«Stefano Zambon (University of Ferrara) & Michela Cordazzo (Free University of Bolzano/Bozen) Corresponding author: Univ. Prof. Dr. Stefano Zambon ...»
The variations in the recognition of staff leaving benefits and other post-employment benefits have decreased equity by 3.26% and increased net income by 0.49% (Table 9). Table 10 confirms this result showing that 64.29% (53.33%) of individual impacts on equity (net income) are classified with a partial index between -5% and 0 (0 and 5%). The application of the Wilcoxon signed rank test confirms the significance of the change in equity at 1%, while some evidence is provided by the one-sample t test at 10%. No significant difference however has been found with regard to net income.
Similar changes in equity and net income have been observed also by Allegrini (2007) and Cordazzo (2008). Indeed, their studies show that the relative impact of IAS 19 has been only minimal and that equity has decreased, while net income has increased.
Intangible assets According to the Italian Accounting Principle no. 24 – Le immobilizzazioni immateriali and the requirements of the Italian Civil Code, basic research costs have to be recognized as costs in the income statement when they occur, while applied research costs and development and advertising costs with deferred usefulness can be capitalized and must be depreciated over three years, except for project costs of new projects, which are depreciated over 5 years. Startup and expansion costs with deferred usefulness can be capitalized and depreciated over 5 years. Software development costs can be capitalized under certain circumstances.
According to IAS 38 – Intangible assets an asset shall be recognized in the financial statements if the definition of an intangible asset is met, the future economic benefits attributable to the asset will probably flow to the company and the cost can be measured reliably. Therefore, if an intangible item does not meet both the definition of and the criteria for recognition as an intangible asset, IAS 38 requires the expenditure on this item to be recognized as an expense when it is incurred. According to IAS 38, research costs have to be charged to expense when incurred, while development costs can be capitalized only after the technical and commercial feasibility of the asset for sale or use have been established. This means that the entity must intend and be able to complete intangible asset and either use it or sell it and be able to demonstrate how the asset will generate future economic benefits. Startup and expansion costs incurred in relation to transactions regarding share capital are directly deducted from the reserves in equity at the date of the transaction, while other start-up and expansion costs are charged to the income statement. With regard to the recognition of software development costs, IFRS pose more stringent conditions for their capitalization than Italian GAAP. Advertising costs must be charged to the income statement when incurred.
As shown in Table 9, the adoption of IAS 38 in Italy has led to an increase of 2.08% in equity and 5.3% in net income. The increase in equity is mostly due to the surprising increase in development costs of one company (Fiat), which had not capitalized those costs under previous GAAP. All other companies (except one, which reported a minor increase in equity) reported a decrease in equity, due to derecognition of certain intangible assets that can be capitalized under Italian GAAP, but do not meet the requisites for recognition under IAS 38.
The positive effect on net income is due not only to lower amortization charges regarding the intangible assets mentioned earlier, but also to the derecognition of amortization charges for goodwill, which is not capitalized and subsequently amortized anymore, but it is subject to an impairment test.
The application of the Wilcoxon signed rank test shows a significance of the result with respect to equity at 10% and net income at 1%, while the application of the one-sample t test shows a significance at 10% for the mean with reference to net income. The significance of the result for equity (net income) is explained by looking at Table 10, which shows that the majority of the companies (85.72% for equity and 92.31 for net income) have an index of proportionality which is negative (positive).
Business combinations According to the Italian Accounting Principle no. 24 – Le immobilizzazioni materiali and the requirements of the Italian Civil Code, the goodwill acquired in a business combination has to be capitalized and amortized over a period not exceeding 5 years since the date of acquisition. However, if it seems reasonable to believe that the goodwill’s life span exceeds 5 years, goodwill can be amortized over a maximum of 20 years.
IFRS 3– Business combinations prohibits the amortization of goodwill acquired in a business combination and instead requires the goodwill to be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired, in accordance with IAS 36 – Impairment of assets.
The adoption of this accounting principle in Italy has led to an average increase of 5.97% (22.37%) in equity (net income) (Table 9). This positive accounting impact on both accounting figures is due to the elimination of the amortization charges of goodwill. The application of the Wilcoxon signed rank test and the one-sample t test confirms the significance of the result at 1% and 5% respectively for both equity and net income. By looking at Table 10, one can recognize that no company has a negative partial index of proportionality with regard to equity, while 53.85% of the companies present a partial index of proportionality ≥ 10% with regard to net income. These results further confirm the positive effects on equity and net income of the adoption of IFRS 3.
Property, plant and equipment In accordance with the Italian Accounting Principle no. 16 – Le immobilizzazioni materiali, tangible fixed assets are recorded at purchase or production costs. These costs include accessory charges and costs directly attributable to the asset. Ordinary maintenance costs are fully charged to the profit and loss account, while maintenance costs of an incremental nature are attributed to fixed assets and subsequently depreciated over their useful life. The revaluation of the historical cost is not permitted, except for few and particular cases. Indeed, a substantial part of the companies analysed has revalued certain property, plant and equipment to amounts in excess of the historical cost, as permitted or required by specific laws of the countries in which the assets were located. These revaluations are credited to equity and the revalued assets are depreciated over their remaining useful lives. Furthermore, under Italian GAAP the land directly related to buildings included in property, plant and equipment is depreciated together with the related building depreciation. The depreciation of land is not permitted under IFRS.
As for Italian GAAP, IAS 16 – Property, plant and equipment establishes that a fixed asset should initially be recorded at cost. Cost includes all costs necessary to bring the asset to working condition for its intended use. This would include not only its original purchase price but also costs of site preparation, delivery and handling, installation, related professional fees for architects and engineers, and the estimated cost of dismantling and removing the asset and restoring the site. If the payment of an item of property, plant, and equipment is deferred, interest at a market rate must be recognized or imputed. Contrary to what required by the Italian accounting standard, IAS 16 permits two accounting models: the cost model and the revaluation model. The cost model establishes that, after recognition as an asset, an item of PPE shall be carried at its cost less any accumulated depreciation and accumulated impairment losses. The revaluation model establishes that, after recognition as an asset, an item of PPE whose fair value can be measured reliably shall be carried at a revalued amount, being its fair value at the date of the revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations shall be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period.
The application of IAS 16 in Italy has led to an average increase both in equity and in net income, respectively equals to 0.79% and 1.09% (Table 9). The impact of this standard on the two accounting figures is not very strong, mainly due to the low dissimilarities between the Italian accounting standard and IAS 16. Table 10 shows that the majority of the companies (90.91% for equity and 80% for net income) present a partial index of proportionality below 5% for both shareholders equity and net income. This is also confirmed by the Wilcoxon signed rank test and the one-sample t test, which state the non-significance of the differences between the two sets of accounting standards with respect to PPE. Nevertheless, the observed increase in equity could be due to the increase of the value of fixed assets, caused by the elimination of depreciation for land and the inclusion of dismantling and removal costs in historical costs. Such an increase enlarges depreciation charges, which decrease net income.
Provisions, contingent liabilities and contingent assets 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 establish that reserves for risks and charges are set aside to cover losses or payables that are of a precise nature, certain or likely to occur and whose amount or occurrence date cannot be determined at year end.
According to IAS 37 – Provisions, contingent liabilities and contingent assets, an entity must recognize a provision if and only if a present obligation (legal or constructive) has arisen as a result of a past event (the obligating event), the payment is probable (i.e. more likely than not) and the amount can be estimated reliably. Furthermore, the amount recognized as a provision should be the best estimate of the expenditure required to settle the present obligation at the balance sheet date, that is, the amount that an entity would rationally pay to settle the obligation at the balance sheet date or to transfer it to a third party. Consequently, provisions shall be reviewed at each balance sheet date and adjusted to reflect the current best estimate. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision shall be reversed. Additionally, where the effect of the time value of money is material, the amount of a provision shall be the present value of the expenditures expected to be required to settle the obligation. As one can see, the IFRS requirements are less flexible than the Italian ones.
The adoption of IAS 37 in Italy has led to an average increase of 1.16% in equity and to an average decrease of 1.43% in net income (Table 9). The increase in equity is due to the reductions in provisions, caused by the lack of the requirement of a present obligation for many provisions which were previously recorded under Italian GAAP. The decrease in net income may be due to the increase of amortization charges which result from the application of the actuarial method of valuation. The application of the Wilcoxon signed rank test confirms such a difference for equity at 10%, but not for net income. Probably because the partial index of proportionality of 81.82% of the companies lies below the absolute value of 5% (Table 10).
Income taxes In accordance with the Italian Accounting Principle no. 25 – Trattamento contabile delle imposte sul reddito, the requirements of the Italian Civil Code and TUIR, deferred taxes must be recognized as the temporary difference between the value of assets and liabilities reported for financial reporting purposes and those reported for tax purposes. Deferred tax liabilities are generally recognized for all temporary differences subject to tax imposition, whereas deferred tax assets are recognized only if it seems probable that in the following fiscal years enough taxable profit will be generated against which the deductible temporary differences can be utilised.