Local GAAP Research Articles

Transition to IFRS in Germany and Italy: impact on companies' reporting performance

Previous research has investigated the economic consequences of IFRS adoption, but there is little evidence on the impact of IFRS adoption on companies’ reporting performance by adopting a comparative approach. To this purpose, this study investigates the impact on reporting performance of IFRS transition for a sample of German and Italian companies listed on domestic stock exchanges. The analysis is conducted on the changes of magnitude of some key financial ratios, in order to highlight the most important differences and similarities between German and Italian companies due to the transition to IFRS. Our results show that IFRS adoption has changed the magnitude of the key financial ratios. These changes are the result of different accounting treatments under local GAAP and IFRS, which are mostly common to Germany and Italy.

Externalities of Financial Reporting Regulation: Evidence from Investment Efficiency of Voluntary Adopters of IFRS Before and After Mandatory Adoption Requirements

Financial disclosures have externalities; a disclosure by one firm can directly alter the cash flows of other firms, and can also can alter investors' beliefs about the distribution of other firms' cash flows and thereby affect their market values (Foster 1980, Foster 1981, Dye 1990). In seeking empirical evidence of such externalities, this study uses mandatory adoption of International Financial Reporting Standards (IFRS) as an exogenous event to examine how the changes in publicly available information of peer firms (mandatory IFRS adopters) impact upon the investment efficiency of other firms (prior voluntary IFRS adopters). We find that the probability of inefficient investment by prior voluntary adopters declines after IFRS adoption is mandated. Further, the probability of over- (under-) investment by voluntary adopters declines, relative to that of efficient investment, after mandatory adoption. Overall, we document positive externalities of mandatory IFRS adoption on the investment efficiency of prior voluntary adopters. However, we observe heterogeneity in these spillover effects at the firm level. Following Daske et al (2013)'s classification, we document that the observed improvements in investment efficiency are limited to 'serious' voluntary adopters. This finding is consistent with the argument that in the absence of effective enforcement mechanisms across all countries, the adoption of IFRS may be a 'cheap-talk game' for some voluntary adopters. Finally, we find that spillover effects are limited to the prior voluntary adopters from countries with large differences between local GAAP and IFRS. This suggests that the externalities of financial disclosures increase with improvements in the comparability of accounting information.

Spectacular Airlines, Inc.: Implications of the Transition to IFRS in the Context of Cross-Border Acquisitions

ABSTRACTWith increasing global convergence of accounting standards, integration of International Financial Reporting Standards (IFRS) materials in accounting curricula is gaining growing attention worldwide. The Spectacular Airlines case provides an opportunity for you to develop critical thinking skills by requiring you to apply basic accounting concepts to account for customer loyalty programs. It then asks you to identify and apply professional accounting literature to address accounting issues faced by the potential acquirer of Spectacular. Specifically, the case addresses the liability and revenue recognition issues for the frequent flyer plans of airlines, a context in which multiple conceptual approaches are possible and diverse accounting practices are followed. The case helps you to (1) improve your understanding of the importance of financial reporting issues in the context of a real-world business decision, such as cross-border mergers and acquisitions (M&A), (2) research U.S. GAAP and IFRS for addressing revenue recognition issues for customer loyalty programs, (3) understand complexities in the application of an accounting standard in a real-world setting, and (4) evaluate the effects of transition from the local GAAP to IFRS on businesses, their financial statements and ratios.

Interpretive Dialogue: Cultural, Socio Spiritual Dimensions and Auditors’ Competence in Implementing IFRS Convergence in Indonesia

Convergence of local GAAP to IFRS in Indonesia was influenced by cultural, socio-spiritual and internal auditors’ competence when they report the financial statements to the management. This study used the interpretive paradigm as a tool to answer the research questions and supported by empirical facts that utilized the theory as the basis for analyzing the realities during the research process. The aim of this research is to determine the relevant values of the dimensions of cultural, spiritual and internal auditors’ competence to implement IFRS convergence in Indonesia. The results of this study indicate that the internal auditors within the scope of social life cannot separate the elements of culture that was formed in the implementation of IFRS convergence on the financial statements. Internal auditors understand their task as well as spiritual and worldly. Internal auditors’ competence was interpreted as sufficient capability through formal education and experience as an accountant. Suggestions and limitations also presented in this study for further research consideration.KEYWORDS: Culture, International Financial Reporting System, socio spiritual accounting,auditors’ competence, descriptive design, Indonesia interpretative paradigm

Determinants Of The Write-Off Decision Under IFRS: Evidence From Germany

This study examines the factors that influence write-off decisions in German-listed companies. Write-offs have been widely discussed, especially for the US-American market, and a relation to earnings management has been found in existing studies. German companies differentiate from the companies that have already been analyzed as they operate under different accounting standards (IFRS) and in a different institutional setting.Additionally, managers are confronted with the task to derive the IFRS annual statements from the existing annual statements according to local GAAP which follow a differing objective. Based on a sample of 805 observations of German companies listed in the DAX, MDAX, TecDax and SDAX indices between 2004 and 2010, we analyze the impact of firm performance as well as reporting incentives on the write-off decision. We find that the write-off probability rises significantly with decreasing overall firm performance, which is in line with the legal requirements. Additionally, we find a strong relation of the write-off probability with unexpectedly high earnings, which is an indicator for income smoothing. Besides influencing the shareholders perception, income smoothing can serve to minimize overall tax payments or to influence the banks risk assessment. In contrast with prior studies focusing on the US-American market, we found no evidence for other capital market motives, like big bath accounting and management changes; neither could we confirm the hypothesis that earnings-based management compensation or leverage have a significant influence on the write-off decision. These results indicate that German managers aim to influence tax payments and potential lenders in contrast to the perception of potential shareholders.

Asset Write‐offs in Private Firms – The Case of German SMEs

AbstractThis paper finds that private firms make the decision to write off, and write off more in terms of total amount, if they are: (i) more profitable, (ii) have more financial debt, and (iii) pay dividends. Our findings are contrary to expectations based on accounting standards and the existing revaluation literature. They are, however, consistent with the codified, high book‐tax alignment economic setting in which sample private firms operate. This includes agency problems faced by private firms’ stakeholders. We use a comprehensive sample of German SMEs reporting in local GAAP, based on the German commercial code (Handelsgesetzbuch) in 2003–2006. We view write‐offs as corrections of departures of book values from their underlying economic values, in contrast to upward asset revaluations. This governs our choice of estimation – the tobit regression.

Financial Reporting, Financial Regulation, and Financial Stability: Evidence from German Bank Failures in 2007-2008

We investigate three prominent German bank failures in the financial crisis of 2007-2008, IKB Deutsche Industriebank, Landesbank Sachsen, and Hypo Real Estate (HRE). The cases provide a unique setting to analyze the interrelation between financial reporting, regulation, and financial stability. All three banks were regulated based on German local GAAP, not International Financial Reporting Standards (IFRS) even though IKB and HRE were required to publish reports based on IFRS. Thus, some of the most spectacular failures early in the crisis occurred for banks that were regulated based on historical cost accounting. Regulation based on historical cost did not prevent these banks from taking on very high leverage, and it did not result in an effective cushion in the crisis.

Impact of Adopting International Financial Reporting Standards: Empirical Evidence from Turkey

In this study, the impact of adopting International Financial Reporting Standards (IFRSs) on listed companies in Turkey was examined. We observed the financial statements that were prepared in accordance with IFRS and local GAAP and researched the standards which included more relevant information. We worked on the financial statements of the companies in the Istanbul Stock Exchange (ISE) that operated in the manufacturing industry. In our findings, we determined that the financial statements prepared in accordance with local GAAP and IFRS were statistically different. Significant differences were identified in inventories, fixed asset, long term liability and stockholders’ equity accounts in the financial statements. In addition, current ratios, receivables turnover ratios, asset turnover ratios, total liabilities/tangible assets, fixed assets turnovers, equity turnover rates, short term liabilities/total debts and short term liabilities/total assets ratios based on IFRS financial statements were statistically and significantly distinguished from the stated ratios of local GAAP financial statements. We were unable to observe statistically significant differences in book value/market value ratio analysis depending on the market value under local GAAP and IFRS. However, in subsector analysis, we identified that some subsector groups have been affected from the transition to IFRS.

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Research on the Mandatory Transition from the Local Gaap to IFRS in Canada and its Impact on Value Relevance of Accounting Information

After January 1, 2011, all publicly traded Canadian companies were required to switch from the Canadian GAAP to IFRS. In their 2011 annual reports, those firms were required to present restated 2010 financial statements under IFRS for comparison purpose too. Therefore, the transition year of 2010 offers a unique setting for researchers to examine two sets of accounting data under different accounting standards, and the impact of accounting regime change on the quality of financial statements. This paper examines 532 listed Canadian companies in 2011. We find that the transition has a small but statistically significant impact on certain balance sheet items, esp., total liabilities, book value of equity and property, plant and equipment. In the transition year of 2011, return on assets is found to be lower under IFRS than under the Canadian GAAP. Interestingly, companies with a negative ROA under the Canadian GAAP had even more negative ROA under IFRS in 2010. Further tests imply that they might have taken advantage of the transition period with a big bath for future reporting benefits. Lastly, we show that the partial and full earnings disclosures under the IFRS regime provide incremental information to the market and are thus value relevant. Our study addresses a timely issue and could be useful to the market regulators in Canada.

Convergência internacional: análise da relação entre o processo normativo e a composição dos membros do IASB

The IASB, International Accounting organization that leads the convergence of accounting standards, suffers criticism ranging from the creation and formation until the regulatory process itself. Such criticism seek to bring the idea that drives in the preparation of accounting standards and changes end up following a schedule in accordance with the interests of the major countries that finance the organization, as well as their sponsoring companies. Accordingly, the objective of this study is to analyze the accounting standards that have a higher level of inconsistencies between local and international GAAP and assess whether they have changed due to geographic participation of members of the organization. Therefore, it was used as the search basis the GAAP Convergence 2001, which shows the differences between the local and international standards from 60 countries worldwide. It was drawn, then, a database containing such information, updated until 2010, besides a database containing the historical composition of the IASB members for the same period. The rules that were modified by IFRS were also included and the analyzes were performed in a qualitative way. The results show that there is no evidence of loss of neutrality from the participation of the IASB members, taking as a point that the continents with the highest representation does not have a higher level of standards with differences modified by the body through the IFRS, although these continents show a higher amount of local regulatory differences when compared with the IAS and IFRS. Based on the results, it can be inferred that the IASB regulatory process seeks to reduce the differences globally, bringing a set of standards based on the theoretical framework of accounting and which may be applied in a general way, without any differentiation by the organization to the reduction of differences in specific continents. As a suggestion, future research may deal with countries individually and their stages in the convergence process, as well as a possible identification, more specifically, in the standards development process, ensuring that the comments received through the Comment Letters to the IASB have some work on when processed by the body.

Causes and Consequences of a Voluntary Turn Away from IFRS to Local GAAP

This paper examines whether current IFRS are too extensive (i.e., costs exceed benefits) for small and mid-cap companies (SMCs). We analyze determinants and consequences of a turn away from IFRS, thereby exploiting a unique feature of the Swiss setting in which listed firms are allowed to switch from IFRS to Swiss GAAP, all else equal. We predict that small firms with high insider ownership are more likely to switch because of a lower demand for public accounting (IFRS) information. To the extent that the supply of information as required by IFRS exceeds the switching firms’ demand for information, we do not predict adverse capital-market effects after a switch. Consistent with predictions, we find that (a) small firms with higher insider ownership and fewer foreign investor holdings are more likely to switch, (b) switching firms substantially reduce their disclosures, and (c) only firms with more dispersed ownership experience a decrease in liquidity after they switch. Overall, our findings are important for standard setters and securities regulators in shaping the (future) reporting requirements for listed firms.

A French Experience of an IFRS Transition

ABSTRACT: In 2005, IFRS became mandatory for consolidated financial statements of French-listed companies. Our students had increasingly international backgrounds, internships, and jobs after graduation. Therefore, we felt the need to modify our French GAAP-based introductory accounting class to a course using IFRS. This article describes the challenges we faced and the solutions we adopted. Since French GAAP are rules-based and IFRS principles-based, the adoption of IFRS modified our learning goals, the learning strategy, and the assessment methods. We changed from a bookkeeping-oriented approach to one in which students have to define and analyze various transactions with respect to the conceptual framework using broader economic and financial concepts. We also had to modify student behavior from a learning attitude of repeating answers to one of finding answers, which meant further developing their analytical, synthesis, and judgment skills. Class material had to be adjusted to better reflect the complex reality and to allow students to make judgments, thus raising the question to what degree of detail certain topics are taught. This new approach also raised challenges in terms of providing feedback to students, grading, and student evaluation. By raising awareness about these issues, we want to contribute to a smoother transition when switching accounting classes from local GAAP to IFRS in other countries.

Does Mandatory IFRS Adoption Improve the Information Environment?*

More than 120 countries require or permit the use of International Financial Reporting Standards (IFRS) by publicly listed companies on the basis of higher information quality and accounting comparability from IFRS application. However, the empirical evidence about these presumed benefits is often conflicting and fails to distinguish between information quality and comparability. In this paper we examine the effect of mandatory IFRS adoption on firms’ information environment. We find that after mandatory IFRS adoption consensus forecast errors decrease for firms that mandatorily adopt IFRS relative to forecast errors of other firms. We also find decreasing forecast errors for voluntary adopters, but this effect is smaller and not robust. Moreover, we show that the magnitude of the forecast error decrease is associated with the firm‐specific differences between local GAAP and IFRS. This finding suggests that it is IFRS adoption rather than a correlated unobservable factor that is causing forecast errors to decrease. Exploiting individual analyst level data and isolating settings where analysts would benefit more from either increased comparability or higher quality information, we document that the improvement in the information environment is driven both by information and comparability effects. These results suggest that mandatory IFRS adoption has improved the quality of information intermediation in capital markets, and as a result firms’ information environment, by increasing both information quality and accounting comparability.

Value Relevance of Book Value Earnings Under the Local GAAP and IFRS: Evidence from Turkey

Bu calismada, Turkiye’deki muhasebe bilgilerinin hisse senetleri fiyatina yansimasinda Uluslararasi Finansal Raporlama Standartlari (UFRS)’nin etkisi ampirik olarak incelenmistir. 2005 yilindan itibaren Istanbul Menkul Kiymetler Borsasi (IMKB)’nda islem goren sirketlerin finansal tablolarini UFRS’ye uygun olarak hazirlayip sunmalari benimsenmistir. Ohlson (2005) tarafindan onerilen hisse senedi degerleme modeli kullanilarak oncelikle, ulusal muhasebe standartlarina (2000-2002 donemi) ve UFRS (2005-2009 donemi)’ye gore hesaplanan ozkaynak ve kar rakamlarinin hisse senedi fiyatina yansimasi analiz edilmistir. Daha sonra, zorunlu UFRS uygulamasindan elde edilen muhasebe bilgilerinin hisse senedi fiyati uzerindeki etkisi incelenmek uzere 2 ayri donem kiyaslanmistir. Yapilan analiz sonucunda, farkli her iki raporlama sistemine gore hesaplanan ozkaynak ve kar rakamlarinin birlikte ve ayri ayri, hisse senedi fiyatina olumlu ve onemli olcude yansidigi gorulmustur. Ayrica analiz sonuclari, ozkaynak rakamlarinin hisse senedi fiyatina kar rakamlarindan daha fazla yansidigini gostermistir. Iki farkli raporlama standardi kiyaslandiginda da UFRS’nin IMKB’de islem goren sirketlerin muhasebe bilgilerini hisse senetleri fiyatlarina daha iyi yansittigi sonucuna varilmistir. Bu calismayla muhasebe bilgilerinin hisse senetleri fiyatlarina yansimasi ve zorunlu UFRS uygulamalarina iliskin literaturde varolan tartismalara olumlu katki saglamasi dusunulmektedir

Mandatory IFRS Adoption and Institutional Investment Decisions

ABSTRACT We examine whether the mandatory introduction of International Financial Reporting Standards leads to an increase in institutional investor demand for equities. Using a large ownership database covering all types of institutional investors from around the world, we find that institutional holdings increase for mandatory IFRS adopters. Changes in holdings are concentrated around first-time annual reporting events. Second, we document that the positive IFRS effects on institutional holdings are concentrated among investors whose orientation and styles suggest they are most likely to benefit from higher quality financial statements, including active, value, and growth investors. These results are consistent with holdings changes being associated with the financial reporting regime change. Finally, we show that increased institutional holdings are concentrated in countries in which enforcement and reporting incentives are strongest, and where the differences between local GAAP and IFRS are relatively high. Overall, our study helps shed new light on the channels by which IFRS information becomes impounded in market outcomes. JEL Classifications: G11; K22; M41; M42. Data Availability: The data used in this study are available from the commercial sources identified in the paper.

Setting the Bar: Earnings Management During a Change in Accounting Standards

This study examines how European Union firms used the flexibility of IFRS 1 during the 2004/2005 mandatory transition from Local GAAPs to IFRS to set their 2004 reconciliated IFRS earnings. More precisely, we analyze earnings reconciliations published during the 2004/2005 mandatory transition from Local GAAPs to IFRS in Europe, a period during which firms had to disclose earnings both under the old GAAP and IFRS. Our sample is comprised of 1,635 firms from the nine countries subject to IFRS 1 where early adoption of IFRS was not allowed. We posit and find that firms with negative Local GAAP earnings are more likely to report positive Local GAAP-to-IFRS earnings reconciliations, while firms with large positive earnings under Local GAAP are more likely to report negative Local GAAP-to-IFRS earnings reconciliations. We also find firms that increase (decrease) their first benchmark IFRS earnings are more likely to show a decrease (increase) in earnings in subsequent reporting periods. Markets returns are associated with meeting or beating last year earnings only if managers set the bar high in the previous period, consistent with compensation related factors to this IFRS transition earnings management. Overall, this evidence is consistent with firms using the flexibility of IFRS1 and resulting reconciliations to manage their earnings.

Cost-of-Capital Effects of IFRS Reporting in the United States

This paper investigates the cost of equity capital effects of the SEC’s decision to eliminate the U.S. GAAP reconciliation requirement for cross-listed companies using IFRS. We use a sample of foreign domiciled firms that are cross-listed in the U.S. to conduct this investigation. We partition our cross-listed sample into three distinct groups: those firms that file using IFRS, those firms that file directly in U.S GAAP, and those that file in their own domestic GAAP with a 20-F reconciliation. For each of these groups we calculate cost of equity capital using a range of traditional measures and examine changes in these measures from 2006 to 2007 – the year that IFRS filers were no longer required to file a 20-F reconciliation. In order to ensure that the changes in the traditional cost of capital measures are not driven by firm fundamentals we control for firm specific factors when calculating an additional residual cost of capital measure. In contrast to prior research, we find evidence of a significant decline in residual cost of equity from 2006 to 2007 for IFRS filers in response to the elimination of U.S. GAAP reconciliations relative to both U.S. and non-U.S. local GAAP filers. Our results suggest that eliminating the reconciliation for IFRS filers does not weaken the information environment relative to U.S. GAAP.

Mandatory IFRS Adoption and Institutional Investment Decisions

We examine whether the mandatory introduction of International Financial Reporting Standards leads to an increase in institutional investor demand for equities. Using a large ownership database covering all types of institutional investors from around the world, we find that institutional holdings increase for mandatory IFRS adopters. Changes in holdings are concentrated around first-time annual reporting events. Second, we document that the positive IFRS effects on institutional holdings are concentrated among investors whose orientation and styles suggest they are most likely to benefit from higher quality financial statements, including active, value and growth investors. This result is consistent with the holdings changes being associated with the financial reporting regime change. Finally, we show that increased institutional holdings are concentrated in countries where enforcement and reporting incentives are strongest, and where the differences between local GAAP and IFRS are relatively high. Overall, our study helps shed new light on the channels by which IFRS information becomes impounded in market outcomes.

The Effect of Mandatory Adoption of IFRS on Earnings Quality: Evidence from the European Union

ABSTRACTThis paper addresses the question whether the mandatory adoption of International Financial Reporting Standards (IFRS) is associated with higher accounting quality. More specifically, we investigate whether the application of IFRS in 15 European Union (EU) countries is associated with less earnings management and higher timeliness, conditional conservatism, and value relevance of accounting numbers. Our results suggest that there has been some improvement in accounting quality between the pre- and post-IFRS adoption periods. In particular, we find that firms exhibit an increase in the accounting-based attributes, but a decrease in the market-based after the adoption of IFRS in 2005. Interestingly, the findings are more pronounced for the firms in countries where the distance between the pre-existing national GAAP and IFRS is important. Furthermore, we are unable to identify any change within firms that have converged their local GAAP toward IFRS before the mandatory transition.