«Stefano Zambon (University of Ferrara) & Michela Cordazzo (Free University of Bolzano/Bozen) Corresponding author: Univ. Prof. Dr. Stefano Zambon ...»
regular way purchases. Financial assets must be classified in one of the following categories:
a) financial assets at fair value through profit or loss; b) available-for-sale financial assets; c) loans and receivables; d) held-to-maturity investments. Financial liabilities must be classified in one of the following categories: a) financial liabilities at fair value through profit or loss; b) other financial liabilities measured at amortised cost using the effective interest method.
Initially, financial assets and liabilities should be measured at fair value. Subsequently, they should be measured at fair value, with some exceptions. Indeed, loans and receivables, heldto-maturity investments and non-derivative financial liabilities should be measured at amortised cost using the effective interest method, while financial assets held for trading, available-for-sale financial instruments and derivatives are valued at fair value.
The adoption of IAS 39 in Germany resulted in an average increase of equity by 0.61% and in an average decrease of net income by 2.6% (Table 11). The increase in equity is due to an increase of the number of assets recorded and in the assets value for financial instruments when firms switching from HGB to IFRS. This increment is likely because HGB requires lower of cost or market values for financial instruments, while IFRS generally uses fair values. The Wilcoxon signed rank test and the one-sample t test however do not support the significance of such differences. Indeed, by looking at the distribution of the partial index of proportionality for equity in Table 12, one can easily observe that the majority of the companies (84.62%) present a partial index of proportionality that lies below the absolute value of 5%, which confirms the non significance of the changes in equity.
5.3. Comparative analysis of global and partial impacts: Italy vs. Germany The results of the analysis show that the global difference between equity under Italian GAAP and that under IFRS is not significant, while net income under IFRS is significantly different from that under local GAAP. On the other hand, no significant change in equity and net income has been recognized with respect to Germany. Therefore, the hypothesis that IFRS transition has produced differences in the accounting figures under the two set of accounting standards is fully not accepted for German companies, and partially for Italy.
The analysis of the single standards considered demonstrates that the majority of both Italian and German companies listed on national stock exchanges reported changes in equity and net income mainly due to the IFRS accounting treatment of income taxes, pension plans, provisions, contingent liabilities and contingent assets and intangible assets. Additionally, Italian companies report changes in property, plants and equipment and goodwill, while German companies have been affected also by the different accounting valuation of financial instruments: recognition and measurement and inventories.
With regard to the recognition of provisions, the application of IAS 37 has on average increased equity of both Italian and German companies, while a decrease in net income has been registered. For both countries the explanation of higher equity lies in the fact that the requirements of IAS 37 are more stringent than national rules. Indeed, whereas national GAAP allow the recognition of provisions without existing obligations to third parties, this is not possible under IFRS. Consistent with derecognition and related decrease in provisions, equity increases. 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. These results however are significant only with respect to equity. Indeed, the Wilcoxon signed rank test confirms a significant difference at 10% and 5% for Italy and Germany respectively. The onesample t test confirms the difference between local GAAP and IFRS only for German companies at 5%.
The application of IAS 38 has led to an average increase of both equity and net income in Italy, as well as for equity in Germany. In Italy the increase in equity is mainly due to the surprising increase in development costs of Fiat, which distorts the overall result. Indeed, all other Italian companies except one experience a decrease in equity, mainly due to the 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 to lower amortization charges, which are the result of lower intangible assets to amortize. On the other hand, in Germany the increase in equity is due to the capitalization of internally developed intangibles and development cost which could not be capitalized under German GAAP, but can or must be capitalized under IFRS. The application of the Wilcoxon signed rank test shows a significant difference between the local GAAP and IFRS equity at 10% and 5% for Italy and Germany respectively. The one-sample t test confirms this difference at 10% for the mean of German companies only. With regard to net income, the application of the Wilcoxon signed rank test and the t test confirm the significance of the results at 1% for the median and 10% for the mean of Italian companies.
The implementation of IAS 12 has caused an average increase of both equity and net income for German companies, while an increase in equity and a decrease in net income have been registered with respect to Italy. For both countries, the differences between national GAAP and IFRS accounting figures are due to the differences between national tax reporting and IFRS requirements and to the effect that IAS 12 had on the recognition of other balance sheet or income statement items. The differences outlined above however are not supported by the Wilcoxon signed rank test and the one-sample t test.
Adopting IAS 19 in Italy and Germany has caused an average decrease in equity and an increase in net income for the companies analysed. The changes in equity and net income in Italy are mainly due to the calculation of employee benefits using the actuarial method. On the other hand, in Germany the decrease in equity is the direct consequence of the increase in pension obligations, as pension obligations not accounted for under German GAAP have now to be recognized under IFRS and lower discount factors are used for the calculation of the pension liability under IFRS. While the results obtained for equity are confirmed to be significant at 1% by the Wilcoxon signed rank test for both Italy and Germany and at 10% and 1% by the one-sample t test for Italy and Germany respectively, such differences are not confirmed for net income.
Concluding, while the adoption of IAS 12 and IAS 37 has had a similar impact on the equity and net income of both Italian and German companies and the changes were due mainly to similar reasons, this cannot be said for IAS 19 and IAS 38, as the explanations of the changes in Italy do not coincide with those in Germany.
6. Conclusion and limitations of the analysis The present study examines how the mandatory adoption of IFRS has impacted on the reported equity and net income figures of Italian and German companies listed on domestic stock exchanges.
In order to achieve such a purpose, we first evaluate the global effect of the transition from local GAAP to IFRS on equity and net income. The results show that the global difference between equity under Italian GAAP and that under IFRS is not significant, whilst net income under IFRS is significantly different from that under local GAAP. On the other hand, no significant change in equity and net income has been recognized in respect to Germany.
Therefore, the hypothesis that IFRS transition has produced differences in the accounting figures under the two sets of accounting standards is not fully accepted for German companies, and only partially for Italy.
Then, we analyze the impact of the single IFRS standards on both accounting figures, which allows a measure of the impact of each relative accounting difference for a more detailed analysis. The partial analysis demonstrates that the majority of both Italian and German companies listed on national stock exchanges reported changes in equity and net income mainly due to the IFRS accounting treatment of income taxes, pension plans, provisions, contingent liabilities and contingent assets, and intangible assets. Additionally, Italian companies report changes in property, plants and equipment and business combinations, while German companies have been affected also by the different accounting valuation of financial instruments and inventories.
Some implications have to be considered in the way of which the Italian and German sampled companies have applied the IFRS transition for the first time.
A first aspect that has to be considered is that while the Italian accounting figures show globally a significant impact of IFRS conversion, in Germany it seems that equity and net income have not been influenced by such a conversion. This would lead to the conclusion that German companies have not globally been exposed to any influence of IFRS conversion, but the partial analysis does not confirm this result. In particular, the impact of the IFRS conversion affecting areas relating to fair value reporting, depreciation and amortization, and deferred taxes underlines how such a conversion have removed some conservative key-issues existing in Italian and German accounting system, as well as it has made a deep revision and improvement of such accounting systems.
On the other hand, the results of partial analysis confirm some similarities of Italian and German accounting system, which reaffirms their classification within the continental European accounting models according to the international accounting classifications (Alexander and Nobes, 2007). Even though it must be considered that the importance of EU’s decision to promote and request the mandatory application of IFRS is to promote the accounting harmonization between such classifications (Anglo-Saxon and continental European systems), and that companies would not have apply such accounting standards otherwise and would preserve their traditional accounting models (Daske et al., 2008). Our results demonstrate the efforts for accounting harmonization of EU and the extent of the effective implementation in removing the existing differences among the traditional accounting models and IFRS.
The main contribution of this paper is to provide insights to the impacts on accounting figures of Italian and German companies by adopting a comparative approach, being both countries characterized by a rigid and legalistic national accounting system. Our results should be of interest to academics, practitioners and regulators researching and being involved in the mandatory transition to IFRS. Our results may help regulators to improve the process of conversion in Italy and Germany to IFRS for all companies, while academics and practitioners should benefit from the findings by highlighting the comparability problems between the two countries investigated as well as between each country and IFRS.
However, this paper has some limitations. Since the sample of companies is small for both Italy and Germany, the results may not be representative of the population of all Italian and German companies listed on national stock exchanges. It would be worth repeating the study for all companies applying IFRS. Further, the empirical analysis is focused during the first application of IFRS. It would be interesting to see if similar results have been achieved after several years with IFRS application, when companies have defined their accounting policies upon IFRS mandatory application.
In conclusion, from this study Italy and Germany appear to be less “accounting soul sisters” than researchers might have previously thought. Accounting change may produce dissimilar repercussions even when accounting contexts, institutions and traditions are similar. This is an area calling for further research.
Figure 1 – Adoption of IFRS in Italy
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