International variations in IFRS practices: and how Spain differs from other major countries

1. International variations in IFRS practices: and how Spain differs from other major countries Christopher Nobes

2. Presenter: • Dr Christopher Nobes is Professor of Accounting at the University of London and at the University of Sydney. He is Adjunct Professor at the Norwegian Business School. He has taught in Universities in New York and San Diego, and has been a visiting professor in Amsterdam, Barcelona and Venice. • He was a member of the Accounting Standards Committee of the UK and Ireland (1987-90) and of the Board of the International Accounting Standards Committee (1993-2001). • He is the author of 14 books and former co-editor of Accounting and Business Research. He was the 2002 “Outstanding International Accounting Educator” of the American Accounting Association.

3. Tomorrow the world? • The IASC began work in 1973, but the important adoption of IFRS only started in 1994, with a few German companies • “The global rollout of International Financial Reporting Standards is gaining momentum, with more than 100 countries now using IFRS and all of the world’s major countries anticipated to be on board within the next few years” (BDO, 2012)

4. Overview of this presentation • An antidote to these wild claims is needed • Even where IFRS is used, Nobes (2006 in ABR) suggests motivation and scope for different national versions of IFRS practice, including lists of “overt options” • Many researchers have used this as a starting point • This lecture reviews the findings (see Nobes in ABR 2013)

5. Methods of implementing IFRS (consolidated statements of listed companies)

7. Conclusion so far • Research needs a good institutional setting • But, for example, Francis et al. (2008 in EAR) say that most unlisted companies in most of 56 countries (e.g. Spain) had adopted IFRS in 1999/2000

8. How IFRS Practices Can Differ

9. Eight opportunities for differences in IFRS practices • Different versions of IFRS (see slide 5) • Enforcement, compliance (varies nationally) • Language • Gaps in IFRS • Measurement estimations • First-time adoption • Overt options • Covert options

10. 3: Different translations • IAS 7 (para. 7): An investment normally qualifies as a cash equivalent only when it has a short maturity of, say, three months …(Portuguese omits the ‘say’) • IAS 19 (para. 78): discount rate for pension obligations uses interest rate on “commercial bonds” (German says Industrieanleihen) • IAS 41 (para. 34): account for a government grant when receivable (Norwegian, until 2012, said “received”)

11. 4, 5, 6: Gaps, measurement, first-time adoption • Gaps: e.g. IFRSs 4 and 6; and accounting for artworks (see Dubai law case in 2012: http://www.dfsa.ae/WhatsNew/DispForm.aspx?ID=227) • Measurement estimations: list in Nobes 2006 paper still applies, plus IFRS 7 • First-time adoption: e.g. survival of large initial differences in starting positions on goodwill

12. Eight opportunities for differences in IFRS practices • Different versions of IFRS • Enforcement, compliance • Language • Gaps in IFRS • Measurement estimations • First-time adoption • Overt options • Covert options

13. 7, 8: Overt and covert options • List of overt options has been used by several researchers

14. Examples of 2005/6 choices (% of companies)

15. 7, 8: Overt and covert options • List of overt options has been used by several researchers • A few options have since been removed by IASB (e.g. expensing of interest, treatment of AGL, proportional consolidation) • Covert options include such issues as recognising impairments and capitalising development costs • Paper (ABR, 2013) presents extended lists

16. Why would options/estimations be done differently? • Tax? For example, tax-driven choices flowing through from unconsolidated statements (e.g. AVCO in Germany) • Inertia? • Cost-saving; helping analysts?

17. Empirical Studies

18. First empirical studies • Non-systematic samples of choices: KPMG & von Keitz, 2006; ICAEW, 2007; EC, 2008 • Morais (2008) and Fasshaueret al. (2008) look at actuarial gains/losses in the EU • Kvaal& Nobes (ABR in 2010) study 16 options for 232 companies in 2005/6

19. ABR, 2010 paper • Five largest IFRS-using stock markets: Australia, France, Germany, Spain, UK • Index companies (e.g. ASX 50, FTSE 100) • 2005/6 statements • 16 policy choices (e.g. FIFO or weighted average; proportional consolidation for JVs)

20. Hypotheses • Null hypothesis of same practice in all countries • 19 alternative hypotheses (assuming continuation of previous policies) • H3: French and Spanish companies are more inclined than others to show equity-accounted profits after finance items • H16: The tendency to use proportional consolidation is found in the following countries in decreasing order: France, Spain, Germany, UK, Australia • 84 tests: 69 reject null hypothesis at 1%; 7 at 5%; 8 not rejected

21. Policy choices (%of companies by country)

22. Examples of Spanish choices • Why choose the ‘by function’ income statement? • Actuarial items are large, out-of-control and (usually) losses. Why would Spanish companies choose to include them in ‘earnings’? • Why did Spanish companies choose proportional consolidation? It makes sales and cash larger, but….?

23. Do policy choices change over time? • Kvaal & Nobes (EAR, 2012) look at all changes from 2005 to 2008 • H1: more change on transition than from 2005 to 2008 (not for France/Spain) • H2: more continental change than Anglo change (yes) • H3: variance greater for continentals (yes) • No effect of IASB proposed changes

24. Some policy changes from 2005 to 2008

25. Do small companies make different choices? • Nobes & Perramon (AAR, 2013) • Same five countries; 2008/9; compare to small listed companies • Small companies make different choices (and more homogeneous within country)

26. Policy choices (percentages of companies by country)

27. Significant differences, small/large

28. Do other factors affect policy choice? • Jaafar & McLeay (Abacus, 2007) find an influence of sector, but pre-IFRS • Cole et al. (2011): influence of auditor on disclosures/formats • Nobes & Stadler (2012): country influence survives the inclusion of variables for sector, firm and topic; extractive industry has idiosyncratic policies

29. Classification

31. Pre-IFRS classifications • Hatfield (1911), Seidler (1967), AAA (1977), da Costa et al. (1978), Frank (1979), Nair & Frank (1980) all find three groups: US, UK, other • Mueller (1967) has four groups with the US/UK in the same group. Why? • Nobes (1983) and Doupnik & Salter (1993) agree with Mueller • Shoenthal (1989), Cairns (1997), Alexander & Archer (2000), d’Arcy (2001) all reject ‘Anglo-American accounting’

32. Figure 1. A suggested classification of accounting ‘systems’ in some developed western countries in 1980 Accounting systems Micro-fair-judgemental Commercially-driven Macro-uniform Government-driven Tax dominated Business economics Extreme judgemental Business practice Professional rules British origin UK influence Professional regulation US influence SEC enforcement Code-based international influences Plan-based Statute-based Economic control Netherlands Australia NZ UK Ireland Canada USA Italy France Belgium Spain Germany Japan Sweden

33. Classification of IFRS practices • Nobes (Abacus, 2011) • Uses 2008/9 data from Kvaal & Nobes, and adds 3 countries to ‘cover’ Figure 1

37. Classification of IFRS practices • Nobes (Abacus, 2011) • Uses 2008/9 data from Kvaal & Nobes, and adds 3 countries to ‘cover’ Figure 1 • After 30 years of EU and IASC/B harmonisation, the UK is still with Australia and not with Spain

38. Experiments: Data on accounting differences under the same regulation • Nobes and Stadler (AOS, 2013) • IFRS practices in 2011 on 14 policy options: hand-picked data • 12 countries (including China, HK, South Africa, South Korea for the first time) • 515 largest listed companies

39. Percentages of policy choice by country and topic

40. Experiments: Data on accounting differences under the same regulation • IFRS practices in 2011 on 14 policy options: hand-picked data • 12 countries (including China, HK, South Africa, South Korea for the first time) • 515 largest listed companies • Notice the sector difference

41. Sample by country and sector

42. Examples of sectoral differences in policy choice

43. Percentages of policy choice by country and topic

44. Principal component analysis using all available data

45. Grouping of countries based on principal component analysis

46. Try Excluding Countries, Topics, Sectors • Countries: - compare runs 5 and 6: no change in principal components; but affects dendrograms(Figures 1 and 2)

47. Figure 1 Dendrogram for run 5

48. Figure 2 Dendrogram for run 6

49. Try Excluding Countries, Topics, Sectors • Countries: - compare runs 5 and 6: no change in principal components; but affects dendrograms(Figures 1 and 2) • Topics: - compare runs 2 and 3 - for Canada, compare runs 3 and 7

50. Grouping of countries based on principal component analysis