The continued survival of international differences under IFRS

Abstract

The claimed starting point for much recent literature is that International Financial Reporting Standards (IFRS) have been very widely adopted. That is somewhere between an error and a misleading simplification. This paper begins by providing an antidote by analysing the degree to which IFRS have not been adopted in the jurisdictions containing the world's largest 16 stock markets. This might help researchers with their institutional settings. The paper then examines several issues which can lead to international differences in IFRS practice, starting with language and enforcement, but focusing mainly on policy options. Previously published lists of these are up-dated, the extensive recent literature on IFRS policy choice and policy change is synthesised, and new data are provided. Finally, researchers are offered some lessons from the past and some directions for the future.

Keywords:

• accounting policy choice
• IFRS
• international differences
• adoption
• policy options
• classification

Acknowledgements

The author is grateful to the former editor, Pauline Weetman, for commissioning and suggesting content for this paper. He is also grateful, for comments on an earlier draft, to Jane Davison, Axel Haller, Erlend Kvaal, Paul Pacter, R.H. Parker, Christian Stadler, Stephen Zeff and two anonymous reviewers. He is also grateful to the Association of Chartered Certified Accountants for financial support.

Notes

For example, Google scholar records 123 citations (on 1 January 2013); and all the papers discussed in Section 5 use that paper as the starting point.

See the papers referred to in Sections 5.2–5.8.

These are easy to track and are generally announced by the IASB well in advance, whereas changes in national regulations are less easy to track. Sometimes announcements of IFRS adoption do not eventuate.

That is, adoption after the publication of a standard but before its date of compulsory application.

Except to the extent that it is compatible with Australian IFRS, which IFRS 12 and 13 might be.

Basically, those that are unlisted and do not hold assets in a fiduciary capacity (e.g. a bank).

A list of unendorsed standards like that for Australia in the previous paragraphs applied, for example, for 31 December 2011 or 30 June 2012 year ends.

To take the two points at the start of the paragraph, compliance could have been achieved for 31 December 2011 year ends by (i) not taking advantage of EU-IFRS's permission for more hedge accounting, and (ii) not early adopting IFRS 9–13, which had not been endorsed but also had not yet reached their ‘effective dates’.

That is, few companies are taking the permission to do an extra type of hedge accounting that the EU version of IAS 39 allows (ICAEW 2007), and companies are not early adopting unendorsed standards.

By market capitalisation on 31 January 2012, as found in the monthly statistics of the World Federation of Stock Exchanges.

That is, for 31 December 2011 year ends or nearest after.

Francis et al. (2008) sometimes refer to ‘use’ of IFRS (e.g. p. 334 and in the description of the variable on p. 342) but otherwise they almost exclusively refer to ‘adoption’ (e.g. in the title, the abstract and the conclusions).

The Bilanzrechtsmodernisierungsgesetz of 2009 made various adjustments compatible with IFRS (Gee et al. 2010).

FRSs 12, 20–26 and 29 are copies of IASB standards.

Very similar points are made, mutatis mutandis, in other EU countries. For example, UK auditors refer to ‘International Standards on Auditing (UK and Ireland)’, to EU-IFRS and to the requirements of the British Companies Act.

These words are taken from the English language version of the audit report by PricewaterhouseCoopers AG (a German company) on the annual report for 2011 of Bayer AG (a German company), pages 268–269.

In the original German, the audit report uses the same words as the German translation of IAS 1. See further discussion below.

The Fourth Directive and the law have ‘ein den tatsächlichen Verhältnissen entsprechendes Bild’. IAS 1 has ‘eine den tatsächlichen Verhältnissen entsprechende Darstellung’.

This term means here the location of a company's registration, head office and lead auditor.

For example, much goodwill of UK companies is held at zero under IFRS because it was generally held at zero under UK GAAP if purchased before FRS 10 came into force in 1998. With analogous facts, a French company would generally show goodwill under IFRS at the amount of amortised cost on 1 January 2004. This difference will last for ever unless the French company's goodwill becomes impaired.

The first item of Table 2 is not expressed as a choice between two possibilities, but companies have to choose a format for the specified lists of items which are required, by IAS 1, to be presented. A similar point relates to the IAS 19 topic.

For example, in terms of Table 2, US GAAP does not have the first IAS 1 option, the last of IAS 7, or those of IASs 16, 38, 40 or IFRS 3.

For example, because of disagreements with the Financial Accounting Standards Board of the USA on joint standards.

For example, Kvaal and Nobes (2010) included two such items: (i) whether a line item for ‘operating profit’ is included in the income statement, and (ii) how dividends paid are treated in a cash flow statement.  Issue (i) overlaps somewhat with items 3 and 4 of Table 4, and it requires assessing whether descriptions other than ‘operating profit’ count.  Also, this is not a specifically stated policy choice in IAS 1.  For issue (ii), dividends received are generally not visible in cash flow statements, so assumptions have to be made.

Except for software costs.

The first IAS 1 point in Table 5, and  those relating to IASs 17, 38, 40, 41 and IFRS 10 where US GAAP does not allow fair value or has clearer ‘rules’.

For example,  IAS 16 (paras. 60 and 62) and IAS 8 (para. 32 (d)). It could be argued that this topic should be seen as an estimation rather than as a covert option. However, since the estimation determines a method, not just a number, I include it as a covert option.

Those registered abroad or with the prime head office abroad.

The 14 topics of Table 4, plus the two referred to in footnote 24.

Table 6 relates to 2008/2009 data, as used in Nobes (2011) discussed below.  A few companies had ceased to report since 2005/2006, e.g. because of mergers.

IAS 8 (paras. 14, 19, 29) allows policy change but only under certain conditions and if accompanied by disclosures.

The amended Handelsgesetzbuch, which came into force in 1987 as a result of the Bilanzrichtliniengesetz of 1985, introduced the option of the by-function format, as part of EU harmonisation.

Nobes and Perramon (2013) include the 14 topics of Table 4, plus the topic of whether a company displays a line for operating profit.

The first four classifiers used informal data. The last three used surveys by Price Waterhouse (1973 and 1976). These had begun as a list of detailed differences between USA and UK accounting. So, they were good at picking up Anglo-American differences but not others.

The measures in Nobes (1983) were not based directly on a formal sample of company practices but on rules and on general observations of practices in the countries concerned.

Belgium, Ireland and New Zealand have much smaller stock markets than the eight other countries, and are excluded.

These are the two topics of footnote 24, and topic 2 of Tables 4 and 7.

There were three rate-regulated companies, four non-bank companies with non-December year ends, and eight companies using US GAAP.

One of the ‘basic’ companies was in agriculture.

For the two issues, these can be found, respectively, in the CICA Handbook: HB 1521and 3055.

IFRS 11 was issued in May 2011.

For this purpose, sectors 0 and 1 have been combined. Sector 1 contains certain chemical companies which researchers might prefer to add to ‘Industrials’. However, for Canada, this was only one company.

Depreciation methods, criteria for capitalisation of development costs, currency translation method, and identification of whether the company has reportable segments.

Classification of leases and, to some extent, the use of hedge accounting (which rests, inter alia, on whether the company has purchased a hedging instrument).