University of Economics, Prague. Unintended Effects of the IFRS Adoption: The Case of Forced Adopters in the Czech Republic

Transcription

1 University of Economics, Prague Faculty of Finance and Accounting Department of Financial Accounting and Auditing Unintended Effects of the IFRS Adoption: The Case of Forced Adopters in the Czech Republic TARC 2015, Lodz on 8 October David Procházka

2 Agenda Background IFRS adoption in the Czech Republic Specifics of the Czech accounting practice Research design Discussion and Conclusions

3 1 Background David Procházka Globalisation of capital markets pushes for harmonised accounting (Ball 2006) to reduce information risk of foreign investors (Gordon and Bovenberg 1996) International accounting harmonisation is running through worldwide adoption of IFRS Wide range of economic effects of the IFRS adoption (Brüggemann, Hitz, and Sellhorn 2013): - intended - unintended Both individual (company) and cross-country impacts under research investigation Benefits and costs are not spread evenly (Christensen, Lee, and Walker 2007); (Daske et al. 2008); (Lee, Walker, and Christensen 2008); (Li 2010); (Houqe et al. 2012); (Daske et al. 2013) Uneven distribution of effects might be relevant esp. for transition countries, which are characterised with certain weaknesses of institutional environment

4 2 IFRS adoption in the Czech Republic 2.1 Regulation (EC) 1606/2002: David Procházka Mandates listed companies to prepare IFRS consolidated financial statements Allows countries to broaden the scope to other companies/financial statements Compulsory application (Article 4) => Consolidated accounts of listed companies: - For each financial year starting on or after 1 January 2005, companies governed by the law of a Member State shall prepare their consolidated accounts in conformity with the international accounting standards if, at their balance sheet date, their securities are admitted to trading on a regulated market of any Member State Right of option (Article 5) => Member States may permit or require: - the companies referred to in Article 4 to prepare their annual accounts - companies other than those referred to in Article 4 to prepare their consolidated accounts and/or their annual accounts The approaches to Article 5 differ significantly across EU countries

5 Mandatory adopters Fig. 1 David Procházka Structure of the IFRS Adopters Voluntary adopters Forced adopters EU listed companies (consolidated statements) Other companies required by local law (financial sector; PIE; etc.) Companies given the option to choose between local GAAP and IFRS Companies reporting compulsorily under local GAAP, i.e. not allowed by local law to adopt IFRS voluntarily + Having a duty to submit IFRS statements to other entity (mostly parent company)

6 2.2 Czech regulatory framework for IFRS David Procházka Following the note of Nobes (2010), an analysis of a legal framework for financial reporting is a necessary condition for the identification of IFRS adopters and their type (mandatory vs. voluntary) Regulation until 2010 Mandatory application of the IFRS in: - consolidated financial statements of companies listed on EU capital markets (see Article 4 of the Regulation) - individual financial statements of those publicly traded companies (Article 5 option) Voluntary application of the IFRS in: - consolidated financial statements of non-listed companies (Article 5 option)

7 3 Specifics of the Czech accounting practice 3.1 Situation before the EU accession and IFRS adoption Czech state authorities are the main users of accounting information Regulation of financial reporting is subordinated to tax purposes Set-ups of accounting systems so that internal and external users needs are suppressed in favour of needs of the state Czech entities have to cope with the low-quality financial reporting standards Entities are forced to eliminate lacks of financial reporting at their management accounting in order to manage business operations effectively The number of adjustments and differences between financial and management accounting is significantly higher than it is usual in developed countries

8 Fig. 2 Traditional architecture of financial and management accounting systems Users 1 Users 2 Users 3 Outputs 1 Outputs 2 Outputs 3 Calculation in FAS Calculation in MAS Data recording and storing Data recording and storing Definition of rules for data recording, ordering and registering Outputs 1: tax reports; Outputs 2: financial statements; Outputs 3: budgeting, planning, control, performance measurement, etc. Users 1: tax authorities; Users 2: external users such as owners, creditors, etc.; Users 3: managers FAS: financial accounting subsystem; MAS: management accounting subsystem

9 3.2 The Impact of IFRS adoption on architecture of accounting systems There are just few Czech listed companies A considerable number of Czech private companies are under foreign control => IFRS figures have to be prepared and submitted to parent company for consolidation purposes However, local GAAP have to be maintained as statutory system (financial reporting regulatory framework; taxation purposes) => no possibility to adopt IFRS voluntarily for statutory purposes In addition to local GAAP, these companies adopt also IFRS => forced IFRS adopters The forced IFRS adoption has an impact on the architecture of FAS and MAS, as companies have to maintain simultaneously data for: - statutory purposes (Czech GAAP) - local management (management accounting used for internal decision-making); - for consolidation purposes by parent company (usually IFRS) - tax purposes (tax accounting based on Czech GAAP)

10 Fig. 3 Changes in the architecture of FAS and MAS following the IFRS adoption Users 1 Users 2 Users 3 Outputs 1 Outputs 4 Outputs 2 Outputs 3 Calculation in FAS (CAS) Calculation in MAS (IFRS) Data recording and storing Definition of rules for data recording, ordering and registering Outputs 1: tax reports; Outputs 2: financial statements (based on Czech GAAP); Outputs 3: financial statements (based on IFRS); Outputs 4: budgeting, planning, control, performance measurement, etc. Users 1: tax authorities; Users 2: external users such as owners, creditors, etc.; Users 3: managers of subsidiary and parent company FAS: financial accounting subsystem; MAS: management accounting subsystem

11 4 Research design 4.1 Research hypotheses Taking into account a huge number of differences between IFRS and Czech GAAP (a study of (PwC 2013) lists differences on 82 pages), the conversion of statutory accounts to IFRS cannot be trivial and induces some changes: - IFRS are implemented into MAS in order to lower costs - IFRS are incorporate into MAS also because parent companies use these figures for managing subsidiaries (including targets, KPI, management compensation) We try to evaluate the (objective) impact of IFRS adoption on the management accounting and the (subjective) perception of their usefulness by companies management H1: With increasing (objective) frequency of IFRS reporting to parent company, the (subjective) perception of the extent of IFRS usage in management and decision-making increases, too. H2: With increasing (objective) number of areas, in which management accounting utilises the IFRS based measures, the (subjective) perception of the extent of IFRS usage in management and decision-making increases, too.

12 4.2 Data David Procházka Biggest issue and main limitation to research => however relevant for all studies on forced adopters, as IFRS data are not publicly available by definition Population: - all Czech companies under control of those parent companies preparing consolidated statements for a group in compliance with IFRS - no exact list exists and cannot exist - lower limit: companies under control of listed companies at PSE (334) - upper limit: estimate with reference to data of the CSO (around 195,000 companies under foreign control) - using other assumptions and estimates from public institutions, the number of forced IFRS adopters is probably between 2,000 and 20,000

13 Sample: - information from Creditinfo database - extracted companies under foreign control (i.e. >50% of share capital) - revenues over 50 mczk ( 2m) to eliminate micro- and small entities - a random sample of 300 companies - direct contacts to persons responsible for reporting searched for in public resources - found in 154 instances => on-line questionnaire sent - response rate 27 %, i.e. 41 questionnaires received back (6 excluded from the sample) For this paper, 3 questions from survey are relevant: - Q1: At what extent are the IFRS principles incorporated into your management accounting and used in internal decision-making and management of your company? - Q2: In which areas of MAS do you use the IFRS based information? - Q3: What is the frequency of IFRS reporting?

14 4.3 Results Fig. 4 Q1 The extent of IFRS usage in management accounting

15 Fig. 5 Q2 The areas of IFRS usage in management accounting 90% 80% 70% 60% 50% 82,9% 71,4% 40% 30% 20% 10% 28,6% 17,1% 17,1% 14,3% 5,7% 0% Financial targets assigned by the parent company Compensation of executive management Bonuses of "ordinary" employees Price calculations in contracts with customers Budgeting of cost centres Cost calculation and allocations of products Other usage

16 Fig. 6 Q3 The frequency of IFRS reporting

17 4.4 Statistical inferences David Procházka For the preliminary testing of H1, we use a test of correlation coefficient between the answers to Q1 and Q3 For the preliminary testing of H2, we use a test of correlation coefficient between the answers to Q1 and Q2 Tab. 1: Correlation matrix with p-values Q1 Q2 Q3 Q1 1 Q (p=0.00)* 1 Q (p=0.03)** (p=0.01) 1

18 H2 seems to be confirmed, as the correlation is strong and p-value = 0.00 Despite p-value for correlation between Q1 and Q3 is less than 5%, some doubts remains about the validity of H1, as the association measured by correlation coefficient is not too strong We run regression of Q1 on Q2 and Q3, where all seven areas from Fig. 5 are treated separately: - this may overcome some bias in correlation of Q2 and Q3, as the sum of areas for Q2 was made on a proportional basis (all areas were treated with similar weight) - the influence of IFRS reporting frequency on the perception of IFRS usage can be caused by omitted factors => regression analysis allows for solving this problem by the inclusions of more variables

19 Perception Area... Area Frequency Industry Size 0 1 A 7 G where: - Perception is the subjective perception of the extent of IFRS integration into management accounting (Q1 at Fig. 4) - Area A Area B are binary variables getting the value 1 if IFRS are applied in given area, and the value 0, if not (separate data from Fig. 5) - Frequency captures the frequency of IFRS reporting per year (Q3 at Fig. 6) - Industry controls for the potential variation among companies due to different industry accounting and management practices - Size controls for the potential variation among companies due to different size of a companies (total revenue are used as a proxy for the size)

20 Tab. 2: OLS regression for the dependent variable Q1 (subjective perception) Variable Coefficient Std. error P-value Constant Area A (KPI) Area B (man. compensation) ** Area C (employee bonuses) Area D (price calculations) Area E (budgeting) ** Area F (cost allocations) Area G (other) Frequency Industry Size R-squared Adjusted R-squared F(10, 24) P-value(F) ** Significant at 5% level Alternatively, total assets and number of employees were used as a proxy for the size

21 5 Discussion and Conclusions David Procházka H2 supported both by the test of correlation coefficient (using aggregate data) and by regression analysis (using individual binary data) Decisive effect on the incorporation of the IFRS into management accounting can be attribute to: - management compensation schemes and budgeting (of cost centres of higher order) It is a general trend, as neither company size, nor industry affiliation were found statistically significant H1 not confirmed by regression analysis; the association of IFRS reporting frequency and the subjective perception of its utilisation is not evident The reliability of results are restricted by limited sample and public unavailability of data; however it is an inherent deficiency in research on forced IFRS adoption With a change in the Czech regulatory regime, some of original forced IFRS adopters may switch to voluntary adoption => future research shall investigate determinants for (non) using this options

22 References David Procházka Ball, Ray International Financial Reporting Standards (IFRS): Pros and Cons for Investors. Accounting and Business Research 36 (1): doi: / Brüggemann, Ulf, Jörg-Markus Hitz, and Thorsten Sellhorn Intended and Unintended Consequences of Mandatory IFRS Adoption: A Review of Extant Evidence and Suggestions for Future Research. European Accounting Review 22 (1): doi: / Christensen, Hans B., Edward Lee, and Martin Walker Cross-Sectional Variation in the Economic Consequences of International Accounting Harmonization: The Case of Mandatory IFRS Adoption in the UK. The International Journal of Accounting 42 (4): Daske, Holger, Luzi Hail, Christian Leuz, and Rodrigo Verdi Mandatory IFRS Reporting around the World: Early Evidence on the Economic Consequences. Journal of Accounting Research 46 (5): doi: /j x x Adopting a Label: Heterogeneity in the Economic Consequences around IAS/IFRS Adoptions. Journal of Accounting Research 51 (3): doi: / x Gordon, Roger H., and A. Lans Bovenberg Why Is Capital So Immobile Internationally? Possible Explanations and Implications for Capital Income Taxation. The American Economic Review 86 (5): Houqe, Muhammad Nurul, Tony van Zijl, Keitha Dunstan, and A.K.M. Waresul Karim The Effect of IFRS Adoption and Investor Protection on Earnings Quality around the World. The International Journal of Accounting 47 (3): Lee, Edward, Martin Walker, and Hans B. Christensen Mandating IFRS: Its Impact on the Cost of Equity Capital in Europe. London: The Association of Chartered Certified Accountants.

23 Li, Siqi Does Mandatory Adoption of International Financial Reporting Standards in the European Union Reduce the Cost of Equity Capital? The Accounting Review 85 (2): doi: /accr Nobes, Christopher On Researching into the Use of IFRS by Private Entities in Europe. Accounting in Europe 7 (2): doi: / PwC Kapesní Průvodce IFRS a Rozdíly Proti Českému Účetnictví Praha: PricewaterhouseCoopers Audit.

24 David Procházka Department of Financial Accounting and Auditing Faculty of Finance and Accounting University of Economics, Prague W. Churchill Sq. 4 Prague, Czech Republic Web: <prochazd@vse.cz>

25 The Effect of the IFRS Mandatory Application on the Accounting Quality: Evidence from Thailand TARC 2015, Lodz on 8 October Discussed by David Procházka

26 Paper strengths David Procházka Another contribution assessing an impact of the IFRS adoption on local accounting quality: in some extent a replication of Barth, Landsman, and Lang (2008) s paper Thailand as an example of emerging economy with institutions different to those, which are being implicitly reflected during the development of IFRS As Kvaal and Nobes (2010) and Kvaal and Nobes (2012) show, the national patterns of accounting choices after IFRS adoption have remained and thus the economic effects of IFRS adoption seem to be country dependent Relatively large population of firms in questions (682): - number of listed companies similar to Germany, only 4 EU countries having larger capital market

27 Country Belgium Czech Rep Denmark Estonia Finland France Ireland Italy Cyprus Lithuania Latvia Luxemb Hungary Malta

28 Country Germany Netherlands Poland Portugal Austria Greece Slovakia Slovenia Spain Sweden G. Britain

29 Suggestions for improvement: The title of paper: David Procházka - refers to accounting quality, however only value relevance is scrutinised - we have other measures (e.g. timely loss recognition, earnings management, etc.) of accounting quality => consider replacing accounting quality by value relevance Sample restriction: - an exclusion of firms just because their financial statements are not covered by financial databases (DataStream, etc.) has cardinal impact on statistical inferences - should be solved by manual collection of data (1st step random sampling; 2nd data extraction from databases; 3rd manual collection for missing companies) Research design (model): - the model implicitly assumes that institutional factors in pre- and post-adoption were the same => on overview of Thailand s regulatory changes and institutions development around the IFRS adoption might be presented in the paper and some additional variable added in the model

30 Results: - could be better commented - a reader must be very focused to find out, whether situation is better or worse and what is the reason for improvement or deterioration Literature: - the differences in impact of IFRS adoption by voluntary and mandatory adopters on accounting quality shall be distinguished in literature review - I do miss a reference of Ball, Robin, and Wu (2003) s paper, which focuses on what determines accounting quality in four East Asian countries, including Thailand

31 Ball, Ray, Ashok Robin, and Joanna Shuang Wu Incentives versus Standards: Properties of Accounting Income in Four East Asian Countries. Journal of Accounting and Economics 36 (1-3): Barth, Mary E., Wayne R. Landsman, and Mark H. Lang International Accounting Standards and Accounting Quality. Journal of Accounting Research 46 (3): Kvaal, Erlend, and Christopher Nobes International Differences in IFRS Policy Choice: A Research Note. Accounting and Business Research 40 (2): IFRS Policy Changes and the Continuation of National Patterns of IFRS Practice. European Accounting Review 21 (2):