«Stefano Zambon (University of Ferrara) & Michela Cordazzo (Free University of Bolzano/Bozen) Corresponding author: Univ. Prof. Dr. Stefano Zambon ...»
Weißenberger et al. (2004) show that the largest German listed companies have voluntarily adopted IFRS or US GAAP since the mid 1990s. The change to an international accounting regime has been motivated primarily by the expectation of attaining improved standing on the capital markets. Other reasons are an improved supply of information, a more diversified and international body of investors and increased comparability with industry peers. Minor motives are the planning of a foreign listing or the recruiting of international employees.
Beckman et al. (2007) focus on the analysis of 22 German companies that, in the period between 1995 and 2002, provide a reconciliation statement of equity and net income as reported under HGB and under IFRS or US GAAP. They find that the major differences between the accounting figures under HGB and those under IFRS/US GAAP are due to the propensity of German companies to write off assets immediately and to accrue provisions in excess of those allowed under IFRS or US GAAP. Furthermore, it emerges that German companies tend to create hidden reserves in order to compensate for possible future losses or a drop in income. Although these findings may indicate a preference of German companies for conservative accounting practices, the study also shows that there is greater German aggressiveness rather than conservatism in the accounting for leases and in the revenue recognition practices for software and film licensing transactions relative to IFRS or US GAAP. Nevertheless, possibly due to the small sample size, latter findings are considered not to be value relevant.
3) Impact of IFRS transition on EU companies Aisbitt (2006) analyses the impact of the transition to IFRS on equity for the largest UK companies. Her study shows that equity reported under IFRS is not significantly different from that reported under UK GAAP. Nevertheless, she finds that, while the overall impact on equity is modest, the effect on individual line items is quite strong. The issues found to be most affected by the change are relating to retirement benefit obligations, PPE and financial instruments. Something similar has been also found by Horton and Serafeim (2006), who examine how UK companies react to the transition to IFRS, based on a sample of 85 companies listed on the London Stock Exchange FTSE 350.They show that the reconciliation adjustments from UK GAAP to IFRS is value relevant with respect to earnings, but not with respect to equity. Indeed, the study reveals that earnings under IFRS are lower than those under national GAAP. Another study based on UK companies is proposed by Christensen et al. (2007). They show that the mandatory IFRS adoption has not benefited all companies in a uniform way but has resulted in relative winners and losers.
Callao et al. (2007) focus their study on companies listed on the Spanish stock exchange.
On one hand they examine the impact of the transition to IFRS on various accounting variables and key economic and financial indicators, on the other hand they analyse the difference between book and market values. The study shows that local comparability is adversely affected if both IFRS and local accounting standards are applied in the same country at the same time. Furthermore, no improvement in the relevance of financial reporting to local stock market operators has been found.
Cordeiro et al. (2007) base their study on a sample of 39 Portuguese publicly-traded industrial companies. They find that all of the balance sheet and income statement items have registered important variations, increasing, in general, the total value of assets, capital, liabilities and net results. The most significant impacts on the balance sheet have been due to the adjustments to fixed financial assets and debt. Cordazzo (2008) focuses her study on the impact on net income and equity of the transition from local GAAP to IFRS for Italian listed companies. She finds that the implementation of IFRS has had a significant positive impact on earnings and a positive, but not as large impact, on equity.
Ferrer et al. (2008) analyze the impact of the transition to IFRS on the financial statements of groups listed in 11 European countries. The study shows that the adoption of IFRS has had a material impact on the financial information in the UK, Ireland, Sweden, France and Spain, especially on figures such as fixed and current assets, short-term liabilities and earnings. As a result, the ratios most affected by the switch to IFRS were solvency, indebtedness and ROE.
The impact has been more moderate in the remaining European countries.
Daske et al. (2008) have based their study on 26 countries all around the world. They find that mandatory adopters have experienced statistically significant increases in market liquidity after IFRS reporting became mandatory. Consistent with the liquidity improvements, they have also reported a decrease in the cost of capital of companies. They also show that the capital market benefits occurred only in those countries that have relatively strict enforcement regimes and those where the institutional environment provides strong incentives to companies to be transparent. O’Connell and Sullivan (2008) analyse the effects of the mandatory conversion to IFRS on net income for a sample of listed companies from 7 European countries. Their study shows that there is a significant increase in the 2004 net income of the companies sampled, but no significant differences in the impact of IFRS across the 7 countries are shown. Furthermore, they demonstrate that the most influential standard in driving the observed increase in net income after the transition is related to the accounting treatment of business combinations.
4.1. Measurement of global and partial impacts The empirical analysis is based upon two measures, the global and partial indexes of proportionality proposed by Cordazzo (2008), which is derived from the Index of Comparability (IC) introduced by Gray (1980). The global and the partial index of proportionality are used to assess the global and partial impact of the transition from local GAAP to IFRS on equity and net income. Precisely, they are used to compare the value of the investigated figures under national requirements with those under IFRS.
The global index of proportionality is calculated by dividing the distance between the value of the item under IFRS and that under local GAAP by the absolute value of the item under IFRS. The equation of the global index of proportionality for equity and net income is
where GIP_SEi, t is the global index of proportionality for equity for company i at time t, SE_IFRSi, t is the equity according to IFRS for company i at time t, and SE_LGAAPi, t is the equity according to the local GAAP for company i at time t; and
where GIP_NIi, t is the global index of proportionality for net income for company i at time t, NI_IFRSi, t is the net income according to IFRS for company i at time t, and NI_LGAAPi, t is the net income according to the local GAAP for company i at time t.
If the global index of proportionality assumes a value of 0, it means that there is no difference between the two sets of accounting standards, i.e. equity or net income have not changed after the transition. If the index assumes a value greater than 0, then the adoption of IFRS has determined an increase in the value of equity or net income. An index smaller than 0 indicates that the equity or net income reported under IFRS is less than the one reported under local GAAP.
The equity or net income figure under IFRS is chosen as the denominator in order to better assess the impact of IFRS on domestic financial statements and to provide a comparison across countries.
The partial index of proportionality allows establishing the relative impact of the partial adjustments to equity and net income. The equation of the partial index of proportionality for
equity and net income is as follows:
where PIP_SEi, j, t is the partial index of proportionality for the reconciling item j to equity for company i at time t, the partial adjustment is the amount of the reconciling item j to equity for company i at time t, and SE_IFRSi, t is the equity according to IFRS for company i at time t;
income for company i at time t, the partial adjustment is the amount of the reconciling item j to net income for company i at time t, and NI_IFRSi, t is the net income according to IFRS for company i at time t.
For consistency, if the partial index of proportionality assumes the value of 0, it means that the adoption of IFRS has no influence on the value of equity or net income. If the index assumes a value greater than 0, then the single adjustment has determined a positive impact on the value of equity or net income, i.e. the partial adjustment has incremented the value of the figure analysed. On the other hand, an index smaller than 0 indicates that the single adjustment has negatively affected the value of equity or net income, i.e. the value of the accounting figure analysed has decreased.
In order to test whether the means and the medians of the global or partial index of proportionality values are statistically significantly different from the neutral value 0, the twotailed Wilcoxon signed rank test for the medians and the two-tailed one-sample t test for the means are applied.
4.2. Data and sample selection The main objective of the paper is to examine the impact of the mandatory transition from local GAAP to IFRS on equity and net income in Italy and Germany. For this purpose, the sample comprises Italian MIB30 companies, German DAX30 and non-DAX30 companies according to the selection criteria in Table 3.
The initial idea was to base the study only on MIB30 and DAX30 companies, since they are companies with the highest stock market capitalisation and consequently best represent the Italian and German stock exchange. Both MIB30 and DAX30 are composed of companies operating in different business segments, among which the financial sector. Banks, insurance companies or other companies providing financial services have been excluded, due to the peculiarity of the financial market and its specific regulation, which do not make them comparable with the other companies.
Out of 30 MIB30 companies, 9 are either banks or insurance companies, 2 are foreign companies and other 2 are not listed at the time of transition to IFRS and are therefore discarded. This leaves us with a total of 17 MIB30 companies.
Out of 30 DAX30 companies, 6 are discarded because they are financial companies, 14 because they have applied IFRS prior to 1 January 2005 and 7 because they have prepared their financial statements in accordance with US GAAP before the transition to IFRS. The two latter categories of companies are so called early-adopters, i.e. companies that applied IFRS or US GAAP on a voluntary basis before 2005. Such companies benefited from what is stated in § 292a HGB, i.e. the possibility of preparing their consolidated financial statements in accordance with internationally accepted accounting principles (IAS or US GAAP), instead of preparing them in compliance with the national accounting requirements. As one can see, a substantial part of DAX30 companies have decided to make use of this opportunity.
Companies that converted to IFRS prior to 2005 are discarded, because they have applied such accounting standards on a voluntary basis and therefore they can not be considered for the purpose of the paper, which focuses on the compulsory transition from local GAAP to IFRS. Furthermore, since they are not required to comply with IFRS 1, some of them may not have prepared a reconciliation statement of equity and net income. On the other hand, companies that have applied US GAAP before the transition to IFRS are not considered either, since the purpose of the study is to show how equity and net income changed when switching from Italian or German GAAP to IFRS. As a result, out of 30 initial DAX30 companies, only 3 have been included in the sample.