Research Proposal on

Impact of IFRS On

UK, Germany and Italy

Name:Stephen Das

Student ID: A4022183

Date:

Academic Year:2010-2011

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Impact of IFRS On

UK, Germany and Italy

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Table of Contents:

Executive Summary

1. Introduction……………………………………………………………………….. 5

1.1Background to the research and industry background……………………….. 7

1.2Research aim and Objectives…………………………………………………….. 10

1.3Motivation behind the research……………………………………………………11

2. Literature Review…………………………………………………………………..13

2.1Introducing IFRS…………………………………………………………………….13

2.2Benefits of IFRS adoption…………………………………………………………. 14

3. Research Methodology……………………………………………………………16

3.1Data collection technique…………………………………………………………. 16

3.2Data analysis…………………………………………………………………………18

4. Timeline……………………………………………………………………………… 20

5. Conclusion……………………………………………………………………………21

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6. References……………………………………………………………………………22

Executive Summary:

Globalisation and internationalization has undoubtedly transformed global economies,

making it more open and competitive, markets are integrating and with the

advancements made in the field of technology and telecommunication global trades

moving towards great momentum especially in the field of investments made across

borders. These developments have often highlighted and reflected the need of the

existence of accounting standards that are standards across all trading platforms thus

replacing the existing local GAAP, this transformation would excel in+ternational

investments and encourage investors to make investment decisions with greater

confidence.

This research proposal highlights the impact that IFRS would bring in the world of

accounting and finance thus transforming it into one single seamless system. However

there are certain issues that need to be addressed like cost, convergence of local

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GAAP etc for economies to completely migrate to IFRS. The impact of IFRS adoption

on economies is believed to be profound and advantageous.

The proposal aims to propose an in-depth research on the impact of IFRS on UK,

Germany and Italy and thus with the help of analysis justify and establish that different

economies would face varied issues and would benefit in numerous and different ways

with the implementation of IFRS.

1. Introduction:

Globalisation and internationalisation has affected many areas of global trade, and the

processes that are driven by globalisation have in many ways determined economic

and accounting activity. One of the profound outcomes of globalisation has been on the

evolution in the field of accounting and it has been that many countries today are

adapting to this change that is at international level, to their maximum strength and

potential. As mentioned by Joshi and Al-Basketi, 1999; Boolaky 2004 the International

Accounting Board, driven by these various forces of globalisation and

internationalisation are propagating the practice of International financial reporting

standards (IFRS) around the globe, to which different countries are responding

accordingly to the capability by either making an attempt to either adopt or partly adopt

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the IFRS. As Boolaky (2004) further mentions that owing to the element of cost

associated with it, the adoption of IFRS around has been different, where some big

organisations have completely adopted it while smaller businesses have made efforts to

uplift their present accounting practices and standards that are in line with the IFRS.

Keeping into close consideration the financial crisis that have been very recent in the

last few years, there has been a big void in the political and regulatory aspects of

financial world keeping this into consideration there is need for a single set of

converged, global accounting standard that sets a single platform for all accounting

reporting and regulations. Especially in the case of banks such standards would add to

the transparency and comparability across global banking industry.

Keeping the need for a seamless accounting structure the European Union on the first

of January 2005 announced that all the listed companies in the European Union are

required to publish their consolidated financial statements in accordance of the

International Accounting Standards, known as IAS/IFRS rather than the local national

requirements (GAP), as mentioned by many economist and financial scholars with the

influx of greater transparency, improved accounting quality and comparability, the

international standardisation of corporate accounting regulation would facilitate great

accessibility of investment capital across the European Union.

However, even with numerous benefits that IFRS would bring to the table in the world of

international standards of accounting, there are certain limitations and areas of concern

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like the element of cost etc, this research proposes to critically look into the Impact of

the adoption and application of IFRS in the UK, German and Italian economies, the

research with the help of various secondary and primary sources of information would

critically evaluate the impact IFRS has had on these countries, and with the help of

analysis using either qualitative or quantitative research methods the researcher then

aims to relate the findings to the existing literature thus adding validity to the result and

findings of the research.

1.1 Background to the research and industry background:

It is a fact that credible information is very valuable in the efficient working of capital

markets, primarily the two reasons behind this being:

This increases the incentive to invest in the markets and also

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It favors optimal allocation of the savings to the investment made.

Over the last few decades there has been an increased interest that has surfaced in the

understanding and recognition of the different way corporate reporting can take the

edge off information and agency problems. The Securities and Exchange Commission

(SEC) over the years has been making continual efforts to develop a set of accounting

standards that could serve a common purpose and form a financial framework for

financial reporting across the borders offerings. The main driver for this need has been

that the fact that issuers that are aiming to raise capital in multiple countries often victim

of increased compliance costs and inefficiencies tagged along with preparing numerous

financial statements that have to be line with the and have to comply with the different

judicial accounting requirements of the country where the capital being raised from. In

response to this emerging problem the International Organisation of Securities

Commissions (IOSCO) made recommendations for the introduction of 30 core

standards that would be issued by the IAB’S for cross-border offerings and listings.

On an international platform the importance of IFRS has been recognized globally the

International Federation of Accountants (IFAC) through the help of survey findings from

accounting leaders around the world revealed that out of the 143 countries survey 91

counties that is 90% of the total survey unanimously responded that a single set of

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international accounting standards were very important for the economic growth in their

respective countries

IFRS owing to its associated benefits and the return it would bring through adoption has

been globally accepted and have gained traction in all major regions of the world. The

status of IFRS in Europe and the United states can be briefly discussed below:

Europe:

It has been reported and claimed in various financial journals and papers that Europe

among the many regions adopting IFRS has shown the most-noticeable progress. The

European Union financial reporting strategy proposed the use and implementation of

IFRS from 2005, and keeping the scale of the undertaking about 9,000 listed

companies are now employing IFRS in the generation and processing of consolidated

financial statements. Further to this all the member states of the European Union accept

companies to use IFRS for corporate tax statements; it has also come into recognition

that most companies in the European Union today are still using the local General

Accepted Accounting Principle (GAAP) while still in implementation stages of IFRS,

which shows a increased convergence of local GAAP with IFRS.

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United States:

The signs of success reflected in the acceptance and implementation of IFRS at such a

large scale in Europe the United States of America has introduced a renewed focus of

merging the American standards of accounting with the International Financial

Reporting Standards (IFRS). A major step in the convergence of US GAAP and the

IFRS was initiated in 2007, when the SEC decided to vote reconciliation of differences

by the 1,100 non- US companies who have their securities registered with US

Securities and Exchange Commission (SEC). Further to this development IASB

chairman commented that this merger of GAAP and IFRS should be complete by the

end of 2012, it was then added by the chair of SEC that this convergence of accounting

standards and reporting practices would prove to be of great benefits to the United

States, it would not only improve the position of the US in the global financial markets

but would also improve capital raising opportunities and also provide better

comparability of financial statements from an investor perspective.

Rest of the World:

Regulating bodies in countries as diverse as Armenia, Costa Rica, Kuwait, Peru,

Australia, and South Africa require reporting from all publicly listed companies to be

based on IFRS. In addition, the International Organization of Securities Commissions

has recommended that the world’s regulators permit companies to prepare financial

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statements based on IFRS for cross-border offerings and listings. The IASB has also

begun a project to merge the Japanese GAAP with IFRS.

Thus as the literature above reflects that the need for having a globally accepted

standard for financial statement is a must and has significance in respects to creating a

single platform for accepted standards, this would not only add to the efficiency but

would also create opportunities to raise capital which would lead to growth and

development, however, there is still work left to be done as most of the leading

economies are on the final stages of convergence between their local GAAP and IFRS.

The researcher strongly believes that this change and acceptance of IFRS globally

would bring in many constructive changes and reforms that would integrate the global

accounting practice and procedures to one single plan thus creating seamless

accounting practices around the globe.

1.2 Research aim and objectives:

The primary aim of the proposed research would be to critically examine the

implementation of IFRS in three countries namely the UK, Germany and Italy. The

reason for particularly choosing these three countries is that these three countries are

believed to be very much similar in their national accounting standards. Like the UK and

Germany are common law countries where the economic interest focus is primarily on

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the needs of the shareholders and where-as Italy is considered to have a civil law

system where the creditors are considered to be the most significant and vital part of

the entire financial system.

The main objectives of the research are as follows:

1. To quantify the nature and the degree of changes in the financial reporting systems

that have been experienced as a result of adoption of IFRS in the UK, Germany and

Italy.

2. Accessing the element of cost associated with the production and publication of new

information in the three countries.

3. To identify and evaluate the standards those which have been the greatest

challenges in the implementation of IFRS in the three countries.

4. To evaluate the usefulness of IFRS information from the perspective of users of

financial statements.

5. To review and comment on whether the information required under IFRS is decision-

useful for stakeholders.

The researcher strongly believes with these objectives the research would be able to

not only locate any gap in the existing literature but would also be able to clear the

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understanding of IFRS, highlighting its importance and advantages along with any

drawbacks, if any.

1.3 Motivation behind the research:

In developing economies, government-owned institutions are dominant economic forces

and as such require an efficient and effective government financial management

system. Berry and Holzer (1993) argue that the accounting systems installed in those

countries were often too sophisticated for local requirements because they were

imported from developed jurisdictions to underdeveloped ones. But this argument is

less relevant today because of globalization and thus the importance of IFRS around

the world has grown.

Presently many developing countries are migrating to a free market policy through

privatization and capital account liberalisation in order to increase competition and at

the same time are opening up their economies by permitting entry to multinational

corporations. The rationale behind this strategy is to demonstrate their economic

freedom policy and the openness of the economy to the whole world – an aspect of

globalization. International Accounting Standards (Nobes, 1998a, b) the process of

moving towards international standards differs from the past when developing countries

could not afford to finance the cost of transiting from local standards to international

standards or could not develop “adapted accounting standards” suitable to their needs

(Tettley, 1991; Joshi and Al-Basketi, 1999).

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Although the three countries under consideration are categorised under the more

developed economies there are anomalies in their implementation of IFRS and their

present degree of convergence with their local GAAP practices, this fact that with varied

law systems in these countries these countries have still shown maximum sign of

convergence and adoption of IFRS, this has been of particular interest to the researcher

and the diversity and volatility in the economic environment in which these standards

are being implemented has really motivated to further research in this area of global

accounting practices and procedures.

2. Literature review:

This section of the research forms a theoretical framework for the entire research, the

researcher in this section would be critically reviewing and analyzing the various

literatures that is available on IFRS and other related concepts and understanding. This

section would first aim to introduce the very concept of IFRS, its origin, associated

benefits with a brief overview of the convergence progress and the top ten issues in the

successfully adoption and implementation of IFRS as a globally accepted and practiced

accounting standard.

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2.1 Introducing IFRS:

IFRS are accounting rules (‘standards’) issued by the International Accounting

Standards Board (IASB), an independent organisation based in London, UK. They

purport to be a set of rules that ideally would apply equally to financial reporting by

public companies worldwide. Between 1973 and 2000, international standards were

issued by the IASB’s predecessor organisation, the International Accounting Standards

Committee (IASC), a body established in 1973 by the professional accountancy bodies

in Australia, Canada, France, Germany, Japan, Mexico, Netherlands, United Kingdom

and Ireland, and the United States. During that period, the IASC’s rules were described

as ‘International Accounting Standards’ (IAS).

A single set of global financial reporting standards has been under development for

more than three decades since the International Accounting Standards Committee

(IASC) was first established in 1973. Today, the suite of standards comprises of

International Accounting Standards (IAS), which were first issued by the IASC and,

subsequent to April 2001, IFRS issued by the IASC’s successor, the IASB and

interpretations issued by the International Financial Reporting Interpretations

Committee (IFRIC).

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The IASC Foundation and IASB’s objective is “to develop a single set of high quality,

Understandable and enforceable accounting standards to help participants in the

world’s capital markets and other users make economic decisions”. The IASB also

seeks to “co-operate with national standard setters to achieve convergence in

accounting standards around the world.”

It was not until 2005, when the European Commission’s required public companies

reporting within the European Union (EU) to prepare consolidated financial statements

compliant with IFRS that IFRS began to be widely applied around the world. With that,

the IASB made significant progress in achieving its goal.

2.2 Benefits of IFRS adoption:

1. IFRS promises more accurate, comprehensive and timely financial statement

information, relative to the national standards they replace for public financial

reporting in most of the countries adopting them, Continental Europe included. To

the extent that financial statement information is not known from other sources, this

should lead to more-informed valuation in the equity markets, and hence lower risk

to investors.

2. Small investors are less likely than investment professionals to be able to anticipate

financial statement information from other sources. Improving financial reporting

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quality allows them to compete better with professionals, and hence reduces the risk

they are trading with a better-informed professional

3. IFRS adoption could reduce the cost to investors of processing financial information.

The gain would be greatest for institutions that create large, standardised-format

financial databases.

3. Research methodology:

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The research methodology for any research is considered to be the most significant and

is an vital aspect of the business, this process includes the different data collection

methods employed by the research and the research methodology that is either

qualitative or quantitative research methodology. This section of the research is of

particular significance as this adds to the significance of the research findings and

inappropriate research methodology could diverge the researcher from its objectives

thus resulting in incorrect results and research findings. It is very important that the

researcher picks the correct sources of information as these add validity to the research

other aspects of methodology that have particular significance are sample size, sample

population, and size etc.

The researcher in this particular research aims to use the qualitative research

methodology the reason being it would be critically evaluating the findings from financial

statements and then linking the finding with the reviewed literature.

3.1 Data collection technique and methodology:

The secondary research forms an important aspect of the research methodology

adopted by this research, secondary data would be collected from different secondary

resources and then critically analyze the collected data with the aim to form theoretical

framework for the entire research.

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The significance of the secondary research are numerous as it helps the researcher

pave the theoretical standing of the entire research. Data from various sources that

have academic standing will be taken into consideration and all the previous work done

in related area of research will be compiled and theoretically criticized developing the

scope of the research and identifying the key area of further research.

In the course of this research the research will be conducted on the secondary data

collected from various academic journals, books and other electronic sources that are

readily available on the student portal of London School of Business and Finance,

University of Wales. The source employed is reliable as they originate form an

academic standing.

Secondary data may be defined as “data that have already been collected for some

other purpose, perhaps processed and subsequently stored” (Saunders, et al 2007). All

these techniques are a reflection of the method of triangulation to gain extra validity and

reliability with the data and results (Bryman & Bell 2007). “Secondary data analysis in

general, involves the study of data that others have gathered either qualitatively or

quantitatively” (Bryman & Bell 2007). It has an advantage of facilitating the comparative

element to be included into the research design. It also adds quality to the data as it has

undergone rigorous and strict procedures before publication (Bryman & Bell 2007).

Primary research is a source of information that will be collected from the primary

sources of information, the primary data collection and the analysis of the data that will

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be collected is believed to add validity to the research. Although the data collection

process is time and money consuming process but it brings various benefits associated

with it to the research table.

The researcher for the purpose of this research has conducted primary research and in

doing so he has collected data from both the primary sources in the form of survey and

unstructured interviews. The primary data collected was then analysed and evaluated to

form constructive results to associate with the reviewed literature.

Thus the primary research has played a very significant role in the course if this

research, the data collected has added significant value and validity in the conclusion

drawing process.

Primary Data is “data observed, experienced or recorded closest to the event” and it is

important as primary data “are the nearest, one, can get to the truth, although

distortions inevitably occur as the proximity of the event decreases (Walliman 2005, pg

197). The drawback with using primary research is the time and cost involved in the

travel and interview periods. Nevertheless it is data collected first hand hence is more

reliable than secondary data (Bryman & Bell 2007).

3.2 Data analysis:

The different analysis methods that the researcher proposes to employ are as follows:

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Content analysis of financial statements

Analysis of reconciliation between statements IFRS and the national GAAP of

the three countries.

Conducting interviews with multiple stakeholders on adoption of IFRS including

interviews with a few auditors, analysts and regulators.

With the help of this data analysis approach conducted on the basis of the research

finding from both primary and secondary sources the researcher feels the research

objectives would be addressed and achieved with great success. This particular

analysis approach would reflect on the different levels of agreement, convergence and

issues faced in the three countries UK, Germany and Italy during the adoption and

implementation of IFRS.

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4. Timeline:

Month Day Activities

1-15 Overview of the theoretical framework of the research area,

analysing key literature in the form of practices, models,

concepts and practices

20-30 Structuring the critical analysis of the reviewed literature

5-30 Finalizing the appropriate methodology and sketching the data

collection and analysis techniques and tools.

1 – 17 Presenting the findings in the first draft of the research,

reflecting data analysis from both primary and secondary

sources, and discussing with the tutor for feedback and

improvement.

17 - 30 Final research compilation, presentation and conclusion and

recommendation drawing process, with the identification of the

scope of further research.

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Note: This a proposed time line and plan and is subject to change as per the research

advancements and objectives achievement.

5. Conclusion:

It is an inevitable and globally accepted fact that there is a need for standardization of

international accounting practices, procedures and format, this conversion from a

traditional GAAP approach would not add to the global understanding of the standards

but would also bring along numerous benefits of capital gains. With the help of this

proposed research the research would aim to establish the understanding of IFRS in

UK, Germany and Italy the degree of convergence with the local GAAP and thus

commenting and analysing the overall impact of IFRS on the financial reporting

standards of these countries.

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6. References:

Joshi, P.L. and Al-Basketi, H. (1999), “Development of accounting standards and

adoption of IAS: perception of accountants from a developing country”, Asian

Review of Accounting, Vol. 7 No. 2, pp. 97-113.

Boolaky, P.K. (2003), “The relevance and applicability of IAS in Madagascar: the

perception of accounting practitioners”, Journal of Accounting Research, India, Vol.

4, pp. 83-94.

Boolaky, P.K. (2004a), “Determinants of accounting standards in Southern African

development community”, Journal of Accounting Research, India, pp. 33-49.

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Boolaky, P.K. (2004b), “Colonization and accounting standards and practices in

Africa”, Delhi Business Review.

Berry, M. and Holzer, P. (1993), “Restructuring the accounting function in the third

world: Madagascar approach”, Research in Third World Accounting, Vol. 1, pp. 195-

216.

Nobes, C.W. (1998a), Accounting in Developing Countries: Questions about Users,

Uses and Appropriate Reporting Practices, ACCA, London.

Nobes, C.W. (1998b), “Towards a general model of the reasons in financial

reporting”, Abacus, Vol. 34 No. 2, pp. 162-87.

Tettley, J. (1991), “Developing countries: increasing involvement in IASC”, IASC

News, Vol. 19 No. 5.

Pran Boolaky, Kumba Jallow (2008); A historical analysis of the accounting

development in Madagascar between 1900 to 2005 The journey from accounting

plan to IFRS; Journal of Applied Accounting Research Vol. 9 No. 2; pp. 126-144;

Emerald Group Publishing Limited

Bryman, A. and Bell, E. (2007). Business Research Methods, Second Edition,

Oxford: Oxford University Press.

Walliman, N. S. R. (2005). Your research project: a step-by-step guide for the first-

time researcher. 2nd ed. London: SAGE

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Saunders, M., Lewis, P. and Thornhill, A. 2007. Research methods for business

students. 4th ed. London: Prentice Hall