Accounting for Non-current Assets Held for Sale and

Discontinued Operations: A review of the largest hundred

European companies and a look into accounting classification

systems

Master thesis, MscAC,

University of Groningen, Faculty of Economics and Business

2 April 2013

SEBASTIAAN WILLEM VERVEST Studentnumber: 2181940

Nolenslaan 53-2 3515VK Utrecht

tel.: +31 06 15 00 45 94 e-mail: S.W.Vervest@student.rug.nl

Supervisor / University

I.J. Kuiper MSc EMA RA

2nd Supervisor / University Prof. dr. R.L. ter Hoeven RA

 

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ABSTRACT

This is a compliance study of the IFRS 5 non-current assets held for sale and discontinued

operations presentation & disclosure requirements. Theories applicable on IFRS 5 are

discussed and the standard is researched for complexity since prior researchers have

suggested this. Furthermore, accounting classification systems in Europe are investigated due

to the unique population and research. The research population contains the hundred largest

European companies over financial year 2011.

The research results show that the compliance in IFRS 5 presentation & disclosure

requirements is low. The discussion in theories suggests that voluntary disclosure, earnings

management and decision usefulness theory can be applied on IFRS 5. However, these

theories were not empirically linked to the results. This study agrees to some degree that

items in this standard are complex, such as the lack of clarity in the classification of non-

current assets held for sale/disposal groups and discontinued operations. Also, several

presentation & disclosure requirements were found ambiguous. The investigation of

accounting classification systems has found no evidence of an Anglo-Saxon and/or

Continental Europe system present.

This study proposes recommendations to the IASB to make a choice between presenting

major discontinued operations or a strategic shift of the company. Also, guidelines should be

published concerning the ambiguities found in the presentation & disclosure requirements.

Finally, this study proposes recommendations for further study in linking the theories with

the level of compliance in IFRS 5. This may provide useful insights in the use of the

standard.

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SHORT PREFATORY NOTE

Here before you lies my master thesis. The research, writing and concluding has been a

journey of great experience. In the first setting this study was to be focused on accounting

classification systems within IFRS 5 presentation & disclosure requirements. After the

empirical research I decided, in good consultation, to extend my research to a more overall

discussion about IFRS 5 with a focus on the former subject. This has lead to a study that is

both descriptive as exploratory. Also, having done literature and empirical research I believe

this is the pinnacle for any student to achieve in his master thesis. The combination proved to

be harsh, resulting in taking more time to finish the study. However, good things come to

those who wait and I can say I am satisfied about the result.

I would like to thank Ineke Kuiper for her guidance and her effort in assisting me

during the information gathering and writing process of the master thesis. Some complex

issues where resolved thanks to mutual discussion in certain subjects. Also I would like to

thank Prof. Ralph ter Hoeven for the time he made available to discuss the direction of the

thesis and certain adjustments. Last but not least I would like to thank my friends and family

for their endless support during this time.

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TABLE OF CONTENTS

1   INTRODUCTION   5  1.1   NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS 5  1.2   CROSS-COUNTRY DIFFERENCES & ACCOUNTING CLASSIFICATION SYSTEMS 8  1.3   SCIENTIFIC CONTRIBUTION 9  1.4   STUDY STRUCTURE 10  2   COMPLEXITY  IN  NON-­CURRENT  ASSETS  HELD  FOR  SALE  AND  DISCONTINUED  OPERATIONS   11  2.1   ILLUSTRATION AND DISCUSSION OF THE STANDARD 11  2.2   INTERPRETATION OF THE REQUIREMENTS BY THE INDUSTRY 14  2.3   CURRENT DEVELOPMENTS AND FUTURE AMENDMENTS 16  2.4   CHAPTER SUMMARY 17  3   THEORETICAL  DISCUSSION   19  3.1   VOLUNTARY DISCLOSURE 20  3.2   EARNINGS MANAGEMENT 20  3.3   DECISION USEFULNESS THEORY 21  3.4   CHAPTER SUMMARY 23  4   PREVIOUS  LITERATURE  IN  ACCOUNTING  CLASSIFICATION  SYSTEMS   24  4.1   PREVIOUS LITERATURE IN ACCOUNTING CLASSIFICATION SYSTEMS 24  4.2   HYPOTHESIS DEVELOPMENT CROSS-COUNTRY DIFFERENCES 31  5   RESEARCH  DESIGN,  POPULATION  /  SAMPLE  AND  RESEARCH  CHARACTERISTICS   34  5.1   RESEARCH DESIGN 35  5.2   POPULATION / SAMPLE 39  5.3   RESEARCH CHARACTERISTICS 41  6   RESULTS   43  6.1   OVERVIEW OF THE COMPLIANCE 43  6.2   PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION 47  6.3   MAJOR CLASSES IN THE DISCLOSURES 48  6.4   DISCLOSING REASONS FOR SELLING THE ASSETS 50  6.5   ACCOUNTING CLASSIFICATION SYSTEMS 50  7   CONCLUSION,  LIMITATIONS  AND  RECOMMENDATIONS   53  7.1   CONCLUSION 53  7.2   LIMITATIONS 57  7.3   RECOMMENDATIONS 58  8   APPENDIX  A  &  B   61  8.1   APPENDIX A – ITEMS REMOVED FROM RESEARCH 61  8.2   APPENDIX B – CONSTITUENTS LIST 63  9   REFERENCES   64  

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1 Introduction

International Financial Reporting Standard 5 Non-current assets held for sale and

discontinued operations is the standard for entities to illustrate their discontinued operations.

It replaced the IAS 35 Discontinued operations and was implemented in 2005, along with the

International Financial Reporting Standards. After the first year of implementation a research

was done over the use of IFRS 5 in Dutch public listed companies. The researchers,

Blommaert and Lyckama a Nijeholt (2006) commented that the IFRS 5 requirements are

very complex, which can lead to an overload of information. The effects for stakeholders

could therefore be contradictive and IFRS 5 might have not have the desired effect for whom

it is created. This is quite compelling since IFRS should contribute to reporting, instead of

creating an even more complex environment. However, their study somewhat limited. Only

research in according to them the most important regulation has been done. No research has

been done whether the entities are in full compliance with IFRS 5. Their study is descriptive

orientated, which limits them to only describing their results. Discussion in theories that

might be applicable to the standard could explain results. Also, the results in their research

where Blommaert and Lyckama a Nijeholt based their conclusion on, could be influenced by

first year implementation errors, since the Raad van Jaarverslaggeving (the Dutch foundation

for reporting standards) did not had any regulation concerning non-current assets held for

sale and discontinued operations before. Finally, their study is only focused on Dutch public

listed entities. One can wonder if the complexity is country related. These issues have led to

believe that a new study concerning IFRS 5 is required.

1.1 Non-current assets held for sale & discontinued operations

A descriptive research in the degree of compliance with IFRS 5 will be created. This study

will incorporate the IFRS 5 regulations that have not been mentioned by Blommaert and

Lyckama a Nijeholt. Furthermore, a discussion in what theories might be applicable to IFRS

5 will be held. A discussion about the complexity of the standard will also be held since this

might be an explanation for certain outcomes in the research and is suggested by the previous

researchers in this subject. Last the population will contain the hundred largest companies of

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Europe over the financial year 2011, which reduces the risk of country and/or

implementation errors. Creating a descriptive research in the degree of compliance with

reporting can show whether the non-current assets held for sale/disposal groups and

discontinued operations standard is an attribute to IFRS. Compliance with the standard is the

key for its usefulness. A study of Centre for Financial Analysis and Reporting Research

(CeFARR) did a compliance study in the disclosure requirements of asset impairment. The

results showed that some impairment disclosure requirements varied quite considerably and

this might point at differences in applying IFRS. They commented that the burden of

compliance is very high, quote: ”…the burden of compliance is heavy.” (Amiraslani,

Latridis, Pope 2013: 2). Despite the study of Blommaert & Lyckama a Nijeholt and

CeFARR, hypotheses in this stage cannot be made since the literature in IFRS 5 and

compliance is still too limited. However, a statement could be made that this study would

expect a high level of compliance due to IFRS being mandatory. The population companies

have to comply with the regulation. Despite the possible complexity or burden in

compliance. Second, the companies belong to the largest auditing firms in the world. If one

would reason by the theory of DeAngelo (1981); bigger audit firms have better audits;

smaller companies could only do worse than the to be found average compliance with IFRS

5. The main research question will be:

- What degree of compliance do we find in the IFRS 5 presentation & disclosure

requirements?

The compliance is measured in the presentation & disclosure requirements of IFRS 5. This

will be done through using a checklist to verify the compliance with IFRS 5 in annual

statements of the sample entities. In the following research question this study tries to

identify what theories there might be for using IFRS 5. In order to do this, the study takes on

an assumption. The assumption is that the use of IFRS 5 is voluntary and in some cases

mandatory. To illustrate, IFRS 5 has two different topics. These are non-current assets held

for sale/disposal groups and discontinued operations. The first topic is related to the

statement of financial position. It discusses how entities are entitled to activate assets as a

non-current assets held for sale/disposal groups. In order to do this, an entity has to comply

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with extensive regulation, of which most is controllable by the entity. Therefore, an entity

chooses to use IFRS 5 non-current assets held for sale and is its use voluntary. The other

topic is discontinued operations. Discontinued operations are related to the financial

statement of income. It reports the effects on the profit when a major part of business of an

entity is sold. The use of discontinued operations can be defined as mandatory. However, the

regulation uses the term ‘major business line or geographical area’. The definition ‘major’

can be questioned since its threshold is unspecified. This could reduce the mandatory

character of discontinued operations. Having explained the voluntary and mandatory use of

IFRS 5, this study will now explore the view of high and low compliance in IFRS 5. The

idea is that compliance can be high or low and that this, in combination with voluntary and

mandatory use of IFRS, is related to certain theories. An illustration is given in table 1.

TABLE 1

High compliance Low compliance

Voluntary Voluntary disclosure Earnings Management

Mandatory Decision usefulness theory X

Different theories can be applicable on different boxes. For example, theory in voluntary

disclosure can be applicable on entities that voluntary use IFRS 5 and have high compliance.

Voluntary disclosure can however not be applicable with low compliance since its disclosure

is voluntary. Why would a company disclose information if they cannot comply with

regulation? This will be discussed further in the concerning chapter. There the theories in

table 1 will be illustrated. Concomitantly the following research question applies.

- What theories can shed light on the use of IFRS 5 non-current assets held for sale

& discontinued operations, considering the degree of compliance?

Blommaert and Lyckama suggest that the standard is complex. Complexity can cause a lack

of clarity in how to use the standard. This can lead to different interpretations of the standard.

This leads to questions like, does this study interpret regulation the same as the auditors of

the companies and/or why does it not? These issues can have an impact on results in the form

of a variation in the degree of compliance. Having a variation as such would prevent this

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study from having proper research results to work with. Therefore, it is deemed important to

determine whether the standard is complex. Complexity could also explain an increase of a

low degree of compliance, since one would rather reluctant to use standards that he or she

does not understand. The third research question is:

- What issues, if any, suggest that the IFRS 5 Non-current asset held for sale and

Discontinued Operations standard might be complex?

To answer this research question, this study will illustrate the IFRS 5 non-current assets held

for sale & discontinued operations classification and presentation & disclosure requirements

and discuss the regulation that has potential issues or ambiguities. These are then discussed

with the interpretation of the regulation by the industry leaders in accounting. This will

clarify the ambiguities. Furthermore, these issues will be researched in financial statements

of the population to determine its effects. The combination of these proceedings should

clarify if any complexity exists in the IFRS 5 standard.

1.2 Cross-country differences & accounting classification systems

Besides the main research, the study population offers the possibility to investigate cross-

country differences in IFRS 5. This object of research is interesting since the IASB tries to

increase the comparability of financial statements through IFRS. The results of this part of

the study could identify if cross-country differences still exist. If they do, an argument could

be made that the comparability of IFRS 5 has not been increased. Researchers argue that

cross-country differences remain due to accounting quality is a function of the firm’s overall

institutional setting, including the legal and political system of the country in which the firm

resides (Soderstrom and Sun, 2007). Other researchers show based on empirical research a

different outcome. There is evidence by Daske et al. (2008) that the market liquidity

increases around the time of the introduction of IFRS. Other effects like the decrease in

firm’s cost of capital and increase in equity valuations where also measured. Gee et al.

(2010) examined the influence of tax on IFRS between Germany and the UK finds that their

overall position is more similar than recorded in previous studies. These findings suggest that

IFRS increases the comparability of financial reporting. Research in cross-country

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differences led to believe that there certain are accounting classification systems (e.g.

Mueller, 1967; Nair and Frank, 1980; Nobes, 1983). This study will analyze previous

literature on accounting classification systems and will create hypotheses of their existence

in IFRS 5. The research question will be:

- Till what extent is the compliance with IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations presentation & disclosure requirements aligned with

accounting classification systems found in previous literature?

1.3 Scientific contribution

The contribution of this study to science will be of great importance. A study of this

magnitude in IFRS 5 compliance has never been preformed. The results are beneficial to

several parties. It would benefit regulators like the International Accounting Standards

Board1 (IASB). Based on the results of this research, regulators might discuss the usefulness

of the standard, which could lead to adjustments. This study could benefit stakeholders, since

this would give them insights in compliance in IFRS 5. The second part of this study is more

exploratory in nature, as it searches for theories for the use of IFRS 5 and if these are in any

way related to the results. The study looks upon theories in voluntary disclosure, earnings

management and decision usefulness. This abstract way of thinking provides new insights in

the use of IFRS 5, which will contribute to science. The research in accounting classification

systems will determine if IFRS 5 ignores or complies with cross-country differences.

Whether an accounting classification system exists or not, the results could tell parties more

about IFRS 5 and standards with the same conditions. If proven to be true, this study could

provide basis for future hypotheses and similar studies in other IFRS regulation. This is

because an argument could be made that comparability has not increased that much.

                                                                                                               1 The IFRS Foundation is an independent, not-for-profit private sector organization working to set out accepted international financial reporting standards.

1.4 Study structure

The structure of this study will start with an illustration and discussion of the IFRS 5 non-

current assets held for sale/disposal groups and discontinued operations. Furthermore, this

chapter will discuss potential issues and ambiguities in IFRS 5. This will determine if any

complexity concerning the third research question is applicable. The next chapter is a

theoretical discussion concerning the use of IFRS 5. Theories in voluntary disclosure,

earnings management and decision usefulness are discussed. In the following chapter the

literature research in accounting classification systems is held to set out hypotheses for the

research. Next chapter is the research design, where this study identifies the research goals

and sets out the boundaries of the research. After that, the results of the study will be

presented. These will include an overview of the IFRS 5 compliance study, a specific

overview of the issues and the results of the accounting classification systems. The last

chapter will be the conclusion where answers on the research questions are presented and a

conclusion is drawn from the findings. Also, limitations in this study are discussed and

recommendations for changes in the IFRS 5 standard are proposed.

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2 Complexity in Non-current Assets Held for Sale and Discontinued Operations

This chapter will illustrate the classification & disclosure requirements of the non-current

assets held for sale and discontinued operations, known as IFRS 5. Another goal of this

chapter is too determine whether there are any signs that suggest that IFRS 5 might be

complex. This is done by first illustrating the standard and second discussing potential issues

and ambiguities where applicable. This will create a discussion that will indicate which

regulation requires more clarification. In order to clarify these ambiguities, they will be

discussed with interpretation from leaders in the accounting industry. This will be taken into

account and an empirical research concerning how companies present these ambiguities will

be made. The combination of these should provide enough basis to determine possible

complexity.

2.1 Illustration and discussion of the standard

The International Accounting Standards Board2 (IASB) presented IFRS 5 Non-current Assets

Held for Sale and Discontinued Operations in 2004. With this IFRS the IASB replaced its

IAS 35 Discontinued Operations. In addition to setting out a standard for requirements in

classification, measurement and presentation disclosures of non-current assets held for sale it

tries to achieve convergence of accounting standards around the world. This is one of prime

goals of the IASB, as well as the Financial Accounting Standards Board3 (FASB). In

achieving this goal the IASB took consideration from the FASB statement No. 144

Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), issued in 2001.

The classification requirements are illustrated and discussed below. IFRS 5 has three

types of classifications:

- Non-current assets held for sale

- Disposal groups

- Discontinued operations

Non-current assets held for sale are mostly related with individual assets and disposal groups

                                                                                                               2 The IFRS Foundation is an independent, not-for-profit private sector organization working to set out accepted international financial reporting standards. 3 The Financial Accounting Standards Board (FASB) is a not-for-profit private sector organization whose primary purpose is to develop generally accepted accounting principles.  

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that contain groups of assets and liabilities that are disposed in a single transaction. A

disposal group may be part, single or a group of cash-generating units. These are presented in

the annual statement of financial position. Discontinued operations are the results of major

activities that are terminated and reported in annual statement of income. IFRS 5 tries to

capture the reporting of major activities of companies that are being terminated, why they are

being terminated and its financial impact. A non-current asset can be classified as held for

sale if the following two requirements are applicable:

- the asset (or disposal group) must be available for immediate sale in its present

condition subject only to terms that are usual and customary for sales of such assets

(or disposal groups); and

- its sale must be highly probable. (IFRS 5.7)

For a sale to be highly probable the following must apply:

- the appropriate level of management must be committed to a plan to sell the asset (or

disposal group)

-­‐ an active program to locate a buyer and complete the plan must have been initiated;

-­‐ the asset (or disposal group) must be actively marketed for sale at a price that is

reasonable in relation to its current market value

-­‐ the sale should be expected to qualify for recognition as a completed sale within one

year from the date of classification and actions required to complete the plan should

indicate that it is unlikely that significant changes to the plan will be made or that the

plan will be withdrawn.

-­‐ Exception on the fourth bullet is that when delay in the period of one year are caused

by events or circumstances beyond the entity’s control and there is sufficient

evidence that the entity remains committed to its plan to sell the asset the period may

be extended. (IFRS 5.8)

IFRS 5.7 is quite clear, however IFRS 5.8 is not. Questions arise in the definitions, what is

‘the appropriate level of management’, ‘an active program’ and ‘actively marketed’.

However, this is an area where the professional judgment of an auditor comes into play and

this is not in scope of this study. This is mentioned because it might be an explanation for

low compliance (Nelson; 2002).

Discontinued operations are defined as the following:

A discontinued operation is a component of an entity that either has been disposed of, or is

classified as held for sale, and;

(a) represents a separate major line of business or geographical area of operations

(b) is part of a single coordinated plan to dispose of a separate major line of business or

geographical area of operations

(c) is a subsidiary acquired exclusively with a view to resale. (IFRS 5.32)

Once more this study questions the definition, what is a ‘major line of business or

geographical area of operations’? The lack of a clear definition in IFRS 5 might be an

explanation for low compliance. What this study finds remarkable is that the non-current

assets held for sale and discontinued operations are both defined in IFRS 5 but their

definitions are not aligned. When a non-current asset held for sale is sold but does not

represent a major line of business or geographical area of operations they are prohibited of

presenting the results in the discontinued operations according to IFRS 5.32.

The presentation & disclosure requirements are as follows. The standard requires non-

current assets held for sale and disposal groups in the statement of financial position to be

presented separately from the other assets. Similarly, the liabilities of disposal groups are

presented separately from other liabilities. The standard prohibits offsetting the assets and

liabilities against each other. The major classes of the assets and liabilities are to be separated

in either the financial position or the disclosures. As for the disclosures, the standard requires

a description of the non-current assets and disposal groups. The facts & circumstances of the

sale or leading to the expected disposal and the expected manner and timing of that disposal

need to be disclosed as well. A gain or loss recognition concerning the fair value

measurement of the non-current asset should be disclosed, if not separately presented in the

comprehensive income. These are regulation concerning non-assets held for sale. Specific

regulation (e.g. reclassifications and prior periods) is not mentioned as they are rarely being

used and the importance of this chapter is to capture the essence of the standard. The study

finds several ambiguities. For example, the presentation requirements are unclear as to where

the non-current asset held for sale should be presented in the statement of financial position.

The standard only states separate, which could be interpreted in several ways. Second, what

are ‘major classes of the assets and liabilities’? Is this merely the separation of current and

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non-current assets/liabilities or should these involve a deeper level (e.g. property, plant &

equipment, inventories, etc…). The disclosures are quite clear, however there is some lack of

clarity concerning the facts and circumstances. The question is, do companies need to

provide a reason for the sale because IFRS 5.41 states that ‘facts & circumstances leading to

the sale or expected sale’ needs to be disclosed.

The discontinued operations are presented in the statement of income as a post-tax

profit or loss. This single amount exists out:

-­‐ the post-tax profit or loss of discontinued operations; and

-­‐ the post-tax gain or loss recognized on the measurement to fair value less costs to sell

or on the disposal of the assets or disposal group(s) constituting the discontinued

operation. (IFRS 5.33)

The disclosures of the discontinued operations involve an analysis of the single amount in

the statement of income. The analysis exists out:

-­‐ the revenue, expenses and pre-tax profit or loss of discontinued operations;

-­‐ the related income tax expense as required by IAS 12(81)(h);

-­‐ the gain or loss recognized on the measurement to fair value less costs to sell or on

the disposal of the assets or disposal group(s) constituting the discontinued operation;

and

-­‐ the related income tax expense as required by IAS 12(81)(h). (IFRS 5.33)

The net cash flows attributable to the operation, investing and financing activities of

discontinued operations must be reported in either the cash flow or in the notes. The amount

of income from continuing operations and from discontinued operations attributable to

owners of parent must be reported in either the income statement or in the notes.

2.2 Interpretation of the requirements by the industry

In the previous paragraph several ambiguities regarding the IFRS 5 standard have been

mentioned. It is interesting what the accounting industry views are towards these ambiguities

and this might explain possible complexity. Therefore, the ambiguities in the previous

paragraph are cited below with views from the accounting industry. For these views the IFRS

manuals of Deloitte, Ernst & Young (EY), Grand Thornton (GT), Mazars and

PriceWaterhouseCoopers (PwC) are used.

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(a) IFRS 5.38 requires non-current assets held for sale and/or disposal groups in the

statement of financial position to be presented separately from other assets.

Similarly, the liabilities of disposal groups are presented separately from other

liabilities. How should these be presented in the statement of financial position?

Deloitte, EY, Mazars and PwC state clearly that the non-current assets held for sale should

be presented separately from the other assets. This means that the non-current assets held for

sale are positioned apart from the non-current and current assets. This goes the same for the

liabilities held for sale. The firms give no further comments on this item. GT has a different

interpretation. They present the non-current assets held for sale separately under the current

assets. This is done for the liabilities as well. As the other firms, GT does not comment on

how they interpret the regulation.

(b) According to IFRS 5.38 the major classes of the assets and liabilities are to be

separated in either the financial position or the disclosures. How is the definition of

‘major classes’ to interpreted?  

Deloitte and PwC mention that the major classes should be separated but give no example of

what major classes are. GT shows a statement of financial position of what the major classes

should be. These are items as Goodwill, Property, Plant and Equipment, Inventories, Cash

and Cash equivalents, Deferred tax liabilities and Provisions. Ernst & Young created an

example financial statement to assist entities in creating their own. The financial statement

shows that EY uses the same major classes as GT and more. These are intangibles, debtors,

creditors and interest-bearing liabilities.

(c) IFRS 5.41 states that the ‘facts & circumstances leading to the sale or expected sale’

need to be disclosed. Does this include disclosing a reason for the sale?

Deloitte, Mazars and PwC do not state how they interpret the ‘facts & circumstances’ and if

a reason for the sale should be disclosed. EY and GT give both examples on how this should

be disclosed. GT discloses that the management has decided to discontinue the operation.

Furthermore, they disclose what assets are classified as held for sale and what has been sold.

GT states the following; ”This decision was taken in line with the Group’s strategy to focus

on its web-based retail business” (EY: p30). EY discloses that the group has decided to

discontinue the operation. They disclose when the transaction is completed and on what the

effective date of the transaction will be. As for the disclosing the reason for sale, EY has

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disclosed the following; “The business of Hose Limited has been operating in an

unpredictable product environment, making it difficult for management to derive real growth

and profitability from the segment” (EY: p.63) Based on the examples of both industry

leaders this study feels disclosing a reason for the sale of a ‘major line of business or

geographical area of operations’ is required.

2.3 Current developments and future amendments

At the moment the accounting industry is waiting for the IASB to publish a new exposure

draft on IFRS 5. The last exposure draft was published in September 2008, which led to

responses from industry leaders. The exposure draft proposed to change the definition of

discontinued operations by withdrawing its initial definition and replacing it by the

following.

(a) is an operating segment (as that term is defined in IFRS 8) and either has been

disposed of or is classified as held for sale or

(b) is a business (as that term is defined in IFRS 3 Business Combinations (as revised in

2008)) that meets the criteria to be classified as held for sale on acquisition. (IASB

Exposure draft, 2008)

In addition, the exposure draft proposed that an entity should determine when the definition

is applicable regardless of whether it is required to use IFRS 8. Second, the exposure draft

proposed to change the amount disclosed for operating segments. Normally this amount is

determined by the amounts reported to the chief operating decision maker. The exposure

draft proposes to change the amount to the amounts that are presented in the statement of

comprehensive income, even if segment information disclosed includes different amounts.

Third, disclosures for all components of an entity that have been disposed of or are classified

as held for sale, except for businesses that meet the requirements for held for sale on

acquisition.

Several industry leaders have responded on the exposure draft. BDO clearly states

that they do not agree with the proposed definition. They argue that a component or a part of

an operating segment can be of significance, especially when it is a major line of business or

geographical area of operations. The reason for changing the definition to an operating

segment is that several users of financial statements stated that a discontinued operation

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should be part of a strategic shift. BDO argues that the threshold for discontinued operations

at an operating segment level is too high. For example, a company could decide to dispose a

significant part of an operating segment without terminating the operating segment. This

could result in not having to disclose discontinued operations. GT agrees with the argument

that a disposal activity should be reported under the discontinued operations if it represents a

strategic shift. However, as BDO sees the risk of lesser reporting of discontinued operations,

GT sees the opposite. The number and nature of an operating segment depends on the

amount of information provided and reviewed by the chief operating decision maker. He can

choose to review information on a very detailed level, which would result in quantitative

disclosures of the discontinued operations. E&Y also believes a discontinued operation

should be included only when a strategic shift is applicable. They add that the current

definition ‘major line of business’ or ‘geographical area’ is too subjective and hint for the use

of a stronger definition like an operating segment. Deloitte states that the might sound

appealing for the entities that already have identified their operating segments. Entities that

never were obliged to disclose operating segments have to discuss with every disposal

weather it concerns an operating segment. As for the second amendment, BDO and GT agree

that the amount presented in the discontinued operations, should be based on the statement of

comprehensive income. On the third amendment BDO and GT do not agree because this will

lead to excessive disclosures for components of an entity that might not be relevant towards

the idea of the strategic shift. Deloitte and E&Y do not comment on this amendment.

2.4 Chapter summary

This chapter has found two issues and three ambiguities. This study finds IFRS 5.8 where the

highly probability of a sale is determined which will mean that the asset can be activated for

a non-current asset held for sale/disposal group lacking in clarity. The standard is document

in terms like ‘actively marketed’, ‘level of management’ and ‘active program’, which are

unclear and do not have a certain threshold. IFRS 5.32 has the same issue, as a discontinued

operation has to be a ‘major line of business or geographical area’, this study wonders what

is defined by the term ‘major’? Any framework on how to judge whether these terms are

applicable is not included in the standard. Also, it appears that non-current assets held for

sale/disposal groups and discontinued operations are not aligned. This is surprising since

  18  

they are presented in a way that they belong in the same subject. When the sale of a non-

current assets held for sale/disposal groups is realized and it is not a ‘major line of business

or geographical area’ it cannot be included in the discontinued operations according to IFRS

5. As final this study finds two ambiguities in IFRS 5.38 and one in IFRS 5.41. These

ambiguities concern presentation of non-current assets held for sale/disposal groups in the

statement of financial position, disclosures of the major classes of these and if the facts and

circumstances of the discontinued operations should disclose a reason for sale. These will be

empirically researched to determine the complexity. In the issues that this study presents the

current developments illustrate that some leaders in the industry agree that the term ‘major

line of business or geographical area’ should be less subjective. And also that IFRS 5

perhaps should play its role more in being the standard for strategic shifts and how to report

those effects.

  19  

3 Theoretical discussion

In the introduction the concept of linking the voluntary and mandatory use of IFRS with the

degree of compliance has been discussed. This study finds three theories in this concept that

might be applicable for the use of IFRS 5. These are supplemented to the table 2.

TABLE 2

High compliance Low compliance

Voluntary Voluntary disclosure Earnings Management

Mandatory Decision usefulness theory X

In voluntary use of the standard this study finds two theories that might have a link with

IFRS 5 compliance. These are voluntary disclosure and earnings management. The idea

behind voluntary disclosure theory is that entities disclose information free beyond

regulation that is deemed relevant for the user. After all, IFRS 5 does publish information the

effects of discontinued operations, concerning the nature, amount, timing and future cash

flows. Earnings management is the theory that describes the use of reporting standards by the

manager to manipulate the entities reported earnings. This theory is discussed because the

activation of a non-current asset held for sale makes it possible to pre maturely take losses.

Earnings management should be applicable on both kinds of compliance considering its

voluntary character. However, a study by Zhou & Lobo (2001) shows that low compliance is

often more related to earnings management and vice versa. Therefore earnings management

is drawn in low compliance box and voluntary disclosure in the high compliance corner since

the entity whishes to gain advantages by using voluntary disclosure.

Next to voluntary disclosure of IFRS 5 there is mandatory disclosure. This is applicable to

the presentation & disclosure requirements of discontinued operations. This study believes

that the decision usefulness theory might be applicable with high compliance. The theory

argues that if you can’t prepare the reporting correct, at least try to make it more useful.

These theories that now have been linked to table 2 will be discussed and illustrated why

they are linked to the certain boxes.

  20  

3.1 Voluntary disclosure

Entities might have several reasons for voluntary disclosing information. Voluntary

disclosure can benefit entities in lowering their cost of capital (Francis et al, 2005). Other

benefits according to the FASB (2001) can be better credibility and improved investors

relationships, access to more liquid markets and lesser danger of litigation alleging

inadequate informative disclosure and better defenses when such suits are brought.

Voluntary disclosure of non-current assets held for sale will disclose information concerning

the effects of discontinued operations, concerning the nature, amount, timing and future cash

flows. However, the FASB also acknowledges the fact that entities will compare the benefits

with the costs of applying the standard.

3.2 Earnings management

The positive accounting theory by Watts & Zimmerman (1978) is one of the theories in

earnings management. This theory is concerned with, quote: “predicting such actions as the

choices of accounting policies by firm managers and how managers will respond to

proposed new accounting standards” (Scott 2009: 284). These predictions are concentrated

among three hypotheses.

(a) The bonus plan hypothesis. If all considered equal, managers with bonus plans tend

to choose accounting policies that would benefit them more then policies that lie in

the interest of shareholders.

(b) The debt covenant hypothesis. If all considered equal, managers of entities tend to

choose accounting policies that would prevent the entity from violating its debt

contracts.

(c) The political cost hypothesis. If all considered equal, managers of entities that face

political cost tend to choose accounting policies that would avoid these costs.

These hypotheses can explain reasons for using IFRS 5. For example, take in consideration

the bonus plan hypothesis. If a manager has overachieved his profit goal that entitle him to a

bonus and a major asset was going to be sold the next year, he might consider applying non-

current assets held for sale in the current year in order to reduce the profit. In this way it will

be easier to achieve next years goals because he has already depreciated the asset using the

non-current asset held for sale classification. This example goes for the political cost

  21  

hypothesis as well. If an entity shows extreme profits, chances are high that society will act

with more taxes or other constraints. If the entity was going to sell an asset the next year, it

could use non-current asset held for sale classification to diminish the profit in the current

year. Both examples are part of a phenomenon called earnings management. Earnings

management is, quote: “the choice by a manager of accounting policies, or actions affecting

earnings, so as to achieve some specific reported earnings objective” (Scott 2009: 403). So

in theory the classification non-current assets held for sale could be used to manipulate

earnings to a desired level for the manager. This study sees no benefit for the stakeholder in

using a fair value approach one year prior to a potential sale. This would only damage the

reliability of the information. Ball (2006), who did research to the pros and cons of IFRS for

investors foresees these problems with ‘fair value accounting’ as well. He states, quote: “On

the one hand, this philosophy promises to incorporate more information in the financial

statements than hitherto. On the other, it does not necessarily make investors better off and

its usefulness in other contexts has not been clearly demonstrated.” (2006: 14) In chapter 2

ambiguities in the standard are described. The interpretation of these ambiguities depends on

the professional judgment of the auditor. A study by Nelson et al. (2002) has shown that the

more ambiguities in a regulation, the easier the auditor accepts positions or arguments from

management. Considering IFRS 5.7, which depends a lot on the auditor’s judgment, the

chances are higher that a non-current asset held for sale is activated for management

purposes. This can increase the chances of earnings management. Other studies show that

discontinued operations are being used for managing earnings. A study by Barua et al.

(2009) shows that entities shift operating expenses to income-decreasing discontinued

operations to increase core earnings. Based on literature and argumentation this study

believes that IFRS 5 can be used earnings management purposes. If the theory of earnings

management would be adopted, the disclosures would be limited (Zhou & Lobo; 2001).

3.3 Decision usefulness theory

The decision usefulness theory takes the view that, “if we can’t prepare theoretically correct

financial statements, at least we can try to make financial statements more useful” (Scott

2009: 59). The replacing of IAS 35 Discontinued operations by IFRS 5 was mainly triggered

for achieving more convergence between IFRS and US GAAP. This increases the

  22  

comparability between IFRS and US GAAP annual statements, which is more useful for

investors. The use of non-current assets held for sale in the statement of financial position

creates a separation of the core business and business to be discontinued, which gives the

user a clearer picture of the entity. This goes for the statement of income as well, where the

discontinued operations are presented separately. The importance of users is also recognized

in the exposure draft of September 2008. In the exposure draft the main discussion is if the

term ‘major line of business or geographical area of operations’ should be changed to

operating segment. This is because users of financial statements suggested that IFRS 5

should capture the strategic shift and not only major lines of business or geographical area of

operations. So if the decision usefulness theory were to be adopted the study expects the

IFRS 5 presentation & disclosure requirements to be quite detailed (Zhou & Lobo; 2001).

Since we have discussed its comparability and indentifying core business advantages it is

interesting to discuss what would happen if IFRS 5 where not to be used, as this study deems

its use voluntary. This does not include the discontinued operations, since these are

mandatory. When the non-current assets held for sale classification is not used, the assets

remain in the statement of financial position under non-current assets. The disclosures of the

non-current asset will therefore be either disclosed as voluntary information or not at all.

This means that the preemptive fair value measurement on the asset is not allowed and no

separation of cash flow of the asset in the cash flow statement can be made. In terms of

decision usefulness theory it is beneficial to use IFRS 5. If we look at the adoption of the

voluntary disclosure theory by accounting major accounting body’s, The IASB/FASB draft

of the Conceptual Framework (2008) shows that the primary user group, which are

stakeholders in the entity, have a need of information about the amount, timing, and

uncertainty of the firm’s future cash flows. This is consistent with IFRS 5, since it

contributes information towards the amount to be depreciated of the sale, the timing of the

sale and the future cash flows need to be separately stated from the cash flow statement.

Therefore according the decision usefulness theory IFRS 5 is useful in providing information

for stakeholders.

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3.4 Chapter summary

In this chapter the study introduced the idea of relating theories to compliance in IFRS 5.

Some previous studies and reasoning suggest that the theories voluntary disclosure, earnings

management and decision usefulness can have a relationship with compliance. In earnings

management this study notices that IFRS 5 can be used for this purpose, considering the fair

value measurement one year prior to the potential sale can be used to diminish earnings. This

can be used for several purposes (e.g. exceeding bonus plans and debt covenants). Next to

earnings management the decision usefulness theory suggests that IFRS 5 is used for this as

well. Combining the increased comparability with US GAAP, simpler indentifying core

businesses and increasing information for stakeholders concerning amount, timing and future

cash flows suggests that a stakeholder has more information when IFRS 5 is used.

  24  

4 Previous Literature in accounting classification systems

4.1 Previous literature in accounting classification systems

Studies in classification of accounting and reporting systems have two approaches. The first

is the judgmental approach, which focuses on the identification of relevant environmental

factors and linking these to national accounting practices. Based on these links international

groupings are proposed. The work of Mueller (1967) and Nobes (1983, 1988) are examples

of this approach. The empirical approach tries to analyze the individual accounting practices

and develops patterns. On these patterns international groupings are proposed. Examples of

this approach are Nair and Frank (1980) and Gray (1988). This study will examine both

approaches as both have limitations. Judgmental studies have no empirical research, which

allows them only to rationalize thought. Results of empirical studies are widely different, due

to their research design and dataset. Therefore this study will analyze the primary studies in

both approaches.

Hattfield (1911) was the first researcher to discus accounting system classifications in

France, Germany, the U.K. and the U.S. In his research he concludes that a three-group

classification should exist, France and Germany, the U.K. and the U.S. Here the first

separation between the Anglo-Saxon and the Continental Europe accounting system are

described.

Mueller (1967) went on with research in the same field as Hattfield. However, Mueller

tried to explain this phenomenon form a cultural perspective. He defined four basic patterns

related to differences in approach and objectives in accounting practices.

- A macroeconomic pattern is found in countries where national economic policies are its

main importance. Companies in these countries would rather follow the policies instead of

leading them and therefore accounting is more smoothed to create more profitable

economic stability. For example, Sweden grants a tax-shield for certain reserves, which can

be used when the national economy needs stimulation.

- The microeconomic pattern is found in countries where a firm’s continuity is the main point

of business. Accounting concepts are derived from economic analysis and therefore

accounting is more viewed as a branch of business economics. The Netherlands is an

atypical case regarding the microeconomic pattern. In the Netherlands there is much

  25  

emphasis for replacement-value accounting and other subjects like segmental reporting.

- The independent discipline approach views accounting as a service function. Accounting is

considered to be capable enough to create it’s own business practices in classification and

measurements requirements. According to Mueller The United States and The United

Kingdom are prime examples of this pattern.

- In the uniform accounting approach, accounting is a means of administration and control.

Here a uniform approach gives ease of use and a means of control for different kind of

users. Typical examples of this pattern where Germany and Switzerland.

Mueller used these approaches as the basis for the international classification of accounting

practices. Besides the patterns Mueller recognized a wider set of influences. Mueller

recognized a countries legal system, political system and social climate to be of influence on

the accounting and reporting system.

In 1980 Nair and Frank published an article regarding the impact of disclosures and

measurement practices on international accounting classifications. They discuss whether

classification of countries into groups is the same under disclosure and measurement

practices. Using a data source supplied by Price Waterhouse & Co. (1973, 1975) they

discovered that there is a difference between the uses of these practices and recommend for

future classifications to use this separation in practices. Furthermore they created a

classification of countries into groups on both practices (figure 1). For this research the

disclosure practice (figure 1) is of major interest due to the research design of this study.

  26  

FIGURE 1

Source: Nair & Frank, 1980 p.436 (disclosure practices model)

The model (figure 1) above has five groups, which contain countries in the research design.

These are Belgium, France, Greece and Spain in group one. Group three Germany. Group

four the Netherlands and the United Kingdom. Group six the Scandinavian countries and

Group seven Italy and Switzerland.

It was not until Gray (1988) before culture in accounting was specifically researched.

His study was done in fields that took more significance in explaining behaviors and

influences on social systems. Gray especially took interest in literature research in the

anthropology, sociology and psychology fields. (e.g., Parsons and Shils, 1951; Kluckhohn

and Strodtbeck, 1961; Inkeles and Levinson, 1969; Douglas, 1977; and Hofdstede, 1980) It is

noticeable that Hofstede (1984) had a lot of influence on Gray’s study. Hofstede’s research

concerned cultural dimensions and identified four of these. These were individualism, power

distance, uncertainty avoidance and masculinity. Later on a fifth and sixth dimension were

identified, long-term orientation and indulgence versus restraint. On these dimensions Gray

described four accounting values. These values are best described as creating the foundation

for culture in accounting. Gray identified the following accounting values: (1)

professionalism versus statutory control; (2) uniformity versus flexibility; (3) conservatism

versus optimism; (4) secrecy versus transparency. According to Gray these accounting

values can define a countries subculture. Following these accounting values and the study of

NAIR, R. D., The Impact of Disclosure and Measurement Practices on International Accounting Classifications , Accounting Review, 55:3 (1980:July) p.426

  27  

Hofstede, Gray proposed an extension on the model of Hofstede (1980, p.27). According to

Gray, quote:”...the values or attitudes of accountants may be expected to be related to and

derived from societal values with special reference to work-related values. Accounting

‘values’ will, in turn, impact on accounting systems.” (1988, p.5)

FIGURE 2

Source: Gray, 1988 p.5 (Culture Areas Hofstede)

As with the disclosure model of Nair and Frank (1980) this study will analyze the countries

A B A C U S

FIGURE 1 CULTURE AREAS (HOFSTEDE)

More developed Latin Belgium France

Argentina Brazil Spain

Italy

Less Developed Asian Indonesia Pakistan Taiwan Thailand

India Malaysia Philippines

Germanic Austria Israel

Germany Switzerland

Less developed Latin Colombia Ecuador Mexico Venezuela

More developed Asian Japan

Costa Rica Chile Guatemala Panama Peru Portugal Salvador Uruguay

Near Eastern

Arab countries Greece Iran Turkey Yugoslavia

Anglo Australia Canada Ire 1 and New Zealand U.K. U.S.A.

African East Africa West Africa

Asian-Colonial Hong Kong Singapore

Nordic Denmark Finland Netherlands Norway Sweden

South Africa

If Hofstede has correctly identified Individualism, Power Distance, Uncertainty Avoidance, and Masculinity as significant cultural value dimensions then it should be possible to establish their relationship to accounting values. If such a relationship exists then a link between societal values and accounting systems can be established and the influence of culture assessed.

Before an attempt can be made to identify significant accounting values which may be related to societal values it is important to understand the meaning of the four value dimensions identified by Hofstede (1980, 1983) and referred to earlier. These dimensions are well expressed in Hofstede (1984, pp. 83-4) as follows:

Individualism versus Collectivism Individualism stands for a preference for a loosely knit social framework in society wherein individuals are supposed to take care of themselves and their immediate families only. Its opposite, Collectivism, stands for a preference for a tightly knit social framework in which individuals can expect their relatives, clan, or other in-group to look after them in exchange for unquestioning loyalty (it will be clear that the word ‘collectivism’ is not used here to describe any particular political system). The fundamental

6

  28  

in the model (figure 2) that are also in the research design. These are: France, Spain and Italy

in the More developed Latin area. Germany and Switzerland in the Germanic area. The U.K.

in the Anglo-Saxon area. The remaining five countries are listed in the Nordic area.

Nobes (1983) summarizes the research done on international classification of

accounting practices and provides a more developed approach. This leads to a model (figure

2) in the classification of accounting practices. As the model looks like having a similar

approach to Mueller it has one major difference. Nobes embraces the suggestion of Nair and

Frank (1980), which was separating disclosure, and measurement practices. However, Nobes

criticized the data used by Nair and Frank for having straightforward mistakes, misleading

answers and neglecting other issues and therefore could not rely their results. Based on

former research and taken into account this criticism Nobes created a hypothetical

classification of financial reporting measurement practices for western countries (figure 3).

Nobes mentioned he did not create a model for disclosure practices because it would require

an additional paper.

FIGURE 3

Source: Nobes, 2011 p.271 (This is the updated model created in 1983).

  29  

In 1998 Nobes published another paper regarding the subject of international

differences in financial reporting. The paper searches for a general model of reasons for

international differences in financial reporting. Nobes summarizes reasons proposed in

previous literature for international accounting differences (figure 4) en reviews his model

made in 1983. In this research Doupnik and Salter (1995) are mentioned for their model and

variables, which are more based on the work of Hofstede (1980) and Gray (1988). Nobes

argues that there are international differences in financial reporting systems due too the

purposes for these reporting’s. There are four different financing markets, based on strong

credit, strong equity and on whether the market is dominated by in- or outsiders. These

markets determine the demand of information of companies, for example markets where

there are strong inside players (e.g. government, family or banks) would result in more

private provision of accounting information. In these markets there is less need for public

disclosure. However, in dominant outsiders markets the need for public disclosure higher

because the providers of finance won’t have as much private access as strong insiders.

FIGURE 4

Source: Nobes (1998), p163

  30  

Accounting differences are mostly divided in the Anglo-Saxon and Continental

European system. In the Anglo-Saxon system accounting differs from tax rules and in the

continental European system accounting follows the tax rules. Other differences are for

example unsettled currency gains, legal reserves, provisions for depreciations, pensions and

profit and loss formats. These accounting differences are linked to the different financing

markets. For example, strong equity outsider markets tend to have more Anglo-Saxon

accounting. Nobes states five variables where he defines his model on. These variables are

the type of country culture, the strength of the equity-outside system, the type of company,

country degree of cultural self-sufficiency and the type of financial reporting. The type of

country culture and strength of the equity-outside system are described earlier. The main

importance in a type of company is whether the control is widely dispersed among outsiders.

If this is common in a country, the demand for public disclosures is higher. A countries

cultural self-sufficiency comes from its history of invasions, social climate, religion and so

on. This leads to a country being either cultural self-sufficient or cultural dominated. The last

is the type of financial reporting the country uses. These differences can lead to insights in

culture and give a broader orientation on the international classification of accounting

practices.

d’Arcy (2001) also commented on the subject of accounting models. Here she

concludes: ”Different classification models are traced back to the differences in conceptual

and mythological research designs” (2001, p.327). Also it seems that the use of which

database is very important to this research. d’Arcy tries to find a distinction between the

Anglo-Saxon and Continental Europe accounting systems. Using the TRANSACC reference

matrix as a database she did not find a relation that would define this distinction between the

Anglo-Saxion and Continental Europe accounting model.

An important research to mention is a study done by Kvaal and Nobes (2010). They

examined whether there are there are systematic differences in IFRS accounting policies

between countries. Using information form the annual reports of companies in the blue chip

indices of the five largest stock markets that use IFRS, they reject a null hypothesis that IFRS

practice is the same across countries. They collected data in the use of accounting policies in

annual reports and find that national practice continues where this is allowed by IFRS. As

this study focused on IFRS 5, which is rule-based the study of Kvaal and Nobes provide a

  31  

significant conclusion. It suggests that the results of our research are more likely that cross-

country differences do not exceed beyond the bounds of obliged regulation. This might be an

explanation or a contradiction for future results.

Nobes (2011) tested his model (figure 3) designed in 1983. He used the data from

Kvaal and Nobes and supplemented the remaining countries. His dataset contained the

following countries: Australia, United Kingdom, Germany, France, Spain, Netherlands and

Italy. Nobes concludes quote;” All the statistical techniques lead to the same conclusion:

Anglo-Saxon and Continental European groupings can be discerned in the IFRS practices of

very large companies.” (2011, p. 280). His conclusion is particular as the model is based on

measurement practices. Nobes (1983) acknowledges the work Nair and Frank (1980) that

research in these country classifications should be separated in disclosure and measurement

practices. Nobes reviewed his results by separating the measurement from the disclosure

practices and found that besides Sweden the differences where not big enough to alter the

classification of the seven countries and therefore his conclusion would be valid.

4.2 Hypothesis development cross-country differences

This study thrives to find out till what extent the degree in compliance is aligned with IFRS 5

reporting. Research in previous literature states two important facts. Nobes (2011) finds

evidence that a two-way accounting classification within IFRS exists. This is known as the

Anglo-Saxon and European continental groupings. The theory behind these groupings is that

Anglo-Saxon accounting is strong equity based and commercially driven. European

continental accounting is weak equity based, government driven and tax dominated. Based

on these factors companies tend to choose different accounting principles for several reasons

(e.g. minimizing profit for taxation reasons). If one would rationalize through the

information approach to decision usefulness, which recognizes the individual responsibility

for predicting future firm performance, accounting systems where more stakeholders exist

should have better disclosures. This is consistent with the legitimacy theory that argues the

position a company takes within a society. Once a company has manifested itself in a society

it creates ‘social contracts’ with its environment, which it owes her rights to exist to. So

based on these theories the Anglo-Saxon economy with strong equity market and

commercially driven would have better disclosures.

  32  

Now the question remains, which countries are defined by the Anglo-Saxon

classification within the sample group? Most of the researchers (e.g. Mueller, 1967; Nair and

Frank, 1980; Gray, 1988; Kvaal and Nobes, 2010; Nobes, 1983, 1988, 2011) agree that the

U.K. is an Anglo-Saxon country and is separated from the Continental European countries.

Regarding The Netherlands the researchers remain divided. Mueller defines the Netherlands

as having their entire own economic system and therefore should not be in any classification.

Nair and Frank’s model put the Netherlands together with the U.K. Gray model that is based

on Hofstede culture values argues that the Netherlands should be in the Nordic area. Nobes

agrees that the Netherlands indeed have their own economic system, however he has added

The Netherlands too the Anglo-Saxon group like Nair and Frank. Nobes does note that the

Netherlands is an outlier in the Anglo-Saxon group. Due to the dispute in literature the

Netherlands will not be taken into account in either the Anglo-Saxon group or the

Continental European group.

In the Continental European classification there are two classifications noticeable.

The researchers agree that France and Spain have the same accounting classification. The

second classification visible is the Scandinavian classification. According to Nair and Frank

and Gray Denmark, Norway and Sweden should be grouped together. There is no mention of

Finland in Nair and Frank’s work and Gray adds this country to the Nordic area. In this

research Finland is also added to the Scandinavian classification. As for Germany, Italy, and

Switzerland there is no real distinction found in previous literature. Gray and Mueller put

Germany and Switzerland together. Nair & Frank and Nobes state Germany as an individual

classification, however Nobes does not mention Switzerland in his model. This is properly

because Switzerland is not obliged under the European Union to use IFRS, yet a lot of

companies in the FTSE 100 choose to do so. The researchers are also divided about Italy. For

these countries the study will not try to classify them, as is there no clear suggestion in which

classification they should grouped. This leads us to the following hypotheses. As Nobes

(2011) states that his research concludes a distinct difference between Anglo-Saxon and

Continental European classification that will be the first hypothesis that will be tested. This

leads to the following hypothesis:

  33  

H1: Within the sample there is a distinct accounting classification of Anglo-Saxon and

Continental Europe countries visible.

To determine if there are accounting classifications within the Continental European the

following hypotheses are stated.

H2: Within the Continental European accounting classification there is a separate

accounting classification of France and Spain together visible.

H3: Within the Continental European accounting classification there is a separate

accounting classification of the Scandinavian countries visible.

Based on the other hypotheses the null hypothesis has to be:

H0 : Differences in degree of compliance in IFRS 5 presentation & disclosure

requirements are not related to accounting classification systems.

This research has two main outcomes (regardless of the classifications within the Continental

European classification). If H1 is proven it will mean that the statement of Kvaal and Nobes

is false and cross-country differences neglect IFRS 5 to some degree. If H0 is proven, the

statement can be made that cross-country differences have no effect on IFRS 5 where it is

not allowed and IFRS 5 does reduce the effects of accounting systems, which means it is

proven to be effective in the harmonization concerning non-current assets held for sale,

disposal groups and discontinued operations.

  34  

5 Research design, population / sample and research characteristics

The study does a research in the degree of compliance in the IFRS 5 requirements and

investigates accounting classification systems. To study this, the research performs an

empirical research on the presentation & disclosure requirements of IFRS 5. With this

research this study tries to answer the following questions:

- What kind of degree in compliance do we find in the IFRS 5 presentation &

disclosure requirements?

- What issues, if any, suggest that the IFRS 5 Non-current asset held for sale and

Discontinued Operations standard might be complex?

- Till what extent is the degree in compliance in IFRS 5 Non-current Assets Held for

Sale and Discontinued Operations presentation & disclosure requirements aligned

with accounting classification systems found in previous literature?

To answer these questions, the research is divided into three main paragraphs. The research

design will explain how it tries to capture the degree of compliance. The second paragraph,

the data gathering will show what data is selected from the population and will explain more

about the sample. The research characteristics will illustrate the outline of the research. First

the research goals are defined in order to determine what this research tries to find. The

following research goals are identified based on the research questions:

- Identify the degree of compliance in the IFRS 5 presentation & disclosure

requirements.

- Capture the related information regarding the ambiguities and determine if there is a

complexity.

- Determine if any differences in degree of compliance in IFRS 5 presentation &

disclosure requirements align with the accounting classification systems found in

previous literature.

  35  

5.1 Research design

In order to determine the degree of compliance, every annual statement in the sample will be

checked with a list of IFRS 5 presentation and disclosure requirements. In order for users to

understand how the compliance is determined or to recreate the study, disclosure indexes on

which the compliance is determined are presented and illustrated. An annual statement will

be checked with a selected list (disclosure index A & B) of items made in accordance with

the IFRS 5 presentation & disclosure requirements. These items will be checked on

applicability and availability. There are three different outcomes possible.

- The item is not applicable (e.g. no discontinued operations).

- Applicable and available (e.g. there are discontinued operations and sufficient

disclosures are available).

- Applicable but not available (e.g. there are discontinued operations, however no

sufficient information is disclosed).

Based on the outcome a score will be assigned. The determination of the scores is described

in the dichotomous. This research uses unweighted scores to maintain its research usefulness.

This is described in the unweighted scores paragraph. In order to determine the compliance

grade, the total score will be divided by the highest achievable score. This will show the

percentage of the standard that is presented or disclosed. This percentage will represent the

‘compliance grade’ on which differences will be analyzed.

There are two disclosure indexes. The disclosure index A is for non-current assets

held for sale and disposal groups. The disclosure index B is for discontinued operations. Not

all presentation & disclosure requirements by IFRS 5 can be used in the research. For the

presentation of the non-current assets held for sale, disposal groups and discontinued

operations no scores are admitted. This is because annual statements are selected on the basis

if they present non-current assets held for sale, disposal groups or discontinued operations. If

scores where to be applied it would show biased results. For the presentation of prior year

numbers no scores are applied as well. This is because IFRS 1 requires this as well and this

research investigates only IFRS 5. Several other disclosures are also not used by the

research. This is described in items removed from disclosure indexes.

  36  

Disclosure index A for non-current assets held for sale / disposal groups Number of

items

- Presentation of non-current assets held for sale / disposal groups

The non-current asset held for sale presented separately from the assets 1

The non-current liabilities held for sale presented separately from the

liabilities* 1

Total 2

- Disclosures of non-current assets held for sale / disposal groups

A description of the non-current asset is disclosed 1

A description of the facts & circumstances is disclosed 1

The gain or loss recognition is disclosed 1

The major classes of assets and liabilities are separately disclosed 1

Total 4 *This is only applicable for the disposal groups.

The non-current asset held for sale needs to be presented separately from the assets. This

research interprets this as a separate presentation from the assets, regardless if it is under

non-current, current assets or neither. It follows that this separation applies for the liabilities

of disposal groups as well. This has been described as an issue in chapter 2 and therefore will

be analyzed further in paragraph 6.2. The disclosures of the non-current assets held for sale

and disposal groups require a description of the non-current asset, facts & circumstances

regarding the sale, a gain and loss recognition and separate disclosure of the major classes of

assets. This research defines a description by an explanation that fulfills what the asset

exactly is (e.g. the non-current asset held for sale / disposal group consists of a factory

located in a certain place). The facts & circumstances are also an issue as described in

chapter 2. The discussion is whether a reason for the sale should be included. The research

analyzes this in paragraph 6.4 and therefore, the disclosures have only been analyzed on

disclosing information regarding the facts and circumstances around the sale (e.g. subjects

like probability of the sale, date of realization of the sale and efforts concerning the sale). For

the gain and loss recognition this research only expects that an amount presented of which

  37  

the entity expects to gain or lose at the sale. The major classes of assets and liabilities are to

be separately disclosed. This is also an issue described in chapter 2 because the definition

‘major’ is unclear. For this part of the research it has been interpreted as the separation

between non-current and current assets/liabilities. However, in paragraph 6.3 a deeper

analysis is shown.

Disclosure Index B for discontinued operations Number

of items

- Presentation of discontinued operations 0

- Disclosures of discontinued operations

The revenue, expenses and pre-tax profit or loss of discontinued operations 1

The related income tax expense 1

The gain or loss on measurement fair value less costs to sell 1

The related income tax expense 1

Represent the IFRS 5.33 disclosures for prior periods 1

Total 5

- Either presented in the financial statement or disclosed in the notes

Cash flows attributable to the operation, investing and financing activities 1

Amount of income from discontinued operations attributable to parent 1

Total 2

For the presentation of discontinued operations no scores are appointed. For the prior year

numbers no scores are applied as well. This is done for the same reasons under non-current

assets held for sale / disposal groups. The disclosure index for the disclosures and the

category either presented in the financial statement or disclosed in the notes are clear. Every

item needs to be presented or disclosed to gain a score.

For testing the accounting classification systems a cluster analysis will be used. Due

to the fact that the hypotheses are based on previous literature it is only logic that the method

of testing used will also be the same. Nobes (1983, 2011) and d’Arcy (2001) use cluster

  38  

analysis to identify accounting classification systems. In this cluster analysis they use the

average linkage between groups. This will be the method used for testing accounting

classification systems in IFRS 5. The compliance grades will be used as input for the cluster

analysis. In order to test this properly, two cluster analyses are be done. The first one will be

done to determine if there is a separate classification visible between Anglo Saxion and

Continental Europe countries. The second one will establish if a classification of France,

Spain and Scandinavian countries are visible.

IFRS requirements not included in the disclosure indexes

In the research design this study mentioned that several IFRS disclosures couldn’t be used.

This is because these requirements are only visible when they are available and it is not

possible to determine when they are applicable. Giving entities a score for this would result

in a bias in the compliance grades. Examples of these are adjustments, reclassifications and

remeasurements of non-current assets held for sale / disposal groups or discontinued

operations. In Appendix A a list is supplemented of the IFRS 5 presentation & disclosure

requirements and which are left out of the research.

Dichotomous

Based on the disclosure indexes a score of 1 is assigned when an item is applicable and

available. If an item is not applicable or is applicable but not available a score of 0 is

assigned.

€

T = dxi=1

m

∑

Where dx is 1 if the item is disclosed, and otherwise 0. m is defined by its maximum number

of items, which is 14.

Unweighted scores

The total score is computed out of the total sum of the items that are applicable. This implies

that every company has an unweighted score. To maintain the research usefulness,

unweighted scores are important. According to Lopes and Rodrigues (2007) the majority of

  39  

disclosure studies do this. One of the reasons for this is it reduces the personal bias to a

minimum. An other reason is that attaching weights to disclosure items are irrelevant as

companies are more forthcoming with less important information also tend to be more

forthcoming with more important information (Serpo 1979). For these reasons unweighted

scores in this research would serve qualitative results the best.

5.2 Population / sample

The population in for research is the Financial Times Stock Exchange Eurotop 100. These

are the 100 highest capitalized blue chip companies in Europe. The population contains 97

annual statements. This is because the entities registered in Switzerland are allowed to

choose between US GAAP and IFRS. Two of these entities use US GAAP, which excludes

them from the population. The remaining company Unilever was registered in two countries,

The Netherlands and The U.K. This company has it inheritance in The Netherlands and

therefore it was decided to remove this company from The U.K. listing. Of the 97 companies

in the population 46 annual statements had non-current assets held for sale, disposal groups,

both or unidentified. 16 Annual statements had discontinued operations. In total 49 annual

statements had either discontinued operations, non-current assets held for sale or disposal

groups. This will be the sample group of this research. In table 3 is a breakdown shown.

TABLE 3

Non-current assets held for sale specified as: N %

Non-current assets held for sale without disposal groups 15 33%

Disposal groups 6 13%

Non-current assets held for sale and disposal groups 5 11%

Non-current assets held for sale that have liabilities held for sale,

however disposal groups are not mentioned. 20 43%

Total 46 100%

In the results the number (N) of the non-current assets held for sale are 20 and the disposal

groups 31. This is not equal with table 2. The non-current assets held for sale are 20 because

this study adds the non-current assets held for sale, which are no disposal groups (15) with

the non-current assets held for sale and disposal groups (5). This study is not capable to

  40  

separate non-current assets held for sale due to a lack of clarity in these annual statements

and therefore, these are added to the non-current assets held for sale as the disposal groups.

The disposal groups are 31 because this study believes that when a non-current asset held for

sale has liabilities it should be a disposal group (20). Including the disposal groups (6) and

the non-current assets held for sale and disposal groups category (5) for the same reason as

described above makes this 31 disposal groups.

The population is widely diversified among countries which makes it an ideal

population for testing the cross-country differences. Table 4 shows a constituents list divided

by country. N1 here is the number of companies in the FTSE Eurotop 100 that use IFRS.

TABLE 4

Constitutents FTSE Eurotop 100

Country N1 %

Belgium 1 1%

Denmark 2 2%

Finland 2 2%

Norwegian 2 2%

Netherlands 5 5%

Sweden 6 6%

Italy 7 7%

Spain 7 7%

Switzerland 8 8%

Germany 14 14%

France 18 19%

U.K. 25 26%

Total 97 100%

  41  

Table 5 shows an overview of countries compared to the population (N1), applicable IFRS 5

(N2) and margin.

TABLE 5

Constituents divided by margin population/sample size

Country N1 N2 %

Netherlands 5 5 100%

Italy 7 6 86%

Spain 7 5 71%

Denmark 2 1 50%

Finland 2 1 50%

Norwegian 2 1 50%

Great-Britain 25 12 48%

Germany 14 6 43%

France 18 7 39%

Switzerland 8 3 38%

Sweden 6 2 33%

Belgium 1 0 0%

Total 97 49 51%

Table 3 shows that no Belgium companies use IFRS, which excludes Belgium from the

research. In total 11 countries remain in the sample. The last column of table 3 shows that the

sample size in comparison to the population. As shown the sample size contains at least 33%

of the population, which is deemed sufficient for hypothesis testing.

5.3 Research characteristics

The research characteristics show several items, which are important for recreating the study

and in order for readers to determine if the research done was valid. For these reasons the

following characteristics are supplemented.

Method of data collection

The data collection is done by hand through selecting the data from annual reports. By using

this monitoring approach in the data collection this research cannot attempt to elicit

responses.

Control of variables

This study has an ex-post facto design, which states that the researcher has no control over

the variables. Though they might not have control over the variables they are able to

manipulate them. However, this researcher is not affiliated with one of the companies in the

sample and with none of the auditing firms who represents these companies.

Time dimension

This research is a cross-sectional research because only annual reports of 2011 are used. This

is a limitation of this study. Due to lack of manpower and time it was not able to do a

longitudinal research, which would require data over several years.

Topical scope

The research is a statistical study as it is designed to obtain data rather broad then in depth.

This is because a statistical study will supply more data and in this case more relevant for

this research. However, this study would benefit from a case study in companies that perform

out of the ordinary. Due to the lack of manpower this has not been done.

Research environment

The research has been done under field conditions. As mentioned earlier the data is

handpicked from annual financial statements that are published by their companies and

therefore there is no control over the conditions of the research.

  43  

6 Results

In this chapter the results of the research are shown. This is divided in the overview of the

degree of compliance in IFRS 5, information regarding the ambiguities and cluster analyses

regarding the accounting classification systems. The N in the tables presents the amount of

annual statements. The % presents the compliance in the annual statements.

6.1 Overview of the compliance

In table 6 the scores of the entities are presented by percentile. The table shows the scores are

quite diversified among the sample. The research finds 7 annual statements with 0% as 100%

compliance. Furthermore, the most annual statements are in the upper 50% of the sample.

Table 7 shows the sample statistics. These show a standard deviation of 33,68%. This is

60,67% of the average, which shows that differences are present in IFRS 5 presentation &

disclosure requirements.

TABLE 6

IFRS 5 Compliance divided by percentile

Percentile N % Of total

0% 7 14%

1 – 10% 1 2%

11 – 20% 2 4%

21 – 30% 5 10%

31 – 40% 2 4%

41 – 50% 0 0%

50% 10 20%

51 – 60% 0 0%

61 – 70% 0 0%

71 – 80% 10 20%

81 – 90% 5 10%

91 – 99% 0 0%

100% 7 14%

Total 49 100%

  44  

TABLE 7

Sample statistics - Compliance differences %

Average 55,52%

Median 50,00%

Standard deviation 33,68%

TABLE 8

Non-current assets held for sale in quantity and compliance percentage %

Presentation in the statement of financial position

Non-current asset held for sale presented separately from the assets 100%

Disclosures of non-current assets held for sale

A description of the non-current asset is disclosed 60%

A description of the facts & circumstances is disclosed 30%

The gain or loss recognition is disclosed 20%

The major classes of assets are separately disclosed 50%

In the sample there are 20 annual statements that contained non-current assets held for sale.

Where they are presented in the statement of financial position is investigated in paragraph

6.2. These results show that the non-current assets held for sale are presented according to

IFRS 5. However, the disclosures are lesser in compliance. In 12 (60%) annual statements a

description of the assets is disclosed. Only 6 (30%) annual statements disclose the facts &

circumstances and only 4 (20%) of all the annual statements disclose a gain & loss

recognition. A total of 10 (50%) annual statements had the major classes of the assets

separately disclosed.

  45  

TABLE 9

Disposal groups in quantity and compliance percentage %

Presentation in the statement of financial position

The non-current assets of the disposal groups are presented separately from

the assets 100%

The non-current liabilities of the disposal groups presented separately from

the liabilities 94%

Disclosures of disposal groups

A description of the non-current asset is disclosed 94%

A description of the facts & circumstances is disclosed 61%

The gain or loss recognition is disclosed 42%

The major classes of assets and liabilities are separately disclosed 68%

Of the 31 disposal groups all presented the assets separately on the statement of financial

position. In 2 (6%) cases the liabilities of disposal groups were offset against the assets,

which is not allowed under IFRS 5.38. In the disclosures 29 (94%) annual statements show a

description. A total of 19 (61%) disclose facts & circumstances and 13 (42%) disclose gain

and loss recognitions. In 21 (68%) annual statements the major classes of assets and

liabilities where separately disclosed.

  46  

TABLE 10

Discontinued operations in quantity and compliance percentage %

Disclosures of discontinued operations

The revenue, expenses and pre-tax profit or loss of discontinued operations 63%

The related income tax expense 50%

The gain or loss on measurement fair value less costs to sell 56%

The related income tax expense 31%

Represent the IFRS 5.33 disclosures for prior periods. 69%

Either presented in the financial statement or disclosed in the notes

Cash flows attributable to the operation, investing and financing activities 50%

Income from continuing and discontinuing operations to owner of parent 75%

Of the sample group 16 annual statements reported discontinued operations. In 10 (63%)

annual statements the revenue, expenses and pre-tax profit or loss are disclosed. 8 (50%)

Annual statements disclose the related income tax expense. When revenue and expenses are

disclosed, 79% of the times income tax expenses are disclosed as well. What is remarkable is

that 9 (56%) annual statements show a gain or loss on measurement fair value less cost to

sell. The related income tax expense is reported 5 (31%) times. These numbers computed

show that 55% report related income tax expense. In 8 (50%) of the times a cash flow is

reported, in either the financial statement or disclosed in the notes.

12 (75%) Annual statements the income attributable from continuing and discontinuing

operations to the owner of the parent is disclosed.

6.2 Presentation in the statement of financial position

TABLE 11

Position of Non-current assets/liabilities held for sale in the

statement of financial position N %

Held for sale Assets

Presented under the current assets 24 52%

Presented separately under current assets 5 11%

Presented under the assets (where there is no separation

between current/non-current) 11 24%

Presented separate from the current/non-current assets 4 9%

Other then the above 2 4%

Total 46 100%

Held for sale Liabilities

Presented under the current liabilities 12 41%

Presented separately under the current liabilities 3 10%

Presented under the liabilities (where there is no separation

between current/non-current) 9 31%

Presented outside the (current / non-current) liabilities 5 17%

Total 29 100%

As described in chapter 2 it is unclear where in the statement of the financial position the

non-current assets held for sale and disposal groups should be presented. The results show

that 52% is presented under the current assets. Another 11% presents the non-current assets

held for sale separately under the current assets, making a total of 63% under the current

assets. In 24% of the annual statements there is no separation of the non-current and the

current assets. Then the non-current assets held for sale is presented as any other asset. The

non-current liabilities held for sale also prefer to be presented under the current liabilities. Of

the 29 annual statements, 41% choose to present the non-current liabilities held for sale

under the current liabilities. Another 10% is presented separately under the current liabilities,

making a total of 51% to prefer the current liabilities. In 31% of the annual statements there

  48  

is no separation between current and non-current liabilities. In this category the non-current

liabilities held for sale are also put in line among with the other liabilities.

6.3 Major classes in the disclosures

TABLE 12

Non-current assets held for sale in the disclosures N %

Non-current assets held for sale with breakdown 29 63%

Non-current assets held for sale without breakdown 17 37%

Total 46 100%

Non-current assets held for sale with breakdown in the

following categories

Non-current assets 5 4%

Current assets 5 4%

Tangible assets 4 3%

Intangible assets 15 13%

Property, plant & equipment 19 16%

Inventories 10 8%

Goodwill 9 8%

Investments 9 8%

Accounts receivable 7 6%

Cash & equivalents 7 6%

Loans & cash balances of third parties 4 3%

Deferred tax assets 4 3%

Other assets 21 18%

Total 119 100%

Of the 46 annual statements 29 (63%) of the non-current assets held for sale disclose a

breakdown of the major classes. In those who present a breakdown of the major classes the

results find a widespread of the interpretation of major classes. In total 19 categories are

found, averaging 4 categories per annual statement. The 13 largest categories are presented

  49  

because only the categories with four or more annual statements are shown. This was the

case with 6 annual statements. These have been added to the category other assets. In the

major classes the categories Property, plant & equipment (16%), Intangible assets (13%),

Other assets (13%), inventories (8%), Goodwill (8%) and Investments (9%) are most

frequently used.

TABLE 13

Non-current liabilities held for sale in the disclosures N %

Non-current liabilities held for sale with breakdown 23 74%

Non-current liabilities held for sale without breakdown 8 26%

Total 31 100%

Non-current liabilities held for sale with breakdown in the

following categories

Non-current liabilities 2 3%

Current liabilities 3 5%

Provisions 11 18%

Other provisions 2 3%

Accounts payable, trade 9 15%

Borrowings & cash balances of third parties 11 18%

Deferred tax liabilities 5 8%

Other liabilities 18 30%

Total 61 100%

The results find that 23 out of 31 (74%) annual statements disclose a breakdown of the non-

current liabilities held for sale. As with the non-current assets held for sale more categories

are found, however due to the widespread of the liabilities only the categories with one hit

have been added to the other liabilities. In total 12 categories were found, of which 4 where

one hits. The other liabilities (23%), provisions (18%), Borrowings & cash balances of third

parties (18%) and Accounts payable, trade are the classes frequently used.

  50  

6.4 Disclosing reasons for selling the assets

TABLE 14

Reasons for selling of the non-current assets / disposal groups N %

Reorganization 1 2%

Market regulation 1 2%

Realizing value for shareholders 1 2%

Disposals 3 7%

Divestment strategies 6 13%

No reason disclosed 34 74%

Total 46 100%

Of the 46 annual statements that present non-current assets held for sale / disposal groups

74% did not disclose a reason for the sale. 12 (26%) Annual statements disclosed a reason

for selling the assets, of which the reasons mainly are, disposals or divestment strategies. The

category disposals is defined by decommissioning of assets. A divestment strategy is defined

as having an underlying strategy where selling the assets is required.

6.5 Accounting classification systems

As described in paragraph 4.2 there are three hypotheses to be tested. Table 14 will show if

the first hypothesis concerning the Anglo-Saxon and Continental Europe is true or false.

Table 15 will show if there are classifications within Continental Europe. A cluster analysis

normally shows a hierarchical tree diagram. Due to the widespread of the results it was not

possible to present this. Therefore, the results are shown in the cluster distributions. For the

first hypothesis the cluster analysis was created with two-cluster distribution and for the

other hypotheses three were used to determine the several accounting classification systems.

  51  

TABLE 15

Cluster analysis Anglo-Saxon & Continental

Europe N Cluster 1 Cluster 2

Anglo-Saxon

The U.K. 12 25% 75%

Continental Europe

Switzerland 3 0% 100%

Germany 6 67% 33%

Denmark 1 100% 0%

Spain 5 60% 40%

Finland 1 100% 0%

France 7 43% 57%

Italy 6 33% 67%

Norwegian 1 0% 100%

Sweden 2 50% 50%

Total 32 50% 50%

The first hypothesis was that within the sample there is an accounting classification of

Anglo-Saxon and Continental Europe present. For the hypothesis to be true, the results

should show a 95% in either cluster at Anglo-Saxon and Continental Europe. The results

show that this is not the case. There is a widespread of the results and neither accounting

classification system is sorted in one of the clusters. Therefore, the first hypothesis is not

true.

  52  

TABLE 16

Cluster analysis Continental Europe N Cluster 1 Cluster 2 Cluster 3

France & Spain

Spain 5 60% 20% 20%

France 7 43% 29% 29%

Total 12 51% 24% 24%

Scandinavian countries

Finland 1 100% 0% 0%

Norwegian 1 0% 0% 100%

Sweden 2 50% 50% 0%

Denmark 1 100% 0% 0%

Total 5 63% 13% 25%

Other Continental Europe countries

Switzerland 3 0% 33% 67%

Germany 6 67% 33% 0%

Italy 6 33% 17% 50%

Netherlands 5 33% 17% 50%

Total 37 54% 22% 35%

As for the H2 and H3, table 16 shows the results for clusters in Continental Europe. The

results show a lot of widespread and no clear cluster is formed. This means that H2 and H3

are not true and therefore, H0 must be true. The differences in compliance in IFRS 5

presentation & disclosure requirements are not related to accounting classification systems.

  53  

7 Conclusion, limitations and recommendations

7.1 Conclusion

This study is a research in the degree of compliance in IFRS 5 of the hundred largest

companies in Europe. This study is descriptive in nature, due to the limited studies found

concerning the subject degree of compliance in IFRS. Therefore, the first research question

was: “What kind of degree in compliance do we find in the IFRS 5 presentation & disclosure

requirements?” This study decided it was important to study what theories there might be for

using the standard. In the introduction table 1 was created (named here table 17), which

illustrates the idea of voluntary and mandatory use of IFRS 5 and its possible relation to high

and low degree of compliance.

TABLE 17

High compliance Low compliance

Voluntary Voluntary disclosure Earnings Management

Mandatory Decision usefulness theory X

With this table the following research question was asked: “What theories can shed light on

the use of IFRS 5 non-current assets held for sale & discontinued operations, considering the

degree of compliance?” The third research question was: “What issues, if any, suggest that

the IFRS 5 Non-current asset held for sale and Discontinued Operations standard might be

complex?” This was questioned since prior researchers indicated that complexity might be an

issue. The final research question studies accounting classification systems because this

study offered the possibility of a unique insight in these systems. The research question was:

“Till what extent is the degree in compliance in IFRS 5 Non-current Assets Held for Sale and

Discontinued Operations presentation & disclosure requirements aligned with accounting

classification systems found in previous literature?

In answering the first research question, research shows an average degree of

compliance in IFRS 5 presentation & disclosure requirements of 55,25% and a standard

deviation of 33,67%. This can be considered as low since companies have to fully comply

with IFRS standards. The study finds that the compliance can vary from 20% to 100%. Table

18 consists of an overview of the remarkable results of the research.

  54  

TABLE 18

Overview of the remarkable results %

Disclosures of non-current assets held for sale

A description of the facts & circumstances is disclosed 30%

The gain or loss recognition is disclosed 20%

Disclosures of disposal groups

The gain or loss recognition is disclosed 42%

Disclosure of discontinued operations

The income tax expense related to the gain or loss fair value measurement 31%

The results suggest that not every company publishes all the information required by IFRS 5.

Therefore, the IASB should be notified of these results. They could benefit from this study as

the research can indicate where there is a lack of compliance. Also, it is important to notify

stakeholders of these results so that they realize that it is possible that information might be

missing in the non-current assets held for sale & discontinued operations section of an annual

statement.

The theoretical discussion finds that the theories voluntary disclosure, earnings

management and the decision usefulness can be applied to IFRS 5. In the introduction this

study linked voluntary and mandatory use of IFRS 5 with high and low degree of

compliance. The theoretical discussion suggests that the voluntary disclosure theory can be a

reason for voluntary disclosure and high degree of compliance of IFRS 5 presentation &

disclosure requirements. This is in accordance with the results from the Francis et al. (2005)

study, as he proves that voluntary disclosure reduces the cost in capital. For the combination

voluntary disclosure and low compliance the discussion suggests that earnings management

might be applicable. In most situations an entity is free to disclose non-current assets held for

sale. This can be beneficial when classifying a non-current asset held for sale. The asset can

be depreciated through a fair value measurement. This approach can be used to diminish

earnings. Research by Zhou & Lobo (2001) concludes that when firms disclose less they tend

to be more involved in earnings management and vice versa. For mandatory disclosure with

  55  

high compliance the discussion suggests a link with the decision usefulness theory, as

implementing IFRS 5 increases the convergence with US GAAP. This will lead to better

comparability between the standards, which might contribute to investors from non-IFRS

countries. Next to this the IASB also tries to increase the decision usefulness by

recommending amendments to change the major line of business or geographical area of

operations line to operating segment and try to capture more information related to a

strategic shift, something the users of the annual statements desired. This study has not tried

to determine an empirical link between the theory and compliance with IFRS 5. This is study

does recommended this step and therefore it is discussed in the recommendations paragraph.

Previous researchers in IFRS 5 suggested that the standard might be complex.

Complexity can cause different interpretations of the standard, what might lead to a possible

variation in the degree of compliance. Therefore, the following research question

investigated if there are any issues with IFRS 5 that might suggest the standard to be

complex. This study finds two issues in IFRS 5 classification requirements and three

ambiguities in the presentation & disclosure requirements. The ambiguities were empirically

investigated. The first issue was the lack of clarity in classifying a non-current asset a non-

current asset held for sale/disposal group. IFRS 5.8. determines whether a sale is highly

probable through looking if the item is ‘actively marketed’, has the ‘appropriate level of

management’ and is ‘an active program’, all terms described without a threshold. Also, the

definition of the discontinued operations is unclear since a discontinued operation has to be a

‘major’ line of business or geographical area of operations. A discussion can arise in the

definition of ‘major’. How define a major line of business or geographical area of

operations? The IASB proposed an amendment to change this to operating segment because

users of the annual statements argued that discontinued operations should be part of a

strategic shift. However, this has not yet been implemented due to resistance form several

audit firms due to it was unclear what would happen with the quantity of the disclosures. In

the end the question is, should discontinued operations present a strategic shift rather then the

disposal of major operations since a disposal of major operations is most likely a result from

a strategic shift? The second issue was that the definition of a non-current asset held for sale

and discontinued operation are not aligned. Non-current assets held for sale that are sold,

which do not present a major line of business or geographical area do not need to be

  56  

presented in the discontinued operations. This leads to the possibility that entities can present

non-current assets held for sale without disclosing these in the discontinued operations. By

doing this it can create haziness for its users. Three ambiguities were found in the

presentation & disclosure requirements of IFRS 5. One was the lack of clarity in presenting

the non-current assets held for sale in the statement of financial position. Deloitte, EY,

Mazars and PwC guidelines recommend that the non-current assets held for sale should be

presented separately from the current and the non-current assets. Only 9% of the sample

shows entities publishing these separately. GT states that these should be presented

separately under the current assets, of which 11% do. The majority of annual statements

(52%) present the non-current assets held for sale under the current assets, which is

remarkable since the guidelines of audit firms recommend other presentation. The disclosure

of major classes was at first sight also an ambiguity. Audit firms illustrate that these should

not just disclose a separation between the non-current and the current assets of the non-

current asset held for sale. Items like goodwill, Plant & Property & Equipment, debtors &

creditors should also be found. The results show that 63% of the annual statements disclose a

breakdown of the major classes. A total of 19 categories were found in the breakdown,

averaging 4 per annual statement. The following ambiguity was if entities should disclosure

a reason for selling the non-current asset. EY & GT both show in their examples annual

statements that a reason should be disclosed. However, the results do not. Of the annual

statements 74% do not disclose a reason for the sale. Why these companies do not disclose

the reason is unclear. The IASB should publish guidelines on how to interpret the ambiguity

because the lack of clarity in the standard gives the composer of the annual statement more

freedom on how to interpret these (Nelson; 2002). This might not always be in the best

interest for the users of the annual statements.

Concerning the last research question, this study finds no evidence of an accounting

classification system present in IFRS 5 presentation & disclosure requirements. The cluster

analysis on the Anglo-Saxon and the Continental Europe system shows a mix of results,

where no cluster can be determined. The cluster analysis on the determination of accounting

systems in Continental Europe shows also no clear cluster. No clusters could be determined;

however, the second cluster analysis shows that France & Spain have the same cluster

spread. The total of annual statements of France & Spain in the sample were 12. Whether

  57  

this is coincidence or France & Spain have more similarities, it remains unknown. Further

study is required. Nobes (2011) concludes in his study that there are accounting classification

systems present in IFRS only where this is allowed. The results of this study are in

accordance with this statement since the contrary has not been proven in this research.

To conclude this study, it finds the degree of compliance in IFRS 5 not as expected.

Considering the degree of compliance should be 100% it shows an image that mandatory

regulation is not per se a guarantee for good compliance in reporting. The results indicate

that the standard is not maintained accordingly. The IASB should take notes from this study

and try to improve the compliance. The study tried to find theories that can explain the use

of IFRS 5 and if these could be linked to the degree of compliance. Discussion does suggest

that theories concerning voluntary disclosure, decision usefulness and Earnings management

are applicable. However, no empirical evidence is available since these theories have not

been tested on linkage with IFRS 5. This study does provide a basis for future research.

Table 17 provides a set of hypotheses, which are interesting to test. Blommeart and

Lycklama a Nijholt (2006) mentioned that the IFRS 5 requirements where quite complex.

This has lead to the belief that complexity of the standard might be a cause for variation in

the results or even for a low degree of compliance. The study does find some complexity in

the standard. Examples are disclosing a reason for sale of the non-current asset held for sale

and the lack of clarity of the definition ‘major’ in discontinued operations. This study notes

that it is important for the IASB to take action in maintaining compliance in IFRS 5, since

the compliance over the financial year 2011 in the hundred largest European companies was

low.

7.2 Limitations

Although this study was carefully prepared, it has its limitations. The limitations concerning

the research design are as follows. The method of data gathering is done by hand, which

always carries the possibility of errors in selecting and picking the data. Second, the sample

size can be considered small and is limited in its time dimension. Only 49 observations over

the financial year 2011 have been made. This being small makes it hard to interpret the

results of this study correctly. This is an issue with the determination of accounting

classification systems in the IFRS 5 presentation & disclosure requirements. Here sometimes

  58  

only one financial statement per country is found (e.g. Finland, Norwegian & Denmark).

This makes the determination of accounting classification systems difficult. Increasing the

sample size and its time dimension would greatly benefit the research, as it would reduce the

risk of highly varied results and therefore make it more accurate. However, these two

limitations concerning the research design were unavoidable since I as researcher do not

have enough manpower to avoid these. The third limitation is concerning the third research

question in finding issues/ambiguities that suggest that the standard might be complex. The

selecting of regulation based on ambiguities is solely judged by my perception. Although I as

a researcher have a neutral point of view, it is possible that these results might be biased.

7.3 Recommendations

This study has some recommendations for improvement of IFRS 5 non-current assets held

for sale and discontinued operations. First, this study believes that a choice should be made

between either disclosing all the disposals in the non-current asset held for sale and liquefy

the results through discontinued operations, including ones which are not major lines of

business or geographical areas of operations. By doing this, a flow of outgoing business of

the entity is created and this would give users a clear overview. On the downside this could

lead to extensive disclosures of disposals that are deemed less important. Another approach

is one that is mentioned in an exposure draft of the IASB (2008) as a proposed amendment.

IFRS 5 should be disclosing the results of a strategic change. This study believes this is a

more viable and useful approach since the discontinued operations are already disclosing

disposals of major lines of business or geographical areas and most annual statements

disclose a paragraph of the disposals that are not included in the discontinued operations.

Second, the IASB should publish guidelines on the ambiguities since the industry leaders in

accounting have few similarities in their interpretation of the standard. This should be rather

more then less. Another recommendation comes from the financial statement of Banco

Bilbao Vizcaya Argentaria (BBVA). This study has not gone into measurement requirements

since these could not be checked. However, finding financial numbers concerning the

disclosures of the non-current assets held for sale/disposal groups proved to be hard. BBVA

proved to counter this by using a movement statement for the non-current assets held for

sale/disposal groups, shown in table 19.

  59  

TABLE 19

Non-current assets held for sale/disposal groups

Changes in the year xxxx

Costs

Balance at the beginning xxx

Additions xxx

Retirements xxx

Transfers xxx

Balance at the end xxx

Impairment

Balance at the beginning xxx

Additions xxx

Retirements xxx

Transfers xxx

Balance at the end xxx

Total xxx

This study recommends implementing a movement statement like this. The statement

including with disclosures over the amounts can show how the non-current assets held for

sale are computed, which should create a clear overview for its users. This study has some

recommendations for further research. Research in company characteristics might be useful

in understanding the degree of compliance in IFRS 5. Some examples of these characteristics

are; the specific audit firm of which the company is being audited, the industry type, the size

of the non-current assets held for sale and discontinued operations in comparison to the

assets and profit of the company. The last suggestion might also be able to determine if

earnings management is applicable in IFRS 5.

Another recommendation for future research is linking the theories with the degree of

compliance. This would result in the following hypotheses to be tested:

H1: Voluntary Disclosure theory is related to high degree of compliance with IFRS 5.

H2: Decision usefulness theory is related to high degree of compliance with IFRS 5.

H3: Earnings management theory is related to low degree of compliance with IFRS 5.

These hypotheses could be tested as follows. The annual statements that have been studied in

this research would be studied again. However, evidence is sought in the annual statements

for the theories above. These annual statements would then be linked to the results in the

compliance study. This could determine whether the theories are applicable on IFRS 5

presentation & disclosure requirements. A side note is to be made that for the testing of

decision usefulness theory only the degree of compliance of discontinued operations can be

used since this discontinued operations are mandatory and non-current assets held for sale

can be seen as voluntary. The last recommendation is that this study has only done a cross-

sectional research. A longitudinal and larger study might indicate or specify certain issues

better and could show if the degree of compliance over the years will improve or remains the

same.

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8 Appendix A & B

 

8.1 Appendix A – items removed from research

The following items have been removed from research because the items where only

auditable if the entity presented them. There was the possibility that the item was applicable

but wasn’t presented. Therefore a complete retrieval of the information was not possible.

Entities who did this had the possibility of gaining an advantage in the compliance study.  

TABLE 20

IFRS Items removed from research

Presentation of discontinued operations (statement of comprehensive income)

5.35 Adjustments in the current period to amounts previously presented as discontinued

operations that are related to the disposal are classified separately.

5.36 The component is ceased to be classified as discontinued operations. Presentation of

results (IFRS 5.33 till 5.35) are to be reclassified (for all periods).

5.37 Any gain or loss on the remeasurement of a non current asset classified held for sale

that is not discontinued operation will be included in the continuing operations.

Disclosures of discontinued operations

5.35 The nature and amount of the adjustments in the current period previously presented

as discontinued operations related to the disposal are disclosed.

Presentation of non-current assets held for sale (statement of financial position)

5.38 Any cumulative income recognized in other comprehensive income relating to non-

current assets classified as held for sale are presented separately.

5.40 No reclassifications or re-presenting amounts as held for sale of prior periods to

reflect the classification are made.

Disclosures of non-current assets held for sale

5.41 If applicable the reported segment in which non-current asset is presented in

according with IFRS 8 Operating Segments

5.42 If the classification of held for sale is ceased, a description regarding of the facts

and circumstances leading to the decision is disclosed.

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5.42 The effects on the results of operations of the decision above are disclosed for the

current period and any prior periods.

Presentation of disposal groups (statement of financial position)

5.40 No reclassifications or re-presenting amounts as held for sale of prior periods to

reflect the classification are made.

Disclosures of disposal groups

5.42 If the classification of held for sale is ceased, a description regarding of the facts

and circumstances leading to the decision is disclosed.

5.42 The effects on the results of operations of the decision above are disclosed for the

period and any prior periods.

5.36A If a sale plan is committed that involves the loss of control of a subsidiary

information regarding IFRS 5.33 - .36 is to be disclosed.

5.39 If the disposal group is newly acquired and meets the criteria to be classified held

for sale disclosure of assets and liabilities are not required.

 

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8.2 Appendix B – Constituents list

TABLE 21

FTSE Eurotop V00 Index Constituents list

1. A P Moller - Maersk A 26. Holcim

2. Arcelor Mittal 27. HSBC Holdgs

3. Atlas Copco 28. Iberdrola

4. AXA 29. ING Group CVA

5. Banco Bilbao Vizcaya Argentaria 30. Intesa Sanpaolo

6. Banco Santander 31. Koninklijke Philips Electronic

7. BASF 32. Muenchener Rueckversicherungs Reg

8. Bayer AG 33. National Grid

9. BG Group 34. Nestle

10. BP 35. Repsol-Ypf

11. British American Tobacco 36. Rio Tinto

12. Carrefour 37. Royal Bank Of Scotland Group

13. Centrica 38. SABMiller

14. Credit Agricole 39. Sanofi

15. Danone 40. Siemens AG

16. Deutsche Telekom 41. Soc Generale De France

17. Diageo 42. Telecom Italia Rsp

18. E.ON 43. Telefonica

19. Enel 44. Telenor A/S

20. Eni 45. Tesco

21. Fortum 46. Unicredit

22. GDF SUEZ 47. Unilever

23. Generali 48. Volvo A

24. GlaxoSmithKline 49. Zurich Financial Services

25. Heineken NV

  64  

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Disclosure checklists & example annual statements

Deloitte, ‘Assets held for sale and discontinued operations; a guide to IFRS 5’, 2008

Grand Thornton, ‘Non-current Assets Held For Sale and Discontinued Operations’, 2008

KPMG, ‘New on the Horizon: Financial statement presentation’, 2010

Ernst & Young, ‘Good Group (International) Limited, International GAAP Illustrative

financial statements for year ended 31 December 2011’, 2011

Ernst & Young, ‘International GAAP Disclosure Checklist, Based on International Financial

Reporting Standards in issue at 30 September 2011’, 2011

Mazars, ‘IFRS 5,Non-current Assets Held for Sale and Discontinued Operations: practical

guide to application and expected changes’, 2009

PriceWaterhouseCoopers, ‘International Standards >> IFRS 5 – Non-current assets held for

sale and discontinued operations’ 2008

Exposure drafts

IASB, ‘Exposure draft, Discontinued Operations, Proposed amendments to IFRS 5’, 2008

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Deloitte, ‘IAS Plus., Proposed amentments regarding discontinued operations’, 2008

Grand Thornton, ‘Exposure Draft Discontinued operations – proposed amendments to IFRS

5’, 2009

BDO, ‘Exposure Draft Discontinued operations – proposed amendments to IFRS 5’, 2009