On Researching into the Use of IFRS by Private Entities in Europe

Abstract

There were three important regulatory developments in 2009 for accounting by private entities in Europe, including a new IASB standard designed mainly for private entities. This research note considers the EU regulatory context and other issues relevant to research into voluntary adoption of international standards by private entities in Europe. These are applied as a critical case study of a previously published paper.

Acknowledgements

The author is grateful for comments on an earlier draft from Erlend Kvaal (Norwegian School of Management), R. H. Parker (University of Exeter), Thorsten Sellhorn (WHU, Germany), Christian Stadler (Royal Holloway) and reviewers of this journal. The author is also grateful to PricewaterhouseCoopers for research support.

Notes

The meaning of this word is discussed in Section 2.

COM (2009) 83 final of 26 February 2009.

Defined as those not exceeding two of the three criteria: 10 employees, sales of €1 million and assets of €½ million.

Strictly speaking, it is ‘IFRS as adopted by the EU’ that is required or allowed. However, the distinction is not important for this paper.

Some large public markets (e.g. the UK's Alternative Investment Market, AIM) are not ‘regulated’ and therefore are not covered by these requirements.

There is another problem of terminology here. The term ‘company’ in English (and in English law) is narrower than the French société or the German Gesellschaft, which include entities such as partnerships.

For example, data in Parker (2008, pp. 304–306; and 2006, p. 9) shows that 96% of French SAs, 94% of German AGs and 77% of British PLCs are not listed.

For example, ‘small’ currently means not above two out of the three criteria: sales of €8.8 million, assets of €4.4 million and employees 50.

For example, there are both SSAP 20 and FRS 23 on currency translation; FRS 26 only applies to some companies; then there is the Financial Reporting Standard for Smaller Enterprises (FRSSE).

Confirmed by the project manager, Paul Pacter, in a letter of 25 March 2009.

An example of a potential problem is that the Fourth Directive defines ‘extraordinary items’ and includes them in its formats for the income statement, whereas SME-IFRS does not allow such items to be shown. In practice, there are no extraordinary items in UK GAAP, which has been operating within the constraints of the Directive (Parker, 2008, p. 302).

http://ec.europa.eu/internal_market/accounting/ias_en.htm#options

iasplus.com, under the section ‘Use of IFRS by Jurisdiction’.

Although Ashbaugh reports that she included a few companies that provided numerical reconciliation to IAS (Section 3 and footnote 11).

See PwC (2009, para. 4.48).

According to the Auditing Standard, ISA 700.

On 2 March 2009.

In a few countries (e.g. Germany and Hungary), IFRS can be used but only if statements complying with national rules are also prepared (EC, 2008).

In some other cases, a few companies (e.g. those with listed parents) can use IFRS (EC, 2008).

For example, unlisted companies generally have no audit or filing requirements in the USA (Ordelheide and KPMG, 2001, p. 2980), and many have none in Australia.

Such as Bureau van Dijk Amadeus (Europe) and Dafne (Germany).

See the references to the Federal Reserve Board (below) and to the World Bank (in Section 5).

The researchers properly refer to ‘IAS’ rather than ‘IFRS’, as IFRS had not been invented in 1999/2000.

For example, the first paragraph of p. 334 begins with ‘use’ and ends with ‘adoption’. The authors then refer to ‘adoption’ rather than ‘use’ almost exclusively in their paper (e.g. in the title, the abstract and the conclusions, and for example in the first sentence of Section 6) except that their variable ‘IAS’ is described as ‘use’ (p. 342).

They have a column headed ‘IAS’, but p. 344 and elsewhere refers to this as ‘IAS adoption’.

In France, Portugal and Spain mainly by plans, in Germany and Italy by code, and in Sweden by the Annual Accounts Act.

See the appropriate country sections in Ordelheide and KPMG (2001). They also report that IAS was not then allowed even for the consolidated statements of listed companies, except in Germany (e.g. pp. 1135, 2224).

That is, for reporting under the law. Entities could, of course, volunteer to publish an extra set of financial statements, but this is presumed to be very rare, especially for private companies; see the text on Germany later.

It is not possible to tell this from the WBES data.

It is allowed in Italy. It is also allowed in Germany, as long as a company also prepares financial statements that comply with the Handelsgesetzbuch for the purposes of tax and distribution calculations.

For example, see the long list on pp. 38–40 for France.

Twenty-five are shown as ‘not permitted’ for the generality of unlisted companies' unconsolidated statements; 8 (mostly European) are shown as allowing; 12 (mostly Latin American) as requiring and 11 have no data.

IAS 1, para. 11 in the version that was in force in 1999/2000.

Of course, it would be possible for entities to ignore the instruction in IAS 1, though this would be unlikely for audited statements. The WBES data contain information on audit, so this could be examined.

They do separately consider companies and other entities.