The impact of national GAAP and accounting traditions on IFRS policy selection: Evidence from Germany and the UK

The adoption of IFRS in the European Union in 2005 aimed to increase the comparability of publicly traded companies’ consolidated accounts. However, previous literature questions whether IFRS are applied consistently across countries with differing institutional environments, and therefore, whether de facto harmony has been achieved. We further examine this question by investigating IFRS accounting policy choices of listed companies in Germany and the UK between 2005 and 2009. We find that most firms, when choosing IFRS options, tend to retain accounting policies required by national rules. We also investigate national accounting traditions in the case of options under national GAAP and find that most companies continue these after adopting IFRS. Moreover, there appears to be little significant change in accounting choices over time from 2005 to 2009. Given the differences in accounting rules and practices that exist across countries, our results suggest that international differences in financial reporting are likely to continue under IFRS.     

Examining dual accounting systems in Europe

After adoption of International Financial Reporting Standards (IFRS) for consolidated financial statements by European-listed companies, a number of European countries still require the use of local standards in the preparation of legal entity financial statements. This study investigates whether this requirement can be explained by a low demand for high-quality financial reporting and an orientation of accounting toward the fulfilment of regulatory needs in these countries. Specifically, using accounting quality as an indicator of the focus of accounting on capital providers' needs, we compare accounting quality between countries permitting and prohibiting the use of IFRS in individual financial statements. Consistent with our expectations, we find that countries requiring the use of local standards in the preparation of legal entity financial statements exhibit a significantly lower level of accounting quality, both prior to and after IFRS adoption. We interpret these results as evidence that these countries have local standards more oriented toward the satisfaction of regulatory needs, rather than investors' needs. Furthermore, since differences in accounting quality persist after the implementation of IFRS, results suggest that firms in these countries face a lower demand for high-quality financial reporting.     

Have IFRS Affected Earnings Management in the European Union?

There has recently been considerable discussion of those features of IFRS that are likely to help improve financial reporting in the European Union. However, certain issues may also have a negative impact on the quality of information. This paper focuses on the effect of IFRS on earnings management. Its main purpose is to examine whether the adoption of IFRS in the European Union has increased or decreased the scope for discretionary accounting practices by comparing discretionary accruals in the periods preceding and immediately after the regulatory change. Another objective is to determine which firms' features and country factors may explain the accounting discretion observed before and after IFRS. We consider a sample of non-financial firms listed on 11 EU stock markets. The results obtained show that earnings management has intensified since the adoption of IFRS in Europe, as discretionary accruals have increased in the period following implementation. The variables explaining accounting discretion are the same before and after IFRS (business size, leverage, investor protection and legal enforcement). These results suggest that variations in earnings management might be due to some room for manipulation under international standards when compared with local standards.     

The effect of mandatory IFRS adoption on real and accrual-based earnings management activities

This study examines the effect of mandatory adoption of International Financial Reporting Standards (IFRS) on both accrual-based and real earnings management. While prior literature has mainly examined the effects of IFRS adoption on accrual-based earnings management, no study to date has focused on the impact of IFRS adoption on real earnings management. Using a sample of 15,206 observations from 22 European countries between 2000 and 2010, this study employs a control sample of voluntary adopters and applies a differences-in-differences design to control for confounding concurrent events. The results suggest that mandatory IFRS adoption had no significant impact on either real or accrual-based earnings management practices. Additional analysis on a sub-sample of firms with relatively strong earnings management incentives supports a dominant role for firm-level reporting incentives over accounting standards in shaping financial reporting quality.     

Has Adoption of IFRS Increased Non–North American Institutional Investment in the Canadian Stock Markets?

We investigate whether non–North American (non‐NA) institutional investment in firms listed on the Canadian stock markets increased between the pre‐ and post‐IFRS adoption periods relative to such investment in firms listed on the U.S. stock markets. Prior to IFRS adoption, Canada had high‐quality financial reporting standards that were similar to the U.S. standards. As consequences of IFRS adoption, Canadian financial statements became more comparable with European and other IFRS country financial statements and less comparable with neighboring U.S. financial statements. Thus, a question of interest is whether the enhanced comparability with non‐NA companies was beneficial in terms of attracting non‐NA investment to Canadian companies versus U.S. companies. We find that there was no significant change in non‐NA institutional investment in Canadian firms relative to U.S. firms for the very largest (fifth quintile) and for smaller (first, second, and third quintiles) Canadian companies. However, intermediate‐sized Canadian companies in the fourth size quintile lost non‐NA institutional investment relative to their U.S. peer companies, suggesting that non‐NA investors cared more about comparability with U.S. peer companies than non‐NA peer companies for companies in this size quintile.     

IFRS adoption,reporting incentives and financial reporting quality in private firms

This study examines financial reporting quality (FRQ) effects around voluntary International Financial Reporting Standards (IFRS) adoptions by German private firms across two important dimensions, earnings quality and disclosure practices. To capture differences in the motivations for IFRS adoptions, we identify four different types of IFRS adopting firms based on a comprehensive set of firm characteristics. We observe earnings quality improvements around IFRS adoptions primarily for one type of firm, which is young, fast growing and seeking access to public equity markets. Using a matched sample of private German GAAP and IFRS reporting firms, we find some evidence suggesting that IFRS also contribute to higher earnings quality. Recognizing that our earnings quality metrics are only incomplete measures of FRQ, we also compare the disclosure practices of IFRS and German GAAP firms. We find that all IFRS firm types disclose significantly more information in their financial reports and show a higher propensity to publish their financial reports voluntarily on the corporate website. Our findings indicate that failure to identify earnings quality changes around IFRS adoption cannot be automatically interpreted as IFRS adoption having no effect on the FRQ of (private) firms. Collectively, our results suggest that both incentives and accounting standards shape private firms’ FRQ.     

The Impact of Mandatory International Financial Reporting Standards Adoption on Investment Efficiency: Standards,Enforcement, and Reporting Incentives

This paper investigates whether mandatory adoption of International Financial Reporting Standards (IFRS) is followed by a decline in firms’ suboptimal investments. On average, we find that the probability of under‐investment in capital expenditure declines for firms from 23 countries requiring mandatory adoption of IFRS relative to firms from countries that do not have such requirements; meanwhile the probability of over‐investment remains unchanged. However, this real effect becomes smaller when we control for concurrent changes to the enforcement of financial reporting along with the introduction of IFRS in some countries, suggesting that the switch in standards is only one of the drivers for the observed benefits. Moreover, we find that the reduction in suboptimal investments is driven by firms with high reporting incentives to provide transparent financial reports from countries where the existing legal and enforcement systems are strong. We further show that the real effect increases with the predicted changes in accounting comparability. Finally, we find that after mandatory IFRS adoption, capital investment becomes more value‐relevant, less sensitive to the availability of free cash flows, and more responsive to growth opportunities. Our findings provide new insights into the real effects of mandatory IFRS adoption.     

Implications of the ‘IAS Regulation’ for Research into the International Differences in Accounting Systems

Meek and Thomas (2004) call for research on the continued relevance of ‘rediscovered’ dichotomous accounting classifications. We provide such evidence by examining how developments surrounding the ‘IAS Regulation’ (1606/2002) influenced international differences in accounting systems in the European Union. Since a sufficient time series of actual post-2005 International Financial Reporting Standards (IFRS) reporting practice is not yet observable, we propose an initial re-classification of accounting systems based on evidence available to date, that is, the degree of implementation of the IAS Regulation in the Member States. Consistent with Nobes (1998), we find that the degree of public accountability to outside investors (the ‘public/private’ criterion) is becoming the primary differentiator for accounting systems in Europe, surpassing country-level variables such as legal system and culture. The distinction between consolidated and individual financial statements is the second emerging differentiator. While consolidated accounting is becoming more uniform across countries, cross-country cultural differences are most likely to persist in individual accounting. Based on our analysis we highlight two important areas of future research beyond the consolidated financial statements of listed firms (e.g. Nobes, 2005; Schipper, 2005). First, at the country level, the interaction of IFRS and individual financial statements will need to be reassessed. In addition, research could help introduce a degree of differentiation into financial reporting regulation for unlisted firms, because these firms are not a homogeneous group. Also, the convergence of national GAAP systems with IFRS will benefit from fresh research insights. Second, at the firm level, future research could analyze the extent to which the determinants and consequences of IFRS adoption, an area well researched for publicly traded firms (e.g. Cuijpers and Buijink, 2005), generalize to unlisted firms. Such research will help detect emerging patterns of accounting systems within an international context. It will generate insights into the disconnect of consolidated accounts from national influences, the degree of uniformity of consolidated accounts among international firms, the continued relevance of traditional classifications of international accounting systems for individual accounts and accounts of unlisted companies, and the convergence of national standards with IFRS.     

Economic Benefits of Adopting IFRS or US‐GAAP – Have the Expected Cost of Equity Capital Really Decreased?

Abstract:   The question of whether the adoption of International Financial Reporting Standards (IFRS) results in measurable economic benefits is of special interest, particularly in light of the European Union's adoption of IFRS for listed companies. In this paper, I investigate the common conjecture that internationally recognised financial reporting standards (IAS/IFRS or US‐GAAP) reduce the cost of capital for adopting firms. Building on Leuz and Verrecchia (2000) , I use a set of German firms that have adopted such standards and investigate the potential economic benefits of this reporting strategy by analysing their cost of equity capital through the use and customisation of available implied estimation methods. Evidence from the 1993–2002 period fails to document lower expected cost of equity capital for firms applying IAS/IFRS or US‐GAAP. During the transition period I analyse, the expected cost of equity capital in fact appear to have rather increased under non‐local accounting standards.     

IFRS adoption: A costly change that keeps on costing

This paper documents the results of a study exploring the transitionary and ongoing costs incurred by Australian companies from their use of IFRS. A longitudinal survey approach was adopted. Challenging the underlying logic of convergence, survey results highlighted that IFRS is costly for firms both in the lead up to adoption and thereafter. Specifically, the transition to IFRS imposed significant AIS, staff training and development, financial statement user education, and financial statement adjustment costs on many firms. Furthermore, many firms perceived that IFRS adoption has resulted in an ongoing increase of 20% or more on annual accounting and compliance costs.     

Effects of the Adoption of IFRS on the Credit Market: Evidence from Brazil

Based on a sample of approximately 6500 credit ratings and 137,000 loan contracts, this paper analyzes the effects of mandatory IFRS adoption on the Brazilian credit market. We find that the IFRS adoption effects were limited to firms displaying improved accounting information quality at the time of transition, lending support to the notion that economic benefits do not necessarily flow from the publication of financial reports in IFRS but, rather, depend on how earnestly firms adopt the recommended disclosure practices.     

The Effect of Mandatory IFRS Adoption on Financial Analysts’ Information Environment

This paper examines the effect of the mandatory adoption of International Financial Reporting Standards (IFRS) by the European Union on financial analysts’ information environment. To control for the effect of confounding concurrent events, we use a control sample of firms that had already voluntarily adopted IFRS at least two years prior to the mandatory adoption date. We find that analysts’ absolute forecast errors and forecast dispersion decrease relative to this control sample only for those mandatory IFRS adopters domiciled in countries with both strong enforcement regimes and domestic accounting standards that differ significantly from IFRS. Furthermore, for mandatory adopters domiciled in countries with both weak enforcement regimes and domestic accounting standards that differ significantly from IFRS, we find that forecast errors and dispersion decrease more for firms with stronger incentives for transparent financial reporting. These results highlight the important roles of enforcement regimes and firm‐level reporting incentives in determining the impact of mandatory IFRS adoption.     

Implications of the mandatory transition from national GAAP to IFRS — Empirical evidence from Germany

This paper analyses the differences between German GAAP and IFRS by quantifying the effects of the first-time adoption of IFRS of German companies in their reporting practices. Due to the IAS Regulation EC No.1606/2002, all publicly traded European companies (including those in Germany) are required to prepare their consolidated financial statements in accordance with IFRS for accounting periods beginning on or after January 1, 2005. This paper measures the effect of the transition from German GAAP to IFRS by using indices of comparability that were developed by Gray (1980). Therefore, the impact on equity and net income is quantified by examining the reconciliations of 103 German companies which had to adopt IFRS for their consolidated financial statements in 2005. On average a significant increase in stockholders' equity and in net income could be observed. The increase in stockholders' equity is primarily due to the adoption of IAS 11, IAS 16, IAS 37, IAS 38 and IFRS 3. Concerning net income, the increase especially results from the adoption of IFRS 3.     

Improving earnings quality: The effect of reporting incentives and accounting standards

We investigate the different effects on earnings quality of accounting standards and reporting incentives for Germany over the period 1994 to 2005. To this end, we control for reporting incentives at the firm level, instead of the country level, by using the timing of voluntary IFRS adoption as a proxy for reporting incentives. We then include reporting incentives in an analysis of earnings management and information asymmetry. Contrary to common expectation, we find that IFRS reporting potentially decreases earnings quality on average; but also that reporting incentives appear to have lower effects on earnings quality in IFRS statements than in GGAAP statements. Thus, IFRS may lead to more homogenous earnings quality across firms.     

Evolving Connections Between Tax and Financial Reporting in Italy

We analyze the evolution of the relationship between tax and financial reporting in Italy after the mandatory introduction of International Financial Reporting Standards (IFRS) in 2005. Italy represents an interesting case study among European countries, with domestic generally accepted accounting principles (GAAP) oriented towards creditor protection and characterized by a close connection of financial and tax accounting. Unusually, the adoption of IFRS is compulsory for the unconsolidated financial statements of listed companies, but the process of alignment of domestic GAAP to IFRS, that has affected some countries, has had little effect on Italy. Thus, two accounting systems, IFRS and Italian GAAP, are used for the preparation of unconsolidated financial statements by different categories of companies and, as a consequence, two different linkages between tax and financial reporting emerge. In order to assess the degree and the direction of the book-tax linkages we use the methodology developed by Lamb, Nobes and Roberts (1998. International variations in the connections between tax and financial reporting, Accounting and Business Research, 28(3), pp. 173–188). IFRS and tax reporting show a high degree of disconnection, while Italian GAAP, in line with the accounting tradition of most continental European countries, are closely related to tax rules. The analysis points out a rapidly evolving situation, with links between accounting systems and taxation becoming tighter, mainly because of the changes in tax law introduced during the last few years.     

Accounting Policies in the Extractive Industry: A Global and a Turkish Perspective

This paper investigates the influence of accounting standards on financial reporting for companies in the extractive industry. In Turkey, listed firms have prepared their financial reports according to the International Accounting Standards and the International Financial Reporting Standards (IAS/IFRS) since 2005, as has the European Union. The aim of this study is to determine the degree of compliance with IFRS 6, comparing global and Turkish extractive entities. We find that the entities reporting in accordance with IFRS 6 in Turkey are more likely to fail to declare their accounting policies, whereas global companies are more likely to be compliant with IFRS 6.     

Are international accounting standards more credit relevant than domestic standards?

We examine whether the credit relevance of financial statements, defined as the ability of accounting numbers to explain credit ratings, is higher after firms are required to report under International Financial Reporting Standards (IFRS). We find an improvement in credit relevance for firms in 17 countries after mandatory IFRS reporting is introduced in 2005; this increase is higher than that reported for a matched sample of US firms. The increase in credit relevance is particularly pronounced for higher risk speculative-grade issuers, where accounting information is predicted to be more important; and for IFRS adopters with large first-time reconciliations, where the impact of IFRS is expected to be greater. These tests provide reassurance that the overall enhancement in estimated credit relevance is driven by accounting changes related to IFRS adoption. Our results suggest that credit rating analysts’ views of economic fundamentals are more closely aligned with IFRS numbers, and that analysts anticipate at least some of the effects of the IFRS transition.     

Financial reporting changes and the internal information environment: Evidence from SFAS 142

Using the adoption of SFAS 142 as an exogenous shock, we examine the effect of changes in financial reporting on firms’ internal information environment. We argue that complying with SFAS 142 induces managers to acquire new information and therefore improves their information sets. Interviews with executives and auditors confirm this argument. Using a difference-in-differences design, we find that firms affected by SFAS 142 (i.e., treatment firms) experience an improvement in management forecast accuracy in the post-SFAS 142 period. The increase is smaller for those with stronger monitoring in the pre-SFAS 142 period and greater for those with a higher likelihood of goodwill impairment. Furthermore, treatment firms with improvements in management forecast accuracy have higher M&A quality, internal capital allocation efficiency, and performance in the post-SFAS142 period. Overall, our findings indicate that changes in external financial reporting can lead to better corporate decisions via their impact on the internal information environment.     

The Effect of IFRS Adoption and Investor Protection on Earnings Quality Around the World

This study examines the effects of mandatory IFRS adoption and investor protection on the quality of accounting earnings in forty-six countries around the globe. The results suggest that earnings quality increases for mandatory IFRS adoption when a country's investor protection regime provides stronger protection. This study extends the current literature that shows that accounting practices are influenced by country-level macro settings. The results highlight the importance of investor protection for financial reporting quality and the need for regulators to design mechanisms that limit managers' earnings management practices.     

IFRS adoption and analysts’ earnings forecasts: Australian evidence

We study 145 large listed Australian firms to explore the impact of international financial reporting standards (IFRS) adoption on the properties of analysts’ forecasts and the role of firm disclosure about IFRS impact. We find that analyst forecast accuracy improves, and there is no significant change in dispersion in the adoption year, suggesting that analysts coped effectively with transition to IFRS. However, we do not observe the expected relationship between firms’ IFRS impact disclosures in their financial statements issued at the end of the transition year with forecast error and dispersion in the adoption year. The results question the timeliness and usefulness of financial statement disclosure, even in a setting where disclosure was mandated by accounting standards (AASB 1047 and AASB 1) and firms had strong incentives to provide information to analysts.