effectiveness of the economic consequences argument in perpetuating past practice.     

Does a goodwill impairment regime better reflect the underlying economic attributes of goodwill?

IFRS adoption transformed the accounting treatment for goodwill in many countries. Instead of amortizing goodwill, firms now test for its impairment and write off impairment losses against income. Accounting standard‐setting bodies claim that an impairment regime better reflects the underlying economic value of goodwill than systematic amortization. We investigate this claim by comparing the association between goodwill accounting charges against income and firms’ economic investment opportunities in amortization and impairment regimes. We find that the association between firms’ goodwill charges against income and the firms’ investment opportunities is stronger during the IFRS regime than the AGAAP regime. This indicates that, as claimed, impairment charges better reflect the underlying economic attributes of goodwill than do amortization charges.