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From 2005 more than seven thousand EU firms have been required to produce consolidated financial statements prepared under International Financial Reporting Standards (IFRS). Some 5,323 of these firms are equity issuers and EU Regulation requires that all listed European Union companies should report consolidated financial statements for fiscal periods ending in or after December 2005 using IFRS.
As is the case in many regulatory initiatives involving radical change, the European Union proposal to harmonize financial reporting based on IFRS was developed normatively, based on well-argued principles suggesting significant potential economic benefits. However, the enabling regulation was put in place without the benefit of the empirical support based on prior experience that would have allowed the expected benefits of the switch to IFRS to be estimated and evaluated against estimated costs.
Anecdotal evidence (and limited formal evidence) suggests that the switch from local GAAP to IFRS has imposed significant direct and indirect costs on corporate Europe, although the costs are likely distributed unevenly and depended on the "distance" from local GAAP to IFRS together with the implementation effort expended by firms and auditors, and corporate characteristics such as size and complexity. Evidence is now starting to accumulate showing that positive capital market benefits can arise as a result of IFRS adoption, although the institutional setting in which financial reporting occurs seems to be critically important for such benefits to accrue.
European IFRS adoption represented a major milestone towards financial reporting convergence yet spurred controversy reaching the highest levels of government. We find a more positive reaction for firms with lower quality pre-adoption information, which is more pronounced in banks, and with higher pre-adoption information asymmetry, consistent with investors expecting net information quality benefits from IFRS adoption. We also find that the reaction is less positive for firms domiciled in code law countries, consistent with investors' concerns over enforcement of IFRS in those countries. Finally, we find a positive reaction to IFRS adoption events for firms with high quality pre-adoption information, consistent with investors expecting net convergence benefits from IFRS adoption. Overall, the findings suggest that investors in European firms perceived net benefits associated with IFRS adoption.
Prior to 2005, most European firms applied domestic accounting standards. Thus, the adoption of IFRS in Europe represented one of the largest financial reporting changes in recent years. The adoption of IFRS as issued by the International Accounting Standards Board (IASB) would result in the application of a common set of financial reporting standards within Europe, and between Europe and the many other countries that require or permit application of IFRS. Thus, the debate was about not only the benefits and costs of IFRS adoption itself, but also the global financial reporting convergence implications if IFRS were modified as a result of the adoption process so that they can be used all over the world by different group of users.
It is unclear how investors in European firms would react to this anticipated change in financial reporting. This study examines these reactions. It is possible that investors in European firms would react positively to movement towards IFRS adoption if, for example, investors expected application of IFRS to result in higher quality financial reporting information, thereby lowering information asymmetry between the firm and investors and information risk and, thus, cost of capital. Investors also might have believed that application of a common set of standards would have convergence benefits, such as lowering the costs of comparing firms' financial position and performance across countries, and that IFRS adoption would enable European capital markets to become more globally
Competitive, with consequent increases in liquidity for European firms. Alternatively, it is possible that investors in European firms would react negatively to movement towards IFRS adoption. This could be the case if investors believed that IFRS would result in lower quality financial reporting information. For example, IFRS might not adequately reflect regional differences in economies that led to differences in domestic accounting standards. Also, investors might have believed that potential variation in the implementation and enforcement of IFRS would lead to an increase in the exercise of opportunistic managerial discretion when applying IFRS. Finally, investors might have believed that the implementation and transition costs associated with IFRS would exceed any benefits. To gain insight into investors' expectations regarding the net cost or benefit of IFRS adoption in Europe, we examine three-day market-adjusted returns for the portfolio of all firms with equity traded in the European stock market centered on sixteen events that we assess as affecting the likelihood of IFRS adoption in Europe. We find that, in aggregate, investors reacted positively to the increased likelihood of IFRS adoption. We also find that this aggregate reaction derives from both a positive reaction to the thirteen events that we assess increased the likelihood of IFRS adoption and a negative reaction to the three events that we assess decreased it. Taken together, these findings are consistent with equity investors in European firms perceiving that the expected benefits of IFRS adoption exceeded the expected costs. To assess whether investors reacted differently to IFRS adoption events as a function of firms' information asymmetry and accounting standards enforcement, as well as their preadoption information quality, we estimate the cross-sectional relation between firms' event returns and proxies for these characteristics. We find a larger positive reaction for firms with lower pre-adoption information quality, which is consistent with investors expecting that IFRS adoption will result in greater informational benefits for these firms. We find an even larger positive reaction for banks - but only those banks with lower pre-adoption information quality. This is consistent with investors expecting that IFRS will result in a greater improvement in information quality for these banks, perhaps reflecting perceived net benefits associated with adoption of the controversial International Accounting Standard (IAS) 39, Financial Instruments: Recognition and Measurement. We also find a larger positive reaction for firms with higher pre-adoption information asymmetry, which is consistent with investors expecting that IFRS adoption will mitigate this asymmetry. Finally, we find a less positive reaction for firms domiciled in code law countries. Although we cannot derive definitive inferences from this finding, it is consistent with investors harboring concerns regarding implementation of IFRS in countries that are generally thought to have weaker accounting standards enforcement. Further analyses reveal a positive reaction to IFRS adoption events for the subset of European firms with the highest quality pre-adoption information. To the extent investors expect little, if any, informational benefits from IFRS adoption for these firms, this finding is consistent with investors expecting net benefits associated with convergence. Sensitivity analyses reveal that our results are robust to alternative proxies for information quality, measures of standards enforcement environments, and benchmark returns.
Objectives of research:
To describe the background to the development of the EU's harmonization project based on IFRS.
Discuss the implementation framework for IFRS that has been applied in Europe.
Why research is an important part of the ongoing development of financial reporting regulation in Europe.
Review some of the main lessons to be learned from the research program on EU IFRS implementation conducted within the INTACCT network.
Importance & Scope
When IFRS are introduced in a given jurisdiction, they form part of the pre-existing laws and regulations in the country pertaining to the governance of business entities. Often, laws and regulations overlap or become inconsistent with each other, especially when the roles and responsibilities of different institutions are not clearly defined and coordination mechanisms are not in place. Lack of coherence in the regulatory system becomes cause for serious misunderstandings and inefficiency in the implementation of IFRS.
IFRS are intended to be used for the preparation of general-purpose financial statements. IFRS-based financial statements could be also required to be prepared for statutory purposes as well. However, while extending the use of IFRS for such purposes might appear to be cost-efficient, it may create misunderstanding between reporting entities and regulators, particularly in situations where the regulator for a given sector has specific financial reporting requirements that differ from IFRS.
Practical implementation of IFRS requires adequate technical capacity among preparers, auditors, users and regulatory authorities. Countries that implement IFRS face a variety of capacity-related issues, depending on the approach they take. The case studies illustrate a number of technical challenges in the practical implementation of IFRS. The concurrent implementation of IFRS and ISAs further compounds the difficulties. One of the principal difficulties encountered in the practical implementation process is the shortage of accountants and auditors who are technically competent in implementing IFRS and ISAs.
Role and Scope of IFRS
The transition plan to IFRS and its implications for preparers, users, educators and other stakeholders has to be effectively coordinated and communicated.
The implementation of IFRS requires considerable preparation both at the country and entity levels
The transition plan needs to define the scope of application of IFRS clearly with respect to the size and type of entities, as well as defining clearly whether IFRS will apply for the preparation of consolidated and separate financial statements
Certain countries that make the transition to IFRS might need special consideration if their economies experience hyperinflationary situations. An IFRS implementation programme needs to adequately assess the state of readiness of relevant professional accountancy organizations so that the necessary resources are available to ensure competent and continuous support from such organizations
Peer review programmes among auditors are a useful oversight mechanism and provide information on difficulties encountered in the financial reporting and/or audit Process
National accountancy firms could contribute to consistent application of IFRS, not only at the national level but also globally.
Professional accountancy bodies, preparers and users, including regulators, could provide the IASB with useful feedback, not only after standards are finalized and ready for implementation, but early in the drafting process.
Integrating IFRS and ISA modules into university accountancy education curricula and coordinating university accountancy education programmes with professional qualification and regulation could contribute positively to the smooth implementation of IFRS in an economy.
The shortage of expertise in the field of IFRS affects not only the private sector, but also regulators and other government agencies.
Transitioning from national financial reporting standards to IFRS has the potential to create a need for clarification or interpretation of the provisions of certain IFRS in relation to certain country-specific circumstances.
Discrepancies between IFRS that are in effect at the international level and those adopted at the national level should be avoided
Enforcement authorities play a positive role in consistent implementation of IFRS by facilitating sharing of enforcement decisions.
International and regional development banks play a positive role in implementation of IFRS by providing resources to developing countries and countries with economies in transition.
All listed EU companies have been required to use IFRS since 2005.In order to be approved for use in the EU, standards must be endorsed by the Accounting Regulatory Committee (ARC), which includes representatives of member state governments and is advised by a group of accounting experts known as the European Financial Reporting Advisory Group. As a result IFRS as applied in the EU may differ from that used elsewhere.
The IASB is working with the EU to find an acceptable way to remove a remaining anomaly in respect of hedge accounting. The World Bank is working with countries in the ECA region to facilitate the adoption of IFRS and IFRS for SMEs.
International Financial Reporting Standards (IFRS)
IFRSs are principles-based Standards, Interpretations and the Framework (1989) adopted by the International Accounting Standards Board (IASB). Many of the standards forming part of IFRS are known by the older name of IASs.
International Accounting Standards (IAS).
IASs were issued between 1973 and 2001 by the Board of the International Accounting Standards Committee (IASC). On 1 April 2001, the new IASB took over from the IASC the responsibility for setting International Accounting Standards. During its first meeting the new Board adopted existing IAS and SICs. The IASB has continued to develop standards calling the new standards IFRS.
STRUCTURE OF IFRS
IFRS are considered a "principles based" set of standards in that they establish broad rules as well as dictating specific treatments.
International Financial Reporting Standards comprise:
International Financial Reporting Standards (IFRS)-standards issued after 2001.
International Accounting Standards (IAS)-standards issued before 2001.
Interpretations originated from the International Financial Reporting Interpretations Committee (IFRIC)-issued after 2001.
Standing Interpretations Committee (SIC)-issued before 2001.
Framework for the Preparation and Presentation of Financial Statements (1989).
List of IFRS statements
The following IFRS statements have been issued from time to time:
First time Adoption of International Financial Reporting Standards
IFRS 2: Share Based Payment
IFRS 3: Business Combination
IFRS 4: Insurance Contracts
IFRS 5: Non-current Assets Held for Sale and Discontinued Operations
IFRS 6: Exploration for and Evaluation of Mineral Resources
IFRS 7: Financial Instruments: Disclosures
IFRS 8: Operating Segments
IFRS9: Financial Instruments
IAS 1: Presentation of Financial Statements.
IAS 2: Inventories
IAS 3: Consolidated Financial Statements Originally issued 1976, effective 1 Jan 1977. Superseded in 1989 by IAS 27 and IAS 28
IAS 4: Depreciation Accounting Withdrawn in 1999, replaced by IAS 16, 22, and 38, all of which were issued or revised in 1998
IAS 5: Information to Be Disclosed in Financial Statements Originally issued October 1976, effective 1 January 1997. Superseded by IAS 1 in 1997
IAS 6: Accounting Responses to Changing Prices Superseded by IAS 15, which was withdrawn December 2003
IAS 7: Cash Flow Statements
IAS 8: Accounting Policies, Changes in Accounting Estimates and Errors
IAS 9: Accounting for Research and Development Activities - Superseded by IAS 38 effective 1.7.99
IAS 10: Events After the Balance Sheet Date
IAS 11: Construction Contracts
IAS 12: Income Taxes
IAS 13: Presentation of Current Assets and Current Liabilities - Superseded by IAS 1.
IAS 14: Segment Reporting (superseded by IFRS 8 on 1 January 2008)
IAS 15: Information Reflecting the Effects of Changing Prices - Withdrawn December 2003
IAS 16: Property, Plant & Equipment
IAS 17: Leases
IAS 18: Revenue
IAS 19: Employee Benefits
IAS 20: Accounting for Government Grants and Disclosure of Government Assistance
IAS 21: The Effects of Changes in Foreign Exchange Rates
IAS 22: Business Combinations - Superseded by IFRS 3 effective 31 March 2004
IAS 23: Borrowing Costs
IAS 24: Related Party Disclosures
IAS 25: Accounting for Investments - Superseded by IAS 39 and IAS 40 effective 2001
IAS 26: Accounting and Reporting by Retirement Benefit Plans
IAS 27: Consolidated Financial Statements
IAS 28: Investments in Associates
IAS 29: Financial Reporting in Hyperinflationary Economies
IAS 30: Disclosures in the Financial Statements of Banks and Similar Financial Institutions - Superseded by IFRS 7 effective 2007
IAS 31: Interests in Joint Ventures
IAS 32: Financial Instruments: Presentation (Financial instruments disclosures are in IFRS 7 Financial Instruments: Disclosures, and no longer in IAS 32)
IAS 33: Earning Per Share
IAS 34: Interim Financial Reporting
IAS 35: Discontinuing Operations - Superseded by IFRS 5 effective 2005
IAS 36: Impairment of Assets
IAS 37: Provisions, Contingent Liabilities and Contingent Assets
IAS 38: Intangible assets
IAS 39: Financial Instruments: Recognition and Measurement
IAS 40: Investment Property
IAS 41: Agriculture
Objective of financial statements
The basic objective of the financial statement is that it must reflect true and fair view of the business affairs of the organization as these statements are used by various users e.g. individuals, investors, banks, shareholders, entrepreneurs and regulatory authorities.
The following are the four underlying assumptions in IFRS:
1. Accrual Basis:
The effect of transactions and other events are recognized when they occur, not as cash is gained or paid.
2. Going Concern:
An entity will continue for the near foreseeable future.
3. Stable measuring instructions
Financial capital maintenance in nominal monetary units or traditional Historical cost accounting; i.e., accountants consider changes in the purchasing power of the functional currency up to but excluding 26% per annum for three years in a row (which would be 100% cumulative inflation over three years or hyperinflation as defined in IFRS) as immaterial or not sufficiently important for them to choose financial capital maintenance in units of constant purchasing power during low inflation and deflation as authorized in IFRS.
Accountants implementing the stable measuring unit assumption (traditional Historical Cost Accounting) during annual inflation of 25% for 3 years in a row would destroy 100% of the real value of all constant real value monetary units not maintained under the Historical Cost paradigm.
4. Units of constant purchasing power:
Financial capital maintenance in units of constant purchasing power during low inflation and deflation; i.e. the rejection of the stable measuring unit assumption. Measurement in units of constant purchasing power (inflation-adjustment) under Constant Item Purchasing Power Accounting of only constant real value non-monetary items (not variable items) remedies the destruction caused by Historical Cost Accounting of the real values of constant real value non-monetary items never maintained constant as a result of the implementation of the stable measuring unit assumption during low inflation. It is not inflation doing the destroying. It is the implementation of the stable measuring unit assumption, i.e., HCA. Only constant real value non-monetary items are inflation-adjusted during low inflation and deflation. All non-monetary items (both variable real value non-monetary items and constant real value non-monetary items) are inflation-adjusted during hyperinflation as required in IAS 29 Financial Reporting in Hyperinflationary Economies, i.e. under Constant Purchasing Power Accounting.
Qualitative characteristics of financial statements
Due to the enforcement of IFRS the following qualitative characteristics of financial statements have been achieved:
True and Fair View/Fair Presentation
Determinants of Accounting Quality
Legal & Political System
Financial Market Development
Ownership Tax System
The fundamental objective of this research is to recognise any unusual change in behaviour of consumers after the merger of two brands or any significant change in a brand. The research is qualitative based and different books, articles, websites, literature and questionnaire will be used to compile this research. Following are the essential factors of the research: consumer's buying behaviour
Brand functions & positioning
Other marketing elements that help consumer to perceive a new
brand and enables the acceptance of brands.
There are different ways of collecting data but the method used here for the collection of primary data will be through a questionnaire related to the research answered by consumers of mobile phones (with reference to Sony Ericsson Mobiles). Sources of secondary data will be books, journal articles, related websites and other related literature.
A sample size is 20 members of public which will be selected on random basis and data will be collected through questionnaires.