«Stefano Zambon (University of Ferrara) & Michela Cordazzo (Free University of Bolzano/Bozen) Corresponding author: Univ. Prof. Dr. Stefano Zambon ...»
Since basing an empirical analysis on a sample of only 3 German companies would have been worthless, further German companies have been selected. These companies are identified as follows: firstly, we have considered the minimum and maximum amount of revenues reported in 2007 among the sampled Italian companies. Then we have sampled the nonfinancial German listed companies whose revenues drop in the Italian range by using Datastream. The result has been a sample of 98 German companies. Of these 98 companies, 22 were DAX30 companies, and they have not been considered because early adopters. Out of these 76 companies 38 were discarded because they have applied IFRS before 1 January 2005, 12 because they were not listed at the time of transition to IFRS, and 9 because they applied US GAAP instead of German-GAAP before the IFRS transition. This leaves the sample with 17 additional German companies. Two of these 17 companies do not provide any information about the transition, since they are not required to prepare consolidated financial statements before applying IFRS and they have not been included.
The final sample consists of 35 companies, 17 Italian and 18 German companies (3 DAX30 companies and 15 non-DAX30 German companies). A detailed list of the companies is reported in Appendixes A and B.
Out of the 17 Italian companies, 1 company do not prepare both a reconciliation statement of equity and net income, i.e. only the amounts of equity and net income before and after the transition are shown, without providing information about the effects of the application of the IFRS on both figures (Table 4). Therefore, only the global impact on equity and net income have been analysed and no partial impacts have been taken into consideration. As regards to German companies, 3 companies do not prepare a reconciliation statement of both equity and net income, 1 company prepared only a reconciliation statement of equity, and 1 prepared only a reconciliation statement of net income. Also in these cases, where no reconciliation statement is provided, only the global impacts have been analysed, without considering the partial ones (Table 4).
The data comprises the reconciliation statements of both equity and net income from local GAAP to IFRS – as required by IFRS 1 – and the balance sheet and income statement figures prepared under local and international standards, which where included either in the audited financial reports of 2004, 2005 or 2006 or in a separate transition document. All the data have been hand-collected and obtained either from the websites of the Borsa Italiana, the Deutsche Börse AG or the companies included in the sample.
5.1. Global impacts The analysis of the global impacts on equity and net income is based on the calculation of the global index of proportionality. This index is calculated by considering the values reported in the reconciliation statements of equity or net income prepared during the transition from local GAAP to IFRS (if the reconciliation statements are provided), or otherwise by taking the equity or net income disclosed in the local GAAP and IFRS balance sheets and income statements (if the reconciliation statements are not provided).
A) Italy Tables 5 and 6 summarize the descriptive analysis, statistical significance and frequency of the global differences between Italian GAAP and IFRS for equity and net income.
The results suggest that equity under local GAAP does not differ significantly from that under IFRS, since the equity under IFRS is on average 0.06% lower than that under local GAAP. The calculation of the median also shows that the difference of equity between the two sets of accounting standards is minimal. Further evidence is given by Table 6, which shows that the majority of the companies analysed (52.93%) has an index laying between 0 and 5%. These results are confirmed applying the Wilcoxon signed rank test and the onesample t test on the means and medians, which indicate that the equity under IFRS is not significantly different from that reported under Italian GAAP. Nevertheless, while this may be true for the overall effect of the transition, the impacts on the single companies vary considerably. Indeed, while 58.82% of the companies registered an increase in equity due to the transition to IFRS, 35.29% registered a decrease, whereas 5.88% experienced no change in their equity figure.
While no substantial difference between local GAAP and IFRS have been found with respect to equity, net income has experienced a significant increase with the adoption of IFRS. The results of the analysis suggest that net income under IFRS is on average 14.94% higher than that reported under local GAAP, as shown by the 47.06% of the companies with an index of proportionality larger than 10%. An increase of net income due to the application of IFRS is confirmed also by the calculation of the median. The application of the Wilcoxon signed rank test and the one-sample t test confirms the significance of this result at 1%. Also in this case there are differences among the companies analysed. Indeed, while 70.59% of the companies registered an increase in net income, the remaining companies (29.41%) reported a decrease in their bottom line value.
Several studies have been conducted on the effects of the implementation of IFRS in Italy.
The study of the Osservatorio Bilanci of the University of Turin (2006) reveals that 99% of the companies analysed report an IFRS equity that is higher than the local GAAP equity and 79% of the companies have experienced an increase of net income due to the transition.
Cortesi et al. (2007) have calculated an average increase of equity of 9.8% and an average increase of net income of 1.5%. Also the study of Cordazzo (2008) confirms an increase of both accounting figures. She shows that, due to the transition to IFRS, equity has increased on average by 4.78%, while net income has increased on average by 25.34%.
B) Germany Tables 7 and 8 summarize the descriptive analysis, statistical significance and frequency of the global differences between local GAAP and IFRS with regard to equity and net income for German companies.
The results of the analysis suggest that companies have registered an average increase in equity of 5.5% with the adoption of IFRS in Germany. The calculation of the median, which is equal to 7.41%, confirms also this increment in equity. Additional evidence is given by Table 8, which shows that 66.67% of the companies have an index of proportionality equal to or larger than 5%. Furthermore, also the study of Hung and Subramanyam (2004) suggests that the application of IFRS in Germany leads to an average increase in equity. However, the application of the Wilcoxon signed rank test and the one-sample t test provides no significant evidence that supports the increase in equity. The adoption of IFRS has different impacts on the equity figure for companies. While 72.22% of the companies have reported an increase in equity, 27.78% have experienced a decrease in their equity value.
As regards the impact of IFRS transition in net income, the results of the analysis suggest that net income has on average decreased by 9.26% due to IFRS. This decrease takes into consideration also a company (Deutsche Telekom) which has an outstanding high negative global index of proportionality equals to -1.9090. If this company is not considered in the analysis, the average index of proportionality is positive and equals to 0.0143, which means a 1.43% increase of net income after the transition to IFRS. The study of O’Connell and Sullivan (2008) confirms a decrease in net income for German companies, but not too much importance should be put in that result, since the sample of German companies considered in their study is only composed by 3 (among which Deutsche Telekom). Therefore, the latter result (increase of net income by 1.43%) may be more representative, considering also that the median is equal to 0.0160, and 61.11% of the companies analysed have reported respectively an increase and 38.89% have reported a decrease of net income (Table 8). The Wilcoxon signed rank test and the one-sample t test confirm the non-significance of the result obtained for both the mean and the median.
5.2. Partial impacts The study of the partial impacts on equity and net income aims at showing how the individual adjustments explain any differences between domestic and IFRS equity and net income. The results of the individual analysis are based on the calculation of the partial index of proportionality, which takes its values from the reconciliation statements of equity or net income. Such reconciliations from local GAAP to IFRS provide detailed information about the single reconciling items, and consequently make it possible to establish the relative impact of individual IFRS on the accounting figures analysed. For those companies that provide only information about the overall impact on equity and net income, without disclosing any information about the changes in individual balance sheet line and income statement items, partial impacts have not been calculated. As already explained previously (Table 4), 4 companies (1 Italian and 3 German companies) do not prepare both a reconciliation statement of equity and net income, 1 German company prepare only a reconciliation statement of equity, while another German company prepare a reconciliation statement of net income but not of equity. This leaves us with a total of 16 reconciliation statements of equity and net income to analyse for Italy, whereas 14 reconciliation statements for both equity and net income have to be analysed for Germany.
The reconciliations statements analysed often group items differently or use different captions for similar items, which have made it not always easy to trace back a certain effect to a particular standard. 21 IFRS affecting equity have been found for Italy, while 17 have been identified for Germany in the IFRS transition process. With regard to net income, 18 IFRS have been identified for both Italy and Germany. The frequency distribution of all the IFRS affecting the local accounting figures in the transition to IFRS is included in Appendix C. For the purpose of the study, since the sample of companies analysed is already small and in order to obtain partial results sufficiently representative for both Italy and Germany, we have decided to examine only the effects of those IFRS that have affected the equity and net income figures of at least 10 companies per country in the transition process, i.e. more than 50% of companies sampled in each country. Tables 9, 10 and Tables 11, 12 summarize the descriptive analysis, statistical significance and frequency of the partial differences between local GAAP and IFRS due to IFRS with regard to equity and net income, respectively for Italy and Germany.
A) Italy Employee benefits According to the Italian Accounting Principle no. 19 – I fondi per rischi ed oneri. Il trattamento di fine rapporto di lavoro subordinato. I debiti and the requirements of the Italian Civil Code, staff leaving indemnities (Trattamento di Fine Rapporto – TFR) and other postemployment benefits have to be recognized based on the nominal liability matured at the financial statements’ closing date, i.e. the company’s actual commitment regarding the single employee, less advances paid and the tax advance required by the legislator, without taking into consideration the long-term character of the obligation.
According to IAS 19 – Employee benefits, staff leaving indemnities fall under the category of defined benefit obligations and shall therefore be recorded. Defined benefit obligations must be accounted for using the actuarial method, which requires the recognition of actuarial gains and losses, in order to reflect the effects resulting from changes in the actuarial assumptions (demographic, economic and financial assumptions regarding the company’s staff), and to calculate the present value of the benefit. These actuarial gains and losses can either be recognized in the profit and loss account immediately in the year when they occur or they can be deferred. In the latter case, IAS 19 specifies that if the accumulated unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognised immediately as income or expense (corridor-approach).