Table of Contents
Issues behind EU’s decision to adopt IAS
Transition process in Germany
German national accounting system
Main areas of transition difficulty
Evaluation of success of transition
The following paper presents an analysis of the harmonisation process of accounting standards in Europe. While the first part will investigate the reasons behind European Union’s (EU) decision to endorse IAS, the second part will examine the transition process in Germany in more detail.
Issues behind EU’s decision to adopt IAS
Resulting from improved trading conditions (e.g. EU, GATT, WTO, NAFTA) and advanced technologies, particularly in transportation, communication and information processing the regional markets have become widely integrated and global (Emery et al., 2004, p15).
As a consequence of globalization the capital requirements of international companies have also increased (Griffin and Pustay, 2007, p544). However, due to intensive competition companies not only need more capital but it is needed at a lowest possible cost. Consequently many companies are increasingly listing their common stock shares on the global equity market (Gernon and Meek, 2001, pp31-32). The authors also indicate that some companies prefer to list their shares in countries where they operate in order to build ties and enhance brand recognition. However listing stock in foreign countries has also disadvantages. Due to requirements of stock exchanges or national legislations companies have to publish their financial information according to different accounting standards. As Gernon and Meek (2001, p30) argue, the generally accepted accounting practices (GAAP) vary, at times substantially, between different countries. Hence the preparation of various accounts leads to increased costs and confusion. As Roberts et al. (2002, p62) point out large multinational companies are likely to be most affected by the international accounting differences. They further argue that statements of companies from different countries are, due to different methods used or different information provided, not comparable with each other. Thus investors and financial analysts experience great difficulties in understanding the financial information which may lead to poor or not optimal decision making. Furthermore, many other groups, such as local communities, actual and potential employees as well as other companies and economy as a whole, will be affected by these decisions. In addition, accounting professionals and auditors also face considerable problems and additional expenses due to differences in accounting systems (Roberts et al. 2002, p63). However, others have suggested (Gernon and Meek, 2001, pp33) that they might rather favour this diversity since it is generating more income for them.
Finally, Czinkota et al. (2009, p211) argue that diversity in accounting systems could lead to difficulties in monitoring competitive factors across various companies, industries and countries.
As a result of these developments there has been a strong pressure from business community to harmonise the international regulatory framework (Wall and Rees, 2004, p343-344). EU has already made various attempts in the past to harmonise accounting practices in Europe; however, by the end of the 20th century it had become clear that only IAS would provide suitable solution. Hence in 2002 EU endorsed the IAS regulation which required all listed companies to use IAS for their consolidated statements from 2005 onwards (Callao et al., 2009, p33). International standards should not only improve transparency and comparability of financial reporting, reduce barriers for listings in foreign markets thus lowering capital cost (Clavel et al., 2003, pp178-179) but also enable fairer business field, increase competition, make bookkeeping more efficient and according to some international agencies (e.g. UN) even provide assistance to developing countries (Gernon and Meek, 2001, p40). Further, the adoption of IAS in Europe is considered to be a critical component in establishing a single EU-wide capital market (Griffin and Pustay, 2007, p543).
However, as Griffin and Pustay (2007, p535) state that not only national accounting standards between different countries varies but also the underlying goals and philosophy of accounting systems as they reflect the influences of differing legal, cultural, and economic factors. Thus some have argued that these differences are too great and the cost of efforts to eliminate them too high. Furthermore the differences between countries might be appropriate or necessary due to different environmental influences (Gernon and Meek, 2001, p40). In fact, Hellmann et al. (2010, pp3,7) investigated accounting practices in Germany and discovered that often IAS is considered to be irrelevant for Germany as the majority of companies are not financed through capital market.
Further argument lies in the fact that in many countries (e.g. Germany) companies are still required to prepare their individual accounts using national GAAP for taxation purposes (Stahl, 2004, p3). Hence, the previous argument – increased costs and difficulty due to required preparation of two accounts – can also be used against IAS adoption (Höpfner, 2006, p40). Although companies in Germany (and also in some other countries, e. g. France) are permitted to prepare additional individual accounts in accordance with IAS, any further extension of IAS regulation to individual statements cannot be expected in the near future (Jermakowicz and Gornik-Tomaszewski, 2006, p172).
Despite these disadvantages, however, from the middle of 1990s increasing number of European multinational companies voluntarily adopted one of the international accounting standards: IAS or the US generally accepted accounting principles (GAAP) as a response to the increasing internationalisation (Alexander and Nobes, 2004, p97). In Germany 34 companies were using IAS for their consolidated statements by 1999 (Spanheimer and Koch, 2000 p310). Even further, Jermakowicz and Gornik-Tomaszewski (2006, p183) discovered in their survey that 30% of the German respondents used IAS also for their individual statements, either for parent company (2 respondents) or parent company and subsidiary (12 respondents).
With regards to the firms’ voluntarily adoption of international standards, there was also an apparent danger that increased adoption of US GAAP would lead to a dominance of US rules, over which EU would have no influence (Alexander and Nobes, 2004, p103). Consequently, EU’s support for the IAS adoption was growing even further
- Quote paper
- Linda Vuskane (Author), 2010, The adoption of International Accounting Standards in Germany, Munich, GRIN Verlag, https://www.grin.com/document/156388