Economic and normative pressures as drivers for the adoption of International Accounting Standards in Finland since 1976

Abstract

This paper deals with the internationalisation of Finnish business life and the attempts to introduce and apply international accounting standards (IASs) in Finnish accounting practice before the latest developments at the EU level in 2002. The internationalisation of business life creating economic pressures for changes is illustrated. Analysis of four accounting issues is made in order to exemplify how IASs have affected Finnish accounting legislation and practice. The results of the analysis indicate that the effect of IASs has been notable but secondary because of the implementation of the EU Directives in Finnish accounting legislation in the 1990s. IASs have not caused any drastic changes in accounting practice as their requirements have been written as alternatives in legislation. This approach has provided a possibility to large, listed companies to produce financial accounting information in line with the principles of IASs. In the introduction of IASs there have been political aspects when justifications for the national model and for the international orientation have been presented.

Acknowledgements

The author is grateful for the valuable comments and useful advice provided by Pekka Salminen, Aila Virtanen and two anonymous reviewers.

Notes

¹The requirements of the Fourth and Seventh Directives were included in the Accounting Act and Ordinance in 1992 and 1997.

²‘Flexible’ use of depreciations seems to have been based on Saario's realisation depreciation (see Appendix). Reserves could be entered as a separate category of expenses (change in reserves) in the income statement. A corresponding entry had to be made on the credit side of the balance sheet where reserves were presented also as a separate category between liabilities and shareholders' equity. An increase in reserves decreased the annual profit and increased the amount of reserves in the balance sheet. When a reserve decreased, the effects were opposite. In principle, the recording of reserves in the financial reports was an exception from the theory because it violated the matching and the realisation principles. However, the use of reserves could have been partially justified on the basis of the congruence and the prudence principles that were central in Saario's thinking.

³‘According to the International Monetary Fund's guidelines, direct investment is defined as investment by a resident entity in one economy in an enterprise resident in another country with the objective of obtaining a lasting interest in the enterprise and an effective voice in its management. For statistical purposes, an investment is classified as direct investment, if a resident enterprise owns 10 per cent or more of the shares or voting rights of a foreign enterprise’ (Bank of Finland, 1999).

⁴An interesting detail here is that companies seem to have had a ‘competition’ in which a so-called profit ratio was calculated (share premium divided by nominal share price). The company which had the highest ratio had had the greatest success in the share issue – it had been able to acquire ‘cheap money’ from international investors. In those days it seems to not have been clear in business life what the cost of equity is (Poikolainen, 1984; Hurri, 1991).

⁵Seven companies in 1984, 11 in 1986, 18 in 1988, and 23 in 1990 included so-called IAS financial statements in their Finnish annual reports (Tilinpäätöskäytäntö Suomessa, 1985, 1987, 1989, 1991). For instance, Nokia included its first IAS financial statements in its 1985 annual report. In its 1987 Finnish annual report Nokia reported its IAS financial statements before Finnish financial statements. In practice, companies had quite significant differences in these international financial statements and there were heated discussions about the purpose and the content of the statements (cf. Haglund, 1985; Helenius, 1985; Prepula, 1985; Riistama, 1985; Seies, 1985; Tuononen, 1985; Vahtera, 1985; Valkonen, 1985; Vihma, 1988).

⁶Under certain conditions, revaluations of assets were permitted in accounting legislation, although they were in contradiction to the expenditure–revenue theory (Lukka et al., 1984, p. 23).

⁷In fact, the critics of the national model used the principles of the expenditure–revenue theory to justify their arguments. According to their argumentation, the realisation and the matching principles require that manufacturing overhead costs incurred during production are first capitalised and then matched with corresponding revenues when products are sold. In their view, overhead costs were prematurely written off as expenses in the prevailing practice. In this case it seems that the theory did not explain the practical solution that had been adopted. However, Saario had developed another theory, the priority order of costs, in which he used variable versus fixed cost classification to categorise costs (cf. Lukka and Pihlanto, 1994, pp. 70–75). Quite likely the ideas of this theory were reflected in legislation advocating variable costing in the valuation of inventories. A practical explanation in favour of variable costing was its wide use by companies (cf. Järvinen et al., 1987, p. 136).