The impact of changing from local GAAP to IFRS Essay

It seems logical to presume from the rubric of this paper that the transition of the accounting regulations from local GAAP to the IFRS has most surely created assorted complications in the states accommodating the new criterions. Therefore this essay will look into the impact of what has cropped up from traveling from GAAP to IFRS.

Essay Outline

Introduction

GAAP V IFRS

The Path Of Convergence

Differences occurred altering from local GAAP to IFRS illustrations of European States

Impact of the passage

Decision

1. Introduction

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This essay will discourse major differences between the GAAP and IFRS regulations and I will show grounds demoing the divergency between markets Pre-IFRS and Post-IFRS regulations. Furthermore the chief mark of this paper is the impact from the convergence of the above mentioned accounting regulations. For this ground I have chosen to analyze the undermentioned documents, articles and academic researches:

Susana Callao, Jose I. Jarne and Jose A. Lainez “ Adoption of IFRS in Spain: Consequence on the comparison and relevancy of fiscal coverage ” ,

R. Cuijpers, W Buijink “ Voluntary acceptance of non-local GAAP in the European Union: a survey of determiners and effects ”

I™ . Tsalavoutas and L.Evans “ Comparing International Financial Reporting Standards ( IFRSs ) and Grecian GAAP: fiscal statements effects ”

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

2. GAAP V IFRS

2.1 The way of convergence.

What precisely is the significance of the convergence between the GAAP and the IFRS? To reply this inquiry foremost of all I will supply, in short a few information refering these two accounting criterions.

The GAAP is the acronym for General Accepted Accounting Principles and hence each state has its ain GAAP. The one most normally used and in an abstract manner say that it is the challenger of IFRS is the U.S. GAAP which is being used by a batch of states worldwide.

Similarly the IFRS, which stands for International Financial Reporting Standards, are a block of regulations, for precisely the same intent 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 states have adopted the IFRS and more will easy get down to use them in the close hereafter. Refering the European Union there was an attempt to meet each state ‘s accounting criterions in order to accomplish uniformity among the members of the E.U. even before the version of the IFRS regulations. The E.U. in their attempt to accomplish uniformity amongst its members, non merely in the stock markets but every bit good as their statute law, it has been publishing certain directives refering assorted topics. More specifically the chief directives refering the fiscal statements of companies were the Fourth Council Directive 78/660/EEC on the 25th of July 1978 enforcing specific demands on single company histories, with an exclusion on Bankss, the Seventh Council Directive 83/349/EEC on the 13th of June 1983 which supplemented old directives refering group histories, limited liabilities companies and regulations on revelation of fiscal studies and the Eighth Council Directive 84/253/EEC on the 10th of April 1984 that addressed the demands of the hearers of fiscal paperss.

Finally the last action of the E.U. to do the passage 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 criterions. This ordinance has set as a deadline the 1st of January 2005 for all public held companies to fix their amalgamate histories harmonizing to the IFRS.

2.2 Differences among local GAAP and IFRS illustrations of European States

The instance of Greece

The Grecian GAAP was most surely affected by the statute law of the state every bit Wellss as from civilization and political relations over the old ages. Specifically the Greek General Accounting Plan was affected by the Gallic Plan Comptable General ( Ballas, 1994 ; Ballas et al. , 1998 ) . Over the past decennaries since Greece joined the E.U. , it has obliged with the European directives every bit good as with the execution of the IFRS which was introduced in Greece by LAW 3301/2004. Harmonizing to this Law the enlisted companies should follow the IFRS by 1st of January 2005 and that they should unwrap their fiscal statements harmonizing them. Since the statute law was voted by the Grecian parliament in 2004 the bulk of the enlisted companies in Greece have adopted the IFRS as seen on Table 1. We can detect that about half of the companies in Greece have adopted the IFRS in 2004 and after 2005 as portion of the European directive 96 % of them.

The passage from GAAP to IFRS was slightly debatable due to the deficiency of readiness from major houses and the version of the comptrollers to the new set of criterions. In the Paper from I. Tsalavoutas and L.Evans we have seen that the writers have used “ quantitative attacks ” including the usage of a comparison index to mensurate the differences that have occurred to enlisted companies to the Athens Stock Exchange Pre-IFRS to Post-IFRS. As a consequence they have found that there were in fact important alterations to pitching since the passage to IFRS and that it was really bigger than it was under the Grecian GAAP. Furthermore there was a higher liquidness ratio under the IFRS regulations that can be proven an of import topic for Grecian houses because of their relation with inordinate sums of loans. Refering the impact on net income footing and ROE due to the fact of really limited revelation of fiscal documents from companies the consequences were undistinguished.

The instance of Germany

The German GAAP besides known as HGB has somewhat historically forced houses to trust on debt and it could be said that it preserved the equity and it provided protection to creditors. Germany though has n’t transited to the IFRS in the same manner as Spain and Greece. We can see in Table 1 even from 2001 there was a 45 % of companies utilizing the IFRS. This can be attributed to the fact that Germany allowed transnational companies to follow with international accounting criterions, either U.S. GAAP or IAS subsequently n IFRS, by 1993. But these companies had besides to unwrap their fiscal paperss in both the national GAAP every bit good as the international accounting criterions. In add-on more force per unit area was applied by smaller enlisted companies to accommodate international accounting criterions so in 1998 Capital Raising Facilitation Act allowed this alteration.

In the research Joachim Gassen and Thorsten Sellhorn have provided grounds refering houses that moved from HGB to IFRS in the last old ages and the conclude with a sample of 29 houses. Harmonizing to their observations the portion of houses accommodating IFRS had more turnover, frequent monetary value alterations and had more hazard in comparing with HGB houses, moreover their ‘result provided limited grounds that IFRS had positive impact on net incomes quality ‘ .

The instance 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 stay by the IFRS by the 1st of January 2005. Most companies in Spain adopted the IFRS in 2004 and since so more than 89 % of companies have complied with the International Standards Table 1. Previous to the IFRS Spain had the passage of the 1973 Plan General de Contabilidad ( PGC-General Accounting Plan ) and farther alterations to the PGC were implemented in 1990 in order to update the 1973 PGC to follow with the European directives.

Analyzing the research of Susana Callao, Jose I. Jarne and Jose A. Lainez we have seen that they have taken a sample of the houses with the highest stock market capitalisation on the Iberia Index 35. In their paper we have seen that there has been a divergency in certain fiscal ratios as good in the balance sheets after utilizing the IFRS. Particularly an addition was noticed in RoE and in the long term and entire liabilities, whereas there has been a lessening on the equity, the operating income and the acerb trial ratio.

3. Impact of the passage

As we have seen in the above mentioned researches at that place have been many fluctuations amongst the informations that they were found. Surely we can province that there are de jure differences among the local GAAPS and the IFRS for illustration in Greece GAAP one-year depreciation and amortisation rates are determined by statute law or refering the stock list rating the Greek GAAP allows 5 types of rating whereas the IFRS merely 2 ( FIFO and Weighted Average ) , same de jure differences can be found every bit good 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 be among the GAAP and the IFRS. It was proven that there of import divergency in cardinal ratios such as RoE, in the geartrain of companies, in equity even in the operating income and the managerial net incomes. However these facts and differences post-IFRS to pre-IFRS are still significantly low but non minimum.

Another cardinal impact of the adaptation of the IFRS, harmonizing to R. Cuijpers, W Buijink, was that the international criterions are rigorous refering the revelation of fiscal paperss than local GAAPS. So as a consequence a better degree of transparence is expected from the companies and a better apprehension of their Corporate Administration and Actual Financial Figures. Although some local GAAPS where really better in the revelation of paperss ( U.S. GAAP ) . Finally the passage has lead to a stage were many companies keep a set of accounting books which are used one for accounting intents whereas the other for revenue enhancement 1s. This constitutes a major job since revenue enhancement officer are still non familiar with IFRS.

Finally I would wish to merely advert the new ‘challenges ‘ that the accounting profession had to confront in order to follow with the international accounting criterions every bit good as the

5. Decision

In this essay I have tried to establish major differences and effects that occurred since the convergence from local GAAP to IFRS analyzing documents that discuss the differences in the passage with an econometric attack of the de facto differences. Most surely the de juro differences are many and even the comprehension of the IFRS could differ from state to state but these are merely issues that will normalize shortly. I must state that the consequences were slightly complicated refering the grounds provided and that there have n’t been any major impacts on the Counties that adopted the IFRS. I believe that these differences are minimum and they can be surmounted in the following few old ages.

Table 1 by Audit Integrity Insight.

Table 1 IFRS ADOPTION

State

2001

2002

2003

2004

2005

2006

2007

Oesterreichs

71 %

73 %

75 %

82 %

87 %

96 %

96 %

Belgique

11 %

11 %

24 %

61 %

80 %

91 %

91 %

Danmark

3 %

2 %

4 %

31 %

38 %

37 %

39 %

Suomi

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 %

Irish republic

2 %

2 %

2 %

55 %

69 %

89 %

88 %

Italy

1 %

1 %

1 %

48 %

78 %

99 %

100 %

Luxemburg

45 %

33 %

43 %

67 %

81 %

100 %

100 %

Nederlands

3 %

2 %

4 %

51 %

86 %

90 %

91 %

Norway

1 %

1 %

2 %

70 %

88 %

89 %

92 %

Portuguese republic

0 %

2 %

3 %

48 %

92 %

94 %

98 %

Spain

1 %

1 %

1 %

69 %

83 %

85 %

88 %

Sverige

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 %

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