The impact of changing from local GAAP to IFRS

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It seems logical to assume from the title of this paper that the conversion of the accounting rules from local GAAP to the IFRS has most certainly created various complications in the countries adapting the new standards. Therefore this essay will investigate the impact of what has cropped up from moving from GAAP to IFRS.

Essay Outline

Introduction

GAAP vs IFRS

The Path Of Convergence

Differences occurred changing from local GAAP to IFRS examples of European Countries

Impact of the transition

Conclusion

1. Introduction

This essay will discuss major differences between the GAAP and IFRS rules and I will present evidence showing the divergence between markets Pre-IFRS and Post-IFRS rules. Moreover the main target of this paper is the impact from the convergence of the above mentioned accounting rules. For this reason I have chosen to examine the following papers, articles and academic researches:

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Susana Callao, José I. Jarne and José A. Laínez "Adoption of IFRS in Spain: Effect on the comparability and relevance of financial reporting",

R. Cuijpers, W Buijink "Voluntary adoption of non-local GAAP in the European Union: a study of determinants and consequences"

Ι. Tsalavoutas and L.Evans "Comparing International Financial Reporting Standards (IFRSs) and Greek GAAP: financial statements effects"

Joachim Gassen Thorsten Sellhorn "Applying IFRS in Germany -Determinants and Consequences

2. GAAP vs IFRS

2.1 The path of convergence.

What exactly is the meaning of the convergence between the GAAP and the IFRS? To answer this question first of all I will provide, in short a few information concerning these two accounting standards.

The GAAP is the acronym for General Accepted Accounting Principles and therefore each country has its own GAAP. The one most commonly used and in an abstract way say that it is the rival of IFRS is the U.S. GAAP which is being used by a lot of countries worldwide.

Similarly the IFRS, which stands for International Financial Reporting Standards, are a block of rules, for exactly the same purpose as the GAAP was created, but they were issued by the International Accounting Standards Board (IASB) in 2001.

So since 2001 and afterwards more than a 100 countries have adopted the IFRS and more will slowly begin to utilise them in the near future. Concerning the European Union there was an effort to converge each country's accounting standards in order to achieve uniformity among the members of the E.U. even before the adaptation of the IFRS rules. The E.U. in their effort to achieve uniformity amongst its members, not only in the stock markets but as well as their legislation, it has been issuing certain directives concerning various subjects. More specifically the main directives concerning the financial statements of companies were the Fourth Council Directive 78/660/EEC on the 25th of July 1978 imposing specific requirements on individual company accounts, with an exception on banks, the Seventh Council Directive 83/349/EEC on the 13th of June 1983 which supplemented previous directives concerning group accounts, limited liabilities companies and rules on disclosure of financial reports and the Eighth Council Directive 84/253/EEC on the 10th of April 1984 that addressed the requirements of the auditors of financial documents.

Finally the last action of the E.U. to make the transition from GAAP to IFRS was the Regulation (EC) No 1606/2002 of the European Parliament and of the Council issued on the 19th of July 2002 on the application of the international accounting standards. This regulation has set as a deadline the 1st of January 2005 for all public held companies to prepare their consolidated accounts according to the IFRS.

2.2 Differences among local GAAP and IFRS examples of European Countries

The case of Greece

The Greek GAAP was most certainly affected by the legislation of the country as wells as from culture and politics over the years. Specifically the Greek General Accounting Plan was affected by the French Plan Comptable Général (Ballas, 1994; Ballas et al., 1998). Over the past decades since Greece joined the E.U., it has obliged with the European directives as well as with the implementation of the IFRS which was introduced in Greece by LAW 3301/2004. According to this Law the enlisted companies should follow the IFRS by 1st of January 2005 and that they should disclose their financial statements according them. Since the legislation was voted by the Greek parliament in 2004 the majority of the enlisted companies in Greece have adopted the IFRS as seen on Table 1. We can notice that almost half of the companies in Greece have adopted the IFRS in 2004 and after 2005 as part of the European directive 96% of them.

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The transition from GAAP to IFRS was somewhat problematic due to the lack of preparedness from major firms and the adaptation of the accountants to the new set of standards. In the Paper from I. Tsalavoutas and L.Evans we have seen that the authors have used "quantitative approaches" including the use of a comparability index to measure the differences that have occurred to enlisted companies to the Athens Stock Exchange Pre-IFRS to Post-IFRS. As a result they have found that there were in fact significant changes to gearing since the transition to IFRS and that it was actually bigger than it was under the Greek GAAP. Moreover there was a higher liquidity ratio under the IFRS rules that can be proven an important subject for Greek firms because of their relation with excessive amounts of loans. Concerning the impact on net income basis and ROE due to the fact of very limited disclosure of financial papers from companies the results were insignificant.

The case of Germany

The German GAAP also known as HGB has somewhat historically forced firms to rely on debt and it could be said that it preserved the equity and it provided protection to creditors. Germany though hasn't transited to the IFRS in the same way as Spain and Greece. We can see in Table 1 even from 2001 there was a 45% of companies using the IFRS. This can be attributed to the fact that Germany allowed multinational companies to adopt with international accounting standards, either U.S. GAAP or IAS later n IFRS, by 1993. But these companies had also to disclose their financial documents in both the national GAAP as well as the international accounting standards. In addition more pressure was applied by smaller enlisted companies to adapt international accounting standards so in 1998 Capital Raising Facilitation Act allowed this change.

In the research Joachim Gassen and Thorsten Sellhorn have provided evidence concerning firms that moved from HGB to IFRS in the last years and the conclude with a sample of 29 firms. According to their observations the share of firms adapting IFRS had more turnover, frequent price changes and had more risk in comparison with HGB firms, moreover their 'result provided limited evidence that IFRS had positive impact on earnings quality'.

The case of Spain

The IFRS was adopted in Spain after the Law 62/2003, 30th of December issued by the Ministry Of Economy and it required that all the enlisted companies should abide by the IFRS by the 1st of January 2005. Most companies in Spain adopted the IFRS in 2004 and since then more than 89% of companies have complied with the International Standards Table 1. Previous to the IFRS Spain had the enactment of the 1973 Plan General de Contabilidad (PGC-General Accounting Plan) and further changes to the PGC were implemented in 1990 in order to update the 1973 PGC to comply with the European directives.

Examining the research of Susana Callao, José I. Jarne and José A. Laínez we have seen that they have taken a sample of the firms with the highest stock market capitalization on the Iberia Index 35. In their paper we have seen that there has been a divergence in certain financial ratios as well in the balance sheets after using the IFRS. Particularly an increase was noticed in RoE and in the long term and total liabilities, whereas there has been a decrease on the equity, the operating income and the acid test ratio.

3. Impact of the transition

As we have seen in the above mentioned researches there have been many variations amongst the data that they were found. Surely we can state that there are de jure differences among the local GAAPS and the IFRS for example in Greece GAAP annual depreciation and amortization rates are determined by legislation or concerning the inventory evaluation the Greek GAAP allows 5 types of evaluation whereas the IFRS only 2 (FIFO and Weighted Average), same de jure differences can be found as well between the Spanish GAAP and the IFRS.

The impact of those differences was seen in the balance sheets of companies and was supported by the de facto differences that have been proven to exist among the GAAP and the IFRS. It was proven that there important divergence in key ratios such as RoE, in the gearing of companies, in equity even in the operating income and the managerial earnings. Nevertheless these facts and differences post-IFRS to pre-IFRS are still significantly low but not minimal.

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Another key impact of the adaption of the IFRS, according to R. Cuijpers, W Buijink, was that the international standards are stricter concerning the disclosure of financial documents than local GAAPS. So as a result a better level of transparency is expected from the companies and a better understanding of their Corporate Governance and Actual Financial Figures. Although some local GAAPS where actually better in the disclosure of documents (U.S. GAAP). Finally the transition has lead to a phase were many companies keep a set of accounting books which are used one for accounting purposes whereas the other for taxation ones. This constitutes a major problem since tax officer are still not familiar with IFRS.

Finally I would like to simply mention the new 'challenges' that the accounting profession had to face in order to comply with the international accounting standards as well as the

5. Conclusion

In this essay I have tried to found major differences and consequences that occurred since the convergence from local GAAP to IFRS examining papers that discuss the differences in the transition with an econometric approach of the de facto differences. Most certainly the de juro differences are many and even the comprehension of the IFRS could differ from country to country but these are just issues that will normalise soon. I must say that the results were somewhat complicated concerning the evidence provided and that there haven't been any major impacts on the Counties that adopted the IFRS. I believe that these differences are minimal and they can be surmounted in the next few years.

Table 1 by Audit Integrity Insight.

Table 1 IFRS ADOPTION

Country

2001

2002

2003

2004

2005

2006

2007

Austria

71%

73%

75%

82%

87%

96%

96%

Belgium

11%

11%

24%

61%

80%

91%

91%

Denmark

3%

2%

4%

31%

38%

37%

39%

Finland

2%

3%

6%

74%

97%

99%

100%

France

3%

2%

1%

48%

80%

88%

88%

Germany

45%

48%

49%

59%

75%

83%

84%

Greece

4%

2%

2%

41%

96%

100%

100%

Ireland

2%

2%

2%

55%

69%

89%

88%

Italy

1%

1%

1%

48%

78%

99%

100%

Luxembourg

45%

33%

43%

67%

81%

100%

100%

Netherlands

3%

2%

4%

51%

86%

90%

91%

Norway

1%

1%

2%

70%

88%

89%

92%

Portugal

0%

2%

3%

48%

92%

94%

98%

Spain

1%

1%

1%

69%

83%

85%

88%

Sweden

2%

2%

3%

62%

84%

81%

78%

Switzerland

64%

64%

64%

64%

73%

73%

74%

United Kingdom

1%

1%

2%

32%

46%

66%

81%

EUROPE

10%

10%

10%

46

66%

76%

82%