The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from European Countries

Abstract

I present a summary and analysis of a series of papers from this special issue of Accounting in Europe that examine the role and current status of International Financial Reporting Standard (IFRS) in the completion of National Accounting Rules applicable to large ‘non-listed in a regulated market’ non-financial undertakings trading for gain in 25 European countries following the recent implementation of the new European Accounting Directive 2013/34/EU. IFRS has had a varying degree of influence across European countries. Some refer and are closely aligned to IFRS or to IFRS for small and medium-sized entities, some while influenced by IFRS retain complete independence and some show limited influence mostly when accounts are for other purposes such as taxation, dividend distribution or creditor protection. I present a number of classification schemes and contrast these with Nobes [(2008). Accounting classification in the IFRS Era. Australian Accounting Review, 18(3), 191–198] two group accounting classification of European accounting systems as strong equity/commercially driven versus weak equity/government driven/tax-dominated systems.     

IFRS Practices and the Persistence of Accounting System Classification

The earliest paper on international classification of accounting systems is one hundred years old. For about fifteen years from the late 1960s, many papers on the subject were published. One feature of several of the classifications was the dichotomous split of countries into Anglo and continental European. This has been extensively debated. This paper prepares a classification based on the accounting policy choices made by the largest listed companies of eight countries in 2008/9. All the companies were using the same reporting rules, International Financial Reporting Standards (IFRS). This classification by IFRS practices shows the same two groups as a classification of national practices drawn up in 1980, despite 30 years of harmonization. None of the classifications above or the more recent ones was based on the actual accounting practices of companies in annual reports. This has several disadvantages, as the paper investigates. This paper's classification is the first to be based on accounting practices, as well as being the first in the IFRS era. The paper also investigates the implications of the persistent differences in practices for assessing the success of the IASB's whole project on improving comparability of financial statements.     

IFRS implementation in the European Union and the survival of accounting families

This study examines eight IFRS implementation choices available to European Union (EU) and European Economic Area (EEA) member countries under the EU's 2002 IAS Regulation. Great disparities in IFRS implementation exist among the countries covered under the Regulation, including statistically significant differences in the IFRS elections for financial and non-financial firms. Using hierarchical cluster analysis, a classification of EU and EEA member countries according to similarities and differences in their IFRS implementation is developed, which identifies an IFRS antagonistic, an IFRS leaning, and an IFRS integrated group. These groupings may provide a springboard for future studies on effects of IFRS implementation differences. Following Meek and Thomas (2004) call to study the continuing relevance of taxonomies of accounting systems in the IFRS era, the study also provides evidence for a survival of the traditional micro-based vs. macro-uniform, strong vs. weak equity market, and outsider vs. insider economy classifications of accounting systems into the IFRS implementation decisions of EU and EEA member countries. These results suggest that traditional accounting system classifications remain important in the post-IFRS era.     

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.     

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.     

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.     

The persistence of international accounting differences as measured on transition to IFRS

The international accounting classification literature emphasises the importance of understanding how institutional factors shape accounting regulations and practices. With the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union and Australia in 2005, our empirical study examines whether three international accounting classification systems relating to equity financing, law and culture still had merit as measured on transition to IFRS and explore whether they are effective in grouping accounting systems. Using IFRS as the yardstick, we find statistically significant differences in the measurement of shareholders’ equity as between strong (Class A) versus weak (Class B) equity financing systems, common law versus code law systems and cultural systems based on ‘Anglo’, ‘Nordic’ and ‘More Developed Latin’ cultural groups. With regard to the measurement of net income, however, we find statistically significant differences only in respect of strong (Class A) versus weak (Class B) equity financing systems. Our findings demonstrate that traditional international accounting system differences still persisted at the time of IFRS adoption even after long periods of harmonisation and growing international accounting convergence.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Austria and Germany

Abstract

Austria and Germany share similar accounting traditions. International harmonization in both countries has mainly focused on group accounting. In contrast, single financial statements give rise to legal and tax consequences and, thus, are still tied to the traditional principles of orderly accounting. Recent regulatory changes confirmed this dual role of accounting in both countries, while moving local accounting rules closer to IFRS, although to different extents. We illustrate how recent regulations in the two countries made reference to IFRS, how IFRS was considered during the law-making process and outline major differences that remain between domestic and international accounting standards.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from France

Abstract

In France, the European accounting directive has been implemented via a decree and a ministerial order, issued without any public consultation and which led to an amendment of the Commercial Code and three regulations released by the Autorité des normes comptables, the French standard-setter. Our analysis of those texts reveals that none of them refer to International Financial Reporting Standards (IFRS). We did not find evidence of any reference to IFRS from the Autorité des marches financiers, the French market regulator, in its decisions on the right application of French Generally Accepted Accounting Principles by listed companies. Hence, IFRS seem to have played a minor role in the recent modification of French regulations resulting from the implementation of the European accounting directive.     

Public Policy and Accounting Research: What Is to Be Done?

Abstract

Singleton-Green [2010. The communication gap: Why doesn't accounting research make a greater contribution to debates on accounting policy? Accounting in Europe, 7(2), 129–145] argues that a communication gap between researchers and those involved in public debates on accounting problems significantly reduces the impact of accounting research. A new ICAEW report, The Effects of Mandatory IFRS Adoption in the EU: a Review of Empirical Research, tries to bridge the communication gap on the subject that it covers. The report found not only a significant amount of relevant research, but also that its usefulness was limited in various ways. The paper makes a number of recommendations to researchers: they should point out any biases in the data they use, address some issues through field work, not assume that surrounding institutions are unchanged, be careful to understand the specific features of the countries they cover, investigate differences in previous research, and state the economic significance of their findings. The paper also makes recommendations for non-academic participants in public policy debates, including: they should actively promote relevant research, help researchers get access to information, and help ensure that researchers have the incentives to do what is needed to benefit public policy.     

Using Google Trends to track the global interest in International Financial Reporting Standards: Evidence from big data

This study proposes a novel method for identifying international accounting differences under International Financial Reporting Standards (IFRS). Using Google Trends data extracted between January 2014 and August 2022, it creates an index, the Global IFRS/IAS Search Index (GISI), which comprises the search activities of 121 jurisdictions for 45 IFRS accounting standards. To assess its relative validity, I classify Nobes' (1983) 14 jurisdictions in addition to 20 OECD countries. The cluster analysis demonstrates that the GISI is a viable alternative for analyzing international differences under IFRS. The results indicate that incorporating big data could be beneficial for examining global accounting issues. A judgmental international classification of financial reporting practices     

True and Fair View Revisited – A Reply to Alexander and Nobes

This paper is a response to the critical comments of Alexander (2006) and Nobes (2006) on our article on revenue recognition, which was published last year in this journal (Wüstemann and Kierzek, 2005). While Alexander primarily objects to our statement that there is a ‘requirement of legal certainty in the European Union’, Nobes challenges our interpretation of the true and fair view principle and its role in the endorsement and application of International Financial Reporting Standards (IFRS) in the EU. We rebut Alexander's objections by providing references, which evidence that the principle of legal certainty represents a fundamental concept of Community law. We refute Nobes' counterarguments by inferring from the objective of the IAS Regulation and the purpose of the endorsement mechanism that a common meaning of the true and fair view principle must exist in the EU, that IFRS should only become applicable in the EU if they are not contrary to this ‘European’ true and fair view principle and that the true and fair view principle should also be considered in the application of IFRS in the EU, particularly in the choice of accounting policies for unregulated issues.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Italy

Abstract

We examine the recent changes that have affected the Italian accounting scenario after the adoption of the IFRS and the enactment of the European accounting system. In particular, we have focused our attention on the decision of the legislature to enlarge the mandatory adoption of IFRS to non-listed companies and to individual financial statements (FS). At the same time, we have observed the changes determined by the EU Directive 2013/34 on the Italian Civil Code and the FS legislation. Both set of changes are describing a process under which the Italian accounting rules are moving towards the international accounting standards and their framework, contents and methods. Therefore, the main differences among national rules and IFRS are grounded on the measurement rules and the role played by the historical cost principles and the strict and detailed regulation of the Balance sheet and Income statement formats.     

Layering of IFRS and Dual Institutionality of Accounting Standards in Belarus

There is an ongoing debate about the applicability and efficacy of International Financial Reporting Standards (IFRS) adoption in countries with diverse institutional infrastructures. We examine financial reporting in Belarus and factors that are shaping its development. In Belarus, IFRS has been adopted through layering where it is an additional requirement to the existing reporting specified by the national accounting regulations. We explore how global standards were transposed and function in a highly specific institutional context. Based on an examination of reporting in the banking sector, we conclude that different objectives of IFRS and local reporting contribute to dual institutionality of standards where differing formats target the needs of diverse users. Thus, adoption through layering is unlikely to contribute to convergence between different reporting standards used for different purposes, and parallel reporting is expected to persist. By examining financial reporting practices in Belarus, we provide insights for practitioners, regulators, and standard-setters on implementation of IFRS in countries with similar heavy state involvement, and still using local regulations and traditions in parallel with IFRS.     

Effects of Adoption of International Financial Reporting Standards in Belgium: The Evidence from BEL-20 Companies

This study examines the adoption of International Financial Reporting Standards (IFRS) by BEL-20 companies in Belgium. The research analyses the application of IFRS in the consolidated financial statements of Belgian publicly traded companies. In Belgium, as in several other continental European countries, a close link exists between accounting and taxation. The study provides insight into IFRS implementation problems based on a survey sent to BEL-20 companies. The survey focused on the impact that IFRS conversion has on companies, their internal organization and accounting and finance strategy. The benefits and challenges of the adoption of IFRS are analysed, as well as the level of understanding and experience with IFRS, perception of the quality of IFRS, and the impact of adoption of IFRS on consolidated equity and net income. Principal differences between IFRS and Belgian generally accepted accounting principles (GAAP), having a major impact on the conversion to IFRS, are identified. This study should be important not only to the European Union (EU) countries but to countries which will join the EU in the future, and to other countries worldwide that are adopting IFRS.     

Measuring Country Differences in Enforcement of Accounting Standards: An Audit and Enforcement Proxy

In this paper we present an index designed to capture differences between countries in relation to the institutional setting for financial reporting, specifically the auditing of financial statements and the enforcement of compliance with each country's accounting standards. The use of a common set of standards such as International Financial Reporting Standards (IFRS) aims, in broad terms, to promote the comparability and transparency of financial statements and to improve the quality of financial reporting. However, the effectiveness of IFRS adoption may be hampered by differences, across countries, in the institutional setting in which financial reporting occurs. Studies of outcomes from adopting IFRS use a range of legal system proxies to capture these country differences, but the proxies are deficient in that they seldom focus explicitly on factors that affect how compliance with accounting standards is promoted through external audit and the activities of independent enforcement bodies. To address this deficiency, we calculate measures of the quality of the public company auditors’ working environment (AUDIT) and the degree of accounting enforcement activity (ENFORCE) by independent enforcement bodies. We do this for 51 countries for each of the years 2002, 2005 and 2008, using publicly available data provided by the International Federation of Accountants (IFAC), the World Bank and the national securities regulators. Preliminary tests suggest our indices have additional explanatory power (over more general legal proxies) for country‐level measures of economic and market activity, financial transparency and earnings management. We expect they will prove useful to researchers and other interested parties who require country‐level measures that focus on the degree of enforcement of financial reporting practices.     

The Impact of IFRS 16 on Key Financial Ratios: A New Methodological Approach

In January 2016, the International Accounting Standards Board issued a new standard for lease accounting: International Financial Reporting Starndard (IFRS) 16. IFRS 16 will lead to the capitalisation of the majority of current operating leases by lessees. We analyse the impact of the new accounting model on entity’s key financial, contributing to research by making significant changes in the Imhoff et al. [(1991). Operating leases: Impact of constructive capitalization. Accounting Horizons, 5(1), 51–63. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&;db=buh&;AN=9604010111&;site=ehost-live; (1997). Operating leases: Income effects of constructive capitalization. Accounting Horizons, 11(2), 12–32. Retrieved from http://0-search.proquest.com.fama.us.es/docview/208896121?accountid=14744] methodology used by previous authors. We change how the lease term is estimated (more aligned with the final approved standard), and how the discount rate is obtained. Furthermore, we use a more comprehensive sample (646 quoted European companies). In line with previous research we find important systematic impacts on key balance sheet financial ratios (mainly leverage ratios), on a magnitude that depends on the operating lease intensity of the sector in which the entity operates. Our estimated impact is generally higher than that obtained in previous studies. The most affected sectors are retail, hotels and transportation. We do not find a consistent result with regard to the effect on profitability ratios.     

The Role and Current Status of IFRS in the Completion of National Accounting Rules – Evidence from Switzerland

Abstract

Although Switzerland is not a member of the European Union, the EU directives have largely influenced the Swiss accounting regulation. IFRS also have been highly influential since many large companies used them long before they became mandatory for listed firms. Moreover, IFRS served as a benchmark for the development of Swiss GAAP. This article compares the current Swiss accounting regulation to the new EU accounting directive and to IFRS. Despite many similarities, the Swiss regulation retains major specificities, the most notable being the permission of hidden reserves.     

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.     

Accounting Classification in the IFRS Era

The degree to which, and the purposes for which, International Financial Reporting Standards (IFRS) have been adopted vary internationally. This paper uses classification techniques in order to investigate the reaction of countries, or companies within them, to IFRS. In addition, this paper investigates five aspects of this; for example, whether European countries mandate IFRS for unconsolidated financial reports. Previous classifications in accounting are used to help to predict and explain this.