«Stefano Zambon (University of Ferrara) & Michela Cordazzo (Free University of Bolzano/Bozen) Corresponding author: Univ. Prof. Dr. Stefano Zambon ...»
Accounting Soul Sisters?
Implications of IFRS transition for company
financial reporting in Italy and Germany
Stefano Zambon (University of Ferrara)
Michela Cordazzo (Free University of Bolzano/Bozen)
Univ. Prof. Dr. Stefano Zambon
Faculty of Economics
University of Ferrara
Via Voltapaletto, 11
44121 Ferrara – Italy
Accounting Soul Sisters? Implications of IFRS transition for company
financial reporting in Italy and Germany Abstract EC Regulation 1606/2002 requires all listed EU companies to prepare their consolidated financial statements in accordance with IFRS for the years beginning January 1, 2005. The purpose of the paper is to study the impact on financial statements of the mandatory transition from local GAAP to IFRS for a sample of Italian and German companies listed on domestic stock exchanges. The study investigates the global effect of the implementation of IFRS, as well as the effect of each individual accounting adjustment which occurs on key accounting figures. The analysis of such effects is conducted in order to highlight the most important differences between Italian and German companies linked to the transition to IFRS. The interest of comparing companies from these two countries comes from the fact that they are generally included in the same national group of continental European countries which is characterised by a robust legalistic and creditor orientation as well as a strong tax influence on accounts. The results of the analysis suggest that the global effect on equity is not significant for both Italian and German companies, whereas that on net income shows a stronger impact on Italian than on German companies. In regard to the individual accounting adjustments, the most significant partial impacts on equity and net income are those concerning the treatment of employee benefits, provisions, intangible assets and goodwill for both Italian and German companies.
Key words: IFRS transition; Accounting practices; Measurement
1. Introduction The globalisation has promoted great interdependence between countries and capital markets and consequently has increased the demand for global regulatory coordination. With companies following the globalisation process and investors showing increasing interest in cross-border investment opportunities, it has become necessary to create a “common accounting language”, i.e. a set of accounting standards that are acknowledged internationally (McKinsey, 2002).
National regulations may differ considerably amongst countries for several reasons:
culture, legal system, taxation, political system, capitalmarkets (e.g. Zambon, 2002; Choi et al., 2002; Nobes and Parker, 2006). These differences can cause problems for those companies transacting business in several countries, since they may find it difficult to comply with more than one set of accounting standards, especially if there are important differences among the various sets. These differences can also cause problems for investors, who must struggle to compare companies whose financial statements are prepared in accordance with different accounting standards. Therefore, the creation of a unique set of accounting standards worldwide seems to be a good solution in order to ease both the reporting burden for companies and the burden of collecting financial information for investors.
After various attempts to harmonize the accounting regulation amid countries, in 2002 the European Parliament and the council of the European Union (EU) endorsed EC Regulation no. 1606/2002, which requires listed companies to prepare their consolidated financial statements in accordance with International Financial Reporting Standards (IFRS)1, issued by the International Accounting Standards Board (IASB).
Although the regulation has been a decisive step towards international harmonization of accounting standards and more comparable financial information, there are still considerable challenges to be faced in the effective enforcement of IFRS in Europe (Brown and Tarca, 2005). Indeed, contrary to what has been established by IFRS, national requirements in many continental European countries are driven by legal compliance, prudence, creditor protection and tax alignment (Nobes, 1998; Delvaille et al., 2005), and this makes it more difficult for If not stated differently, the term IFRS refers collectively to International Financial Reporting Standards issued by IASB, International Accounting Standards issued by IASC, and Interpretations by the International Financial Reporting Interpretations Committee (IFRIC) or the former Standing Interpretations Committee (SIC).
those countries to switch from national requirements to IFRS. Typical examples of this continental European approach are in fact Italy and Germany.
As a result of the controversies followed by the above mentioned legislative change, international accounting harmonization is being discussed by many accounting researchers worldwide for several years, and currently there is a wide array of research investigating the concrete effects that the adoption of IFRS has had on the financial reporting of companies.
In this perspective, the study provides an assessment of the impacts on financial statements of the mandatory transition from local GAAP to IFRS for a sample of Italian and German companies listed on domestic stock exchanges, by analyzing their reconciliation statements of equity and net income. The empirical analysis investigates not only the overall effect of the implementation of IFRS, but also the effects of the individual accounting standards on equity and net income, by focusing on the most important differences and similarities between Italian and German companies sampled. The comparison of the changes in equity and net income between Italian and German companies is prepared for a set of selected standards, precisely, those standards that were applied by the majority of the companies analysed.
We expect our results to be of interest to academics, practitioners and regulators researching and involved in the mandatory conversion to IFRS. The study provides insights into the range impacts on accounting figures of Italian and German companies by adopting a comparative approach, taking into consideration that both countries are characterized by quite rigid and legalistic national accounting systems that are very often assimilated and/or included in the same cluster (Alexander and Nobes, 2007; Nobes, 1983, 1992). Previous literature on the quantitative effects of IFRS mandatory transition does not focus on such a comparison.
The paper is organized as follows. The next section deals with the enforcement of IFRS in the European Union and in particular in Italy and Germany. Section 3 gives a brief review of the findings of the relevant prior research studies regarding the adoption of IFRS. Section 4 outlines the methodology and the sample selection criteria. The presentation of empirical results is provided in section 5, whilst the last section offers some concluding remarks.
2. The enforcement of IFRS in Italy and Germany The European Commission (EC) Regulation 1606/2002 of 19 July 2002 concerning the application of international accounting standards makes it mandatory for all EU listed companies to prepare their consolidated financial statements in accordance with IFRS for the years beginning on or after January 1, 2005. Precisely, Article 4 of the so-called IASRegulation states that all companies governed by the law of a member state shall prepare their consolidated accounts in conformity with IFRS if, at their balance sheet date, their securities are admitted to trading on a regulated market of any member state within the meaning of Article 1(13) of Council Directive 93/22/EEC of 10 May 1993 on investment services in the securities field. As a derogation to Article 4, Article 9 states that member states can choose to delay the use of IFRS until January 1, 2007 for those companies that are publicly traded both in the EU and on a regulated market outside the EU and therefore are already applying another set of internationally accepted standards (e.g. US GAAP), and for those companies that have issued only debt securities but no equity instruments.
Furthermore, member states can choose to extend the requirements of Article 4 to the individual financial statements of listed companies and to the consolidated and individual financial statements of non-listed companies (Article 5 of EC Regulation 1606/2002). If so, the commission and the other member states must be informed.
The Italian legislator has expressed its choices in Article 25 of Law 306/2003, where a series of entities different form listed companies and from companies that prepare consolidated financial statements are indicated. According to Law 306/2003 and aside from
what required by EC Regulation 1606/2002, the application of IFRS is mandatory for:
– all listed companies for their individual financial statements, – companies that issued financial instruments on the public market as defined by Article 116 TUF (Testo Unico della Finanza) for both the consolidated and individual financial statements, – banks and financial intermediaries that are subject to the supervision of the Banca d’Italia for both the consolidated and individual financial statements, – insurance companies for their consolidated and individual financial statements, but only if they are listed and do not have to prepare consolidated financial statements.
Law 306/2003 was followed and approved by Legislative Decree no. 38/2005 of 28 February 2005, which defines the rules of IFRS implementation. According to Legislative
Decree 38/2005 (Figure 1):
1) Listed companies, companies that issued financial instruments on the public market, banks and financial intermediaries supervised by the Banca d’Italia (except insurance companies) are required to prepare their consolidated financial statements in accordance with IFRS starting 1 January 2005. Furthermore, they have the possibility to apply IFRS to their individual financial statements for the year 2005. In 2006 the application of IFRS becomes mandatory also for the individual accounts.
2) Insurance companies are required to prepare their consolidated financial statements in compliance with IFRS starting 1 January 2005. They do not have to prepare their individual financial statements applying IFRS, unless they are listed and do not have to prepare consolidated financial statements.
3) Those companies that
a) are controlled by listed companies, banks or supervised financial intermediaries,
b) prepare consolidated financial statements,
c) are controlled by companies that prepare consolidated financial statements, are allowed to prepare their consolidated and individual financial statement in accordance with IFRS starting 1 January 2005. If this possibility is made use of, IFRS must be applied to both the consolidated and individual accounts.
4) Companies that are not controlled by companies required to prepare consolidated financial statements are allowed to prepare their individual accounts in accordance with IFRS starting at the date identified with decree by the Ministry of Finance and by the Ministry of Justice.
5) Small businesses that are allowed to prepare abridged financial statements (Article 2435-bis Civil Code)2 are excluded from the possibility to prepare their financial statements in accordance with IFRS.
All the companies mentioned above, i.e. those that are required to apply IFRS and those that voluntary adopt them for their individual or consolidated accounts, have to comply with the standards approved with EC Regulation 1725/2003 and the regulations following and disregard national GAAP. As derogation, Article 9 of Legislative Decree 38/2005 establishes that the format of the financial statements of listed companies has to be determined by the CONSOB (except for the format of financial statements of banks and insurance companies, which are determined by the Banca d’Italia and the ISVAP respectively).
In Germany, the requirements of EC Regulation 1606/2002 were adopted with the enactment of the so-called Bilanzrechtsreformgesetz – BilReG (Accounting Law Reform Act) Article 2435-bis Civil Code allows companies that have no financial securities listed on regulated markets to prepare and abridged form of their financial statements if in the first year of business or for two consecutive