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«Stefano Zambon (University of Ferrara) & Michela Cordazzo (Free University of Bolzano/Bozen) Corresponding author: Univ. Prof. Dr. Stefano Zambon ...»

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years, they do not exceed two of the following limits: i) total assets: 4,400,000 €, ii) sales and service revenues:

8,800,000 €, iii) average number of people employed in a year: 50 people.

of 4 December 2004 and included in the German Commercial Code in § 315a. BilReG does not deal exclusively with the options mentioned in Article 5 of the IAS-Regulation, but also with changes in auditing rules and financial reporting. With regard to the application of IFRS,

BilReG states the following (Table 1):

1) Companies that are not yet listed but have already applied for a trading of their securities on the German stock exchange are required to prepare their consolidated financial statements in accordance with IFRS starting 1 January 2007. In this case no consolidated accounts under German Commercial Code rules (Handelsgesetzbuch – HGB) are needed anymore.

2) Those companies that are not publicly traded and have not applied for a trading of their securities are allowed to present their consolidated financial statements on the basis of IFRS, instead of applying the rules of the Commercial Code starting 1 January 2003.

If a company chooses to prepare its consolidated accounts in compliance with IFRS, those have to be applied in total. Also here, if IFRS consolidated financial statements are prepared, the company is exempted from the preparation of consolidated financial statements under Commercial Code rules. Nevertheless, all companies are required to present their individual financial statements in accordance with German GAAP (HGB) for dividend distribution and tax calculations3, hence the HGB remains mandatory for the presentation of the individual accounts. IFRS individual financial statements however can be prepared for informative purposes. Large corporations may use IFRS instead of Commercial Code rules for the presentation of their individual accounts in the Federal Gazette. If these companies choose to This represents the application of the so-called Maßgeblichkeitsprinzip (authoritative principle), which is incorporated in § 5 EStG (German Income Tax Law) and which states that commercial financial statements form an authoritative basis for tax accounts.

apply IFRS, then they must apply them in full. Furthermore, they have to meet the following


a) both the directors’ report and the report of the supervisory board must be related to the financial statements based on IFRS,

b) the auditor’s report must refer to statements prepared in accordance with IFRS,

c) the individual financial statements according to Commercial Code rules and the related auditor’s report have to be filed with the commercial register,

d) the proposal concerning the distributions to the shareholders must be published.

3) Article 9 of EC Regulation 1606/2002 is fully adopted, which means that those companies whose debt securities are admitted only on a regulated market within the European Union or whose securities are admitted to public trading in the EU and in a non-member state and which, for that purpose, have been already using other internationally accepted standards, are allowed to postpone the application of IFRS for their consolidated accounts to financial years starting 1 January 2007.

3. Prior literature The mandatory adoption of IFRS for EU-listed companies has led many accounting researchers to study the different effects that the transition to IFRS has had on the financial statements, the earnings management and the quality of accounting disclosure of European companies. Indeed, while previous studies investigated issues related to possible consequences of the implementation of IFRS in the European Union, including the costs involved and potential problems associated with the transition to IFRS, more recent studies have focused on the material impact of the adoption of IFRS on the financial statements of EU companies. Some of these studies focus on the impacts of the mandatory transition on the companies of a single country (Aisbitt, 2006; Horton and Serafeim, 2006; Callao et al., 2007;

Christensen et al., 2007; Cordeiro et al., 2007; Cordazzo, 2008), whereas other studies focus on the implications of the introduction of IFRS for companies of the entire European Union or for companies of a set of selected countries (Daske et al., 2008; Ferrer, 2008; O’Connell and Sullivan, 2008). Furthermore, studies have been conducted not only relating to the consequences of the mandatory adoption of IFRS, but also of the voluntary adoption of IFRS, but also for the reasons that lead companies to adopt IFRS on a voluntary basis (Dumontier and Raffounier, 1998; Murphy, 1999; El-Gazzar et al., 1999; Ashbaugh, 2001; Leuz and Verrecchia, 2001; Street and Gray, 2002; Cuijpers and Buijink, 2005; Tarca, 2004;

Weißenberger, 2004; Beckman et al., 2007). A large body of accounting literature reflects on the comparison of different accounting systems, the reasons for these differences and the connected problems with the implementation of IFRS (Jermakowicz, 2004; Larson and Street, 2004; Sucher and Jindrichovska, 2004; Vellam, 2004).

For the purpose of this study, we consider it of interest to focus the literature review on the research that deals with such groups of studies that we classify as 1) implementing problems with the adoption of IFRS, 2) voluntary adoption of international accounting standards, and 3) impact of IFRS transition on EU companies. Tables 2.1, 2.2 and 2.3 offer a structured overview of the research papers considered.

1) Implementing problems with the adoption of IFRS In a study conducted on several EU countries prior to the mandatory adoption of IFRS, Larson and Street (2004) show that most EU companies did not have the intention to voluntarily adopt IFRS for their financial accounts and that, after the mandatory adoption of such accounting standards, companies preferred to preserve also their prior GAAP. This led to the development of a “two-standard system” in several countries, i.e. IFRS for consolidated financial statements of listed companies and national GAAP for non-listed companies. The study finds that the most common impediments to a conversion towards IFRS are limited national capital markets, insufficient guidance on first-time application of IFRS, the taxdriven nature of national accounting rules and the complexity of some standards (such as IAS 39). Furthermore, it also describes some countries’ concerns regarding the applicability of IFRS for SMEs.

In relation to Belgium, Jermakowicz (2004) finds that there has been a significant change in the internal and external reporting activities of Belgian companies and an impact on their reported equity and net income. Furthermore, she finds that the key challenge in the adoption of IFRS, especially for banks and insurance companies, is the use of fair value, which may result in more volatile values of assets and earnings. Other key challenges in the process of adopting IFRS are the complex nature of certain standards and the lack of adequate implementation guidance, which may lead to a different implementation of IFRS among EU countries. Another barrier to the adoption of IFRS has been identified to be the alignment between Belgian tax law and accounting standards. Similar obstacles have been found also by Vellam (2004), Sucher and Jindrichovska (2004). Vellam focuses the study on the implementation problems of IFRS in Poland. She finds that the major barriers in the adoption of IFRS are the tax-driven nature of the Polish accounting standards and the lack of concrete measures regarding the implementation of IFRS. The study conducted by Sucher and Jindrichovska reveals that the major problems with the implementation of IFRS in the Czech Republic are linked to the usage of fair value for measurement of certain items, and the taxalignment between commercial and tax accounts.

2) Voluntary adoption of international accounting standards Several studies have shown that many European companies adopted IFRS prior to 2005 on a voluntary basis. A study of the KPMG (2000) reveals that the main reasons that have led the CEOs of European companies to voluntarily switch from domestic accounting standards to Internationally Accepted Accounting Standards (e.g. IFRS or US GAAP) are, in order of importance: the possibility of increasing the availability of capital, the quality of the standards, the preferences of institutional investors, the possibility of decreasing cost of capital and the preferences of analysts.

Focusing on Swiss companies, Dumontier and Raffournier (1998) find that the early adopters of IFRS are larger, internationally diversified and less capital-intensive companies with a diffuse ownership, and argue that the decision to apply IFRS depends mainly on the pressures from the market. Also Murphy (1999) studies the reasons that led Swiss companies to adopt IFRS on a voluntary basis, and finds that such companies have a higher percentage of foreign sales and are more likely to be listed on a foreign stock exchange. El Gazzar et al.

(1999) find the same relationships using data from various EU countries and identify other circumstance positively influencing the voluntary adoption of IFRS by companies, such as being domiciled in an EU country and having a lower debt-to-equity ratio. Ball et al. (2000) argue that companies’ incentives to comply with IFRS depend on the penalties resulting from non-compliance. If the costs of compliance with IFRS are perceived to exceed the costs of non-compliance, companies are not willing to adopt IFRS.

Examining 211 companies listed on the London Stock Exchange that voluntarily applied IFRS or US GAAP, Ashbaugh (2001) identifies that non-US companies are more likely to use IFRS or US GAAP instead of local GAAP when they have equity shares traded on foreign exchange markets, as well as when IFRS or US GAAP result in more standardized accounting information relative to national GAAP. With regard to the choice between IFRS and US GAAP, the study shows that companies are more likely to adopt IFRS when they participate in seasoned equity offerings, as well as when IFRS are less costly to implement, since they require fewer adjustments from local GAAP relative to US GAAP. US GAAP are primarily adopted by those companies that are listed on US stock exchanges.

Leuz and Verrecchia (2001) analyse a sample of German companies applying either US GAAP or IFRS and show that they have lower bid-ask spreads and increased liquidity compared to companies using local GAAP. Street and Gray (2002) examine the financial statements of 279 companies that announced to prepare their financial statements in compliance with IFRS during the fiscal year 1998. The study reveals that, in many cases, the disclosed accounting policies are not consistent with IFRS.

Cuijpers and Buijink (2005) focus their study on 133 non-financial EU companies that have adopted non-local GAAP by 1999. They find that many of these companies are listed in the US financial markets or on the EASDAQ exchange in Brussels, they have more geographically dispersed operations, and they are based in countries with accounting standards of lower quality and where the adoption of accounting standards different from the national requirements is allowed. Furthermore, they find that companies adopting IFRS or US GAAP, especially early adopters, attract more financial analysts. They also test whether companies using IFRS or US GAAP experience a lower level of information asymmetry, but they do find no evidence supporting such an expectation. In their opinion the reason could lie in the fact that investors and financial analysts need time to understand the changes in the financial reporting of the companies that switched to non-local GAAP. On the other hand, Ball et al. (2003) argue that the lack of evidence of lower information asymmetry could be due to the fact that the quality of financial reporting is not primarily determined by accounting standards, but by the companies’ reporting incentives.

With respect to the choice between IFRS and US GAAP, Tarca (2004) demonstrates that companies using these standards are large-size, they have more foreign revenue and are more likely to have a foreign stock exchange listing. She also shows that companies in Germany, France and Japan make a greater use of IFRS/US GAAP than firms in the UK and Australia.

Furthermore, whilst companies in Germany and Japan are more likely to adopt IFRS, companies in the UK, France and Australia are more likely to make supplementary use of international standards. The study also shows that generally there is a greater use of US GAAP rather than IFRS.

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