Journal of International Accounting, Auditing and Taxation13 (2004) 89–119
Convergence with IFRS in an expanding Europe:progress and obstacles identified by large
accounting firms’ survey
Robert K. Larson∗, Donna L. Street1
Department of Accounting, School of Business Administration, University of Dayton,300 College Park, Dayton, OH 45469-2242, USA
Abstract
The International Accounting Standards Board (IASB) acquired greater legitimacy and staturewhen the European Union (EU) decided to require all listed companies to prepare consolidatedaccounts based on International Financial Reporting Standards (IFRS) beginning in 2005. Thisstudy examines the progress and perceived impediments to convergence in 17 European countriesdirectly affected by the EU’s decision. These include: (1) the 10 new EU member countries, (2) EUcandidate countries, (3) European Economic Area (EEA) countries, and (4) Switzerland. We utilizedata collected by the six largest international accounting firms during their 2002 convergence survey.Additionally, we analyze subsequent events and studies.
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1. Introduction
In recent years, the International Accounting Standards Board (IASB) has acquiredgreater legitimacy and stature (Choi, Frost, & Meek, 2002; Herz, 2003; Meek & Thomas,2004; Roberts, Weetman, & Gordon, 2002). Indeed, the 2002 convergence survey conductedby the six largest accounting firms reveals that 95% of the countries surveyed are committedto either the complete or partial convergence of their national accounting standards withInternational Financial Reporting Standards (IFRS)2 (BDO et al., 2003). A major event forthe IASB was the European Union’s (EU) decision in 2002 to require all EU listed companiesto prepare consolidated accounts using IFRS beginning in 2005. To date, considerableresearch has focused on convergence in the first 15 members of the EU (see, for example,Haller, 2002; Street & Larson, 2004).3
Although it has received limited attention by academic researchers, the EU’s decisionregarding IFRS has substantial ramifications for the rest of Europe. All new EU membercountries are obligated to follow accounting decisions made by the EU. This most directlyaffects the ten new EU members that joined May 2004 and the three EU candidate countries.In addition, Norway, Iceland, and Liechtenstein are members of the European EconomicArea (EEA). EEA countries, by treaty, are obligated to comply with EU Accounting Di-rectives and Regulations, including the adoption of IFRS in 2005. Finally, although not anEU member, Switzerland is geographically in the midst of the EU and has close economicrelationships with many EU countries.
The current study examines the state of convergence in these 17 countries by providingan overview of how IFRS are being adopted and investigating the perceived impedimentsto convergence. The study addresses a key question recently posed by Meek and Thomas,
What about non-listed companies and companies’ nonconsolidated (i.e. individual com-pany) accounts, particularly those from European code law countries? Will they con-tinue to reflect national accounting systems, or will they shift away from them? (Meek& Thomas, 2004, p. 31)
This research utilizes the extensive data set collected by the six largest international ac-counting firms in their GAAP Convergence 2002 survey. Additionally, subsequent eventsand studies are reviewed.
All 17 countries examined in this study will either require or effectively allow listedcompanies to prepare consolidated financial statements in accordance with IFRS by 2005.However, several barriers to convergence were identified by the large firms’ survey. The mostfrequently noted impediments were limited national capital markets, insufficient guidanceon first-time application of IFRS, the lack of existence of transactions of a specific nature(such as pensions and other post-retirement benefits), the tax-driven nature of nationalaccounting regimes (i.e., the alignment between financial accounting and tax reporting),and the complicated nature of particular standards. In regards to the latter, several of the
2 The term IFRS in the paper includes current and future standards issued by the IASB as well as InternationalAccounting Standards (IASs) issued by the former International Accounting Standards Committee.
3 Before May 2004, the EU member countries were Austria, Belgium, Denmark, Finland, France, Germany,Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom.
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countries were particularly concerned about financial instruments. Other standards mostcommonly viewed as complicated were impairment of assets, income taxes, and employeebenefits (pensions).
Our analysis reveals that concerns about tax linkages and complicated standards appearto be creating a situation in certain European countries where IFRS are most often usedfor listed companies’ consolidated accounts, and another basis of accounting is used fornon-listed companies and/or for individual accounts.4 The research finds that few of thecountries studied intend to require IFRS for non-listed companies, and only about half willrequire IFRS when listed companies prepare individual accounts. This finding suggeststhe emergence of a “two-standard” system of financial reporting in a majority of these 17European countries and is consistent withStreet and Larson’s (2004) findings for the first15 EU countries.
The rest of the paper is organized as follows. The study continues with a summary ofthe major findings reported by the firms inGAAP Convergence 2002.This is followed byan overview of official EU convergence efforts and a literature review. A detailed country-by-country analysis of the data is then presented and followed by a discussion of the resultsand the conclusion.
2. GAAP Convergence 2002
GAAPConvergence2002is the third major survey sponsored by the six largest accountingfirms aimed at encouraging convergence of national accounting standards with IFRS [GAAP2000, GAAP 2001, andGAAP Convergence 2002are available atwww.pwcglobal.com].GAAP 2001found that, at year-end 2001, many national accounting systems included nu-merous and significant differences from IFRS and that greater effort must be directed at iden-tifying differences in these countries and planning for their timely elimination (Andersenet al., 2001). The 2002 survey explores the extent to which nations have developed countryplans aimed at converging their national standards with the international benchmark andidentifies impediments these countries have encountered, or anticipate facing, in their effortsto converge with IFRS.
To provide context for the survey analysis by individual country, an understanding of theoverall findings ofGAAPConvergence 2002is important. The 2002 survey indicates globalaccounting convergence towards IFRS is underway. In some manner, 56 of the 59 partici-pating countries had either adopted IFRS or intended to converge their national GAAP withIFRS. While the survey findings support the legitimacy of the IASB’s global accountingrole, it also identifies obstacles that continue to impede convergence in many countries. Aslim majority of the 59 countries express concerns regarding the complicated nature of cer-tain international standards, especially those associated with fair value accounting. Almosthalf note that the tax-driven nature of their national accounting regime hinders convergence.Three impediments to convergence are identified by about one-third of the 59 countries:
4 The term non-listed includes all EU domiciled companies that are not listed on an EU stock exchange. Theterms individual accounts or individual financial statements are used in this paper. In some countries, these financialstatements may be known as annual, single-entity, or parent-only.
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(1) disagreements with certain significant IFRS; (2) insufficient guidance on first-time ap-plication of IFRS; and (3) limited domestic capital markets. Translation difficulties andsatisfaction with national standards among investors and financial statement users repre-sent barriers to convergence in about 20% of the countries. In addition to dealing with theobstacles noted above, the large firms conclude that capital market participants need to joinforces to ensure that (1) the coverage of IFRS in the education and training of accountantsis increased, and (2) national language translations of IFRS, including interpretations, areproduced on a timely basis.GAAP Convergence 2002includes a copy of the survey questionnaire completed by
partners representing the participating accounting firms in the 59 countries (see pages 19through 23). For each country, the findings reported inGAAP Convergence 2002reflectthe consensus view of the participating partners in that country and not necessarily thoseof the national governments or accounting standard setters. Respondents focused on listedcompanies. In countries where requirements for listed and non-listed companies differ,the responding partners were asked to provide additional information regarding the sit-uation for non-listed companies (i.e. would they be allowed or required to prepare con-solidated accounts based on IFRS, etc.).5 The primary data source for this paper is theexplanatory comments provided by the partners. In addition, subsequent events and studiesare reviewed.
3. EU convergence efforts
Effective January 1, 2005, European Commission (EC) Regulation No. 1606/2002 re-quires all EU listed companies to prepare their consolidated accounts in accordance withIFRS.6 However, listed companies will only be required to use those IFRS approvedfor use by the EU. In September 2003, the EU endorsed all then existing IFRS exceptthose relating to financial instruments (including IAS 32, IAS 39, and Standing Interpre-tations Committee (SIC) interpretations 5, 16, and 17). As of September 2004, the EUstill had not endorsed either the IASB’s financial instrument standards or the 16 Inter-national Accounting Standards (IASs) just revised as part of the “Improvements Project”(EC, 2004).7
The EU regulation allows the 25 member countries to determine whether IFRS endorsedby the EC will be required beyond the preparation of consolidated financial statements bylisted companies. Each EU country is given the choice of whether IFRS will be requiredor allowed in preparation of: (1) listed companies’ individual accounts, and (2) non-listedcompanies’ consolidated and/or individual accounts.
5 The survey also did not seek to address any different or additional requirements that may apply to financialservices or other specialized industries.
6 Companies can delay use of IFRS if: (1) they only have publicly traded debt securities; or (2) they alreadyuse another set of internationally accepted standards and are publicly traded both in the EU and on a regulatedthird country market.
7 The EC’s Accounting Regulatory Committee met in September, 2004 to discuss whether to recommend thatthe EC in October endorse IAS 32 and IAS 39. It recommends endorsing IAS 39, except for two sections: theprohibition on hedge accounting for core deposits and the fair value option.
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EU regulations also affect member states of the EEA. Effective since 1994, the EEAagreement allows Iceland, Liechtenstein, and Norway to participate in the EU Single Mar-ket without full EU membership. However, EEA countries “are expected to comply withthe accounting directives and regulations” (DTT, 2003b), including adoption of IFRS forpreparation of consolidated financial statements by listed companies (Andersen et al., 2001).
4. Literature review
Research addressing the convergence or harmonization of international accountingstandards is both growing and becoming more empirical in nature (for more extensivediscussions of this literature, seeAbd-Elsalam & Weetman, 2003; Garrido, Leon, & Zorio,2002; Meek & Thomas, 2004; Rahman, Perera, & Ganesh, 2002; Street & Larson 2004;Tarca, 2004). Many studies assess the International Accounting Standard Committee’s(IASC) (predecessor of the IASB) and the IASB’s success in facilitating or achievingharmonization. These studies focus on either: (1) accounting practices of corporations,de facto; or (2) national accounting standards,de jure(Tay & Parker 1990). This study isconcerned with the latter,de jure, and how or whether national accounting standards areactually moving toward convergence.
Early studies investigating the harmonization of official national accounting standardswith IASs produced varying results (Larson & Kenny, 1999). While more recent studiespoint out that convergence is still not complete (Bloomer, 1999; Street & Gray 1999), thesestudies indicate that the increased legitimacy of the IASC, and now the IASB, is creating asituation where national accounting standards are in the process of converging with IFRS(Abd-Elsalam & Weetman, 2003; Andersen et al., 2000, 2001).
Numerous studies have focused on accounting harmonization within the EU and otherEuropean countries (Aisbitt & Nobes, 2001; Canibano & Mora, 2000; Haller, 2002; Hoarau,1995; Roberts et al., 2002; Thorell & Whittington, 1994; Walton, 2003). In many of theearlier studies, the major harmonization issues examined and debated typically center on theproper and actual roles of the EU accounting directives and the IASC (e.g.Hoarau, 1995;Thorell & Whittington, 1994). One stream of research investigates the problems associatedwith translating accounting terminology and concepts, such as true and fair, into differentEuropean languages (Aisbitt & Nobes, 2001; Evans, 2003). Another stream of researchused annual reports and indexes in an effort to measure European harmonization (Canibano& Mora, 2000; Taplin, 2004). Roberts et al. (2002)andWalton (2003)document the devel-opment of accounting harmonization in Europe through the EU directives and note the shifttowards convergence with IFRS. After providing an in-depth analysis of EU harmonizationand its movement toward the IASB,Haller (2002)raises many important issues. For exam-ple, Haller (2002, 182) points out that the current EU solution of mandating IFRS for theconsolidated accounts of listed companies and allowing countries to require national GAAPfor individual accounts is “not really an increase in efficiency and a reduction in complexity!”
Recent developments in the EU and other European countries allow for an examinationof the effect of mandated regional regulations requiring convergence on national accountingstandards.Rahman et al. (2002)empirically support the idea that regulatory harmony canimprove practice harmony. However, the EU regulation mandating IFRS adoption by listed
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Table 1Sources of information regarding accounting practices in 17 European countriesPanel A:New European Union (EU) member countries (as of May 1, 2004)
Sources Cypus Czech Republic Estonia Hungary Latvia Lithuania Malta Poland Slovakia SloveniaGAAP Convergence
2002Xa X X X X X X X X
GAAP 2001 X X X X X X X X XGAAP 2000 X X X X XEU (2004c) X X X X X X X X X XDTT (2000) X X X X X X X XAlexander and Archer
a Cyprus returned aGAAP Convergence 2002survey, but the response did not address all areas this paper investigates. Cyprus already uses IFRS.
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companies followed a variant of ideas suggested byHoarau (1995)and others by allowingeach country to decide whether national standards should still be allowed or required fornon-listed companies and the individual accounts of listed companies. The current studycontributes to the literature by exploring the dynamics that evolve when regional regula-tions mandate convergence for consolidated accounts of listed companies while allowingindividual countries to determine the degree to which national standards converge withIFRS.
Convergence of national accounting standards with IFRS in what, until recently, couldbe called non-EU Europe has received limited attention in academic accounting journalsbased outside of Europe. Indeed, much of the existing English language academic literatureaddressing this issue has appeared in theEuropean Accounting Review. Most other priorstudies addressing convergence of IFRS and national standards were conducted by the largepublic accounting firms or the World Bank. While not meant to be exhaustive,Table 1liststhe major English language studies and reports regarding convergence for the 17 Europeancountries examined in this study. Many focus on comparisons of one or more country’snational GAAP and IFRS (e.g.Andersen et al., 2000, 2001; PwC, 2002a, 2002b, 2002c).The most complete study isDeloitte Touche Tomatsu’s (DTT) (2000)detailed comparisonof IFRS with GAAP in 14 Eastern European countries. In general, this body of researchindicates that, while over time national accounting standards are gradually converging withIFRS, a number of significant differences remain to be addressed before convergence isachieved. While European countries are moving to converge their accounting standards withIFRS, research is needed to provide updated assessments of convergence and impedimentsto its progress (Meek & Thomas, 2004).
Street and Larson (2004)investigated convergence in the first 15 EU member countriesand found that it is focused primarily on the consolidated accounts of listed companies.A major barrier to convergence of national standards with IFRS appears to be that mostcontinental European countries have historically linked their financial reporting and taxlaws (Eberhartinger, 1999; Eilifsen, 1996; Haller, 2002; Hoogendoorn, 1996; Holeckova,1996; Jaruga et al., 1996; Lamb, Nobes, & Roberts, 1998). Guenther and Hussein (1995, p.132)concluded that “one of the biggest impediments to uniform international accountingstandards is the requirement in many countries that financial reporting standards conformto tax regulations.” In the new EU environment,Meek and Thomas (2004, 31)ask, “Howwill taxation influence their accounting?” Our review of the large firms’ 2002 convergencesurvey findings and recent developments provides preliminary evidence of the extent towhich the European countries examined in this study have been motivated to break or relaxthis traditional link.
5. Findings
We examine convergence efforts in 17 European countries that are either new EU mem-bers or have close economic and political ties to the EU. While the study examines 17countries, it primarily focuses on the 13 countries that provided detailed responses to thelarge accounting firms’ 2002 convergence survey.GAAP Convergence 2002did not coverconvergence efforts in Liechtenstein, Malta, and Turkey, and the survey response from
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Cyprus lacked detail (i.e. IFRS had already been adopted). This section begins by reportingeach country’s plans to converge national GAAP with IFRS (seeTable 2for a summaryof the countries included in the 2002 survey). Then, for the countries covered inGAAPConvergence 2002, this section explores the difficulties experienced or anticipated in work-ing towards convergence (seeTable 3). This includes highlighting the particular accountingtopics and standards that the survey finds to be hindering convergence (seeTable 4). Whilethe analysis focuses on data from the survey, it also incorporates information from otherpertinent reports to provide a more complete and up-to-date snapshot of convergence ef-forts in these countries. The discussion begins with the new EU members, followed by EUcandidate countries, the EEA countries, and Switzerland.
5.1. Cyprus—new EU member country
Cyprus requires all companies to use IFRS in preparation of both individual and consol-idated financial statements (Ernst & Young Cyprus, 2004). Thus, Cyprus’ survey responsedid not indicate any significant obstacles to convergence.
5.2. Czech Republic—new EU member country
The Czech Republic will require all listed companies to apply IFRS in consolidated andindividual financial statements for 2005 accounts (EU, 2004c). Non-listed companies willbe allowed, but not required, to use IFRS for consolidated accounts. Non-listed companieswill still be required to use Czech GAAP for individual accounts. Where applicable, earlyadoption of IFRS is permitted.
Accounting legislation effective January 1, 2002 resulted in the elimination of some dif-ferences between Czech GAAP and IFRS and, accordingly, made Czech GAAP more con-vergent with IFRS. Further progress is expected toward convergence. However, theWorldBank (2003a)notes a number of differences between IFRS and Czech GAAP, includingChanges in Accounting Policies (IAS 8), Intangible Assets (IAS 38), Business Combina-tions (IAS 22), Special Purpose Entities, and Financial Leasing (IAS 17). TheWorld Bank(2003a, p. 1)also reports that “in practice, compliance with certain complex EU Directivesand IAS requirements, including those dealing with consolidation and deferred tax, hasbeen delayed.”
A number of impediments to convergence were identified by the 2002 convergence sur-vey. These include insufficient guidance on first-time application of IFRS, the tax-drivennature of the national accounting requirements (viewed as a major obstacle), a relativelyunderdeveloped capital market, and a general satisfaction with national accounting stan-dards. On a more positive note, foreign investors are seen as supporting the adoption ofIFRS. Another impediment to convergence noted on the Czech Republic survey is the lackof transactions of a specific nature, such as pension schemes and other post-retirement ben-efits. The survey also suggested that national standard-setting authorities believe the localenvironment is specific and needs tailored accounting and reporting standards that reflectthe Czech environment.
The survey indicates convergence could be further stimulated by the introduction of anindependent body that would issue Czech accounting standards. Convergence could also be
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Table 2Expected use of IFRS in 2005 for 17 European countries by listed and non-listed, and by consolidated and individual financial statementsEuropean country IFRS required for consolidated statements of
listed companiesIFRS required for individual accountsof listed companiesa
IFRS Required for consolidatedstatements of non-listed companies
IFRS required for individualaccounts of non-listed companies
New EU membersCyprus Yes Yes Yes YesCzech Republic Yes Yes Allowed option NoEstonia Yes Yes Required for financial institutions; al-
lowed for othersRequired for financial institutions;allowed for others
Hungary Yes, to extent does not conflict with national law No Allowed option, to extent does not con-flict with national law
No
Latvia Allowed, to extent there is no conflict with nationallaw
Allowed, to the extent there is no conflictwith national law
Allowed, to extent there is no conflictwith national law
Allowed, to extent there is no con-flict with national law
Lithuania Yes Yes Yes for banks; not allowed for others Yes for banks; not allowed forothers
Malta Yes Yes Yes YesPoland Yes Allowed option Yes for banks; not allowed for most
othersNot allowed for most companies
Slovakia Yes Yes Yes NoSlovenia Yes Being considered as required Proposed as required for banks and in-
surance firms; allowed for some othersProposed as required for banks andinsurance firms; allowed for someothers
EU candidatesBulgaria Yes Yes Yes YesRomania Yesb Yesb Yesb Yesb
Turkey Allowed option Allowed option
EEA membersIceland Yes, EEA members expected to (must) comply
with EU accounting directives and regulationsBeing considered as allowed option Being considered as allowed option Being considered as allowed option
Liechtenstein Yes, EEA members expected to (must) complywith EU accounting directives and regulations
Allowed option Allowed option Allowed option
Norway Yes, EEA members expected to (must) complywith EU accounting directives and regulations
Will probably not be allowed Being considered as allowed option Will probably not be allowed
OtherSwitzerland Multinational companies must use IFRS or US
GAAP; Others may use Swiss GAAPNo No No
Data sources: GAAP Convergence 2002 Survey Data, 2004 EU Surveys, DTT, E&Y, and PwC.a Several countries state that companies may use IFRS as long as it does not conflict with national accounting laws.b Except for small entities and where Romanian Accounting Law conflicts with IFRS.
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Table 3Perceived impediments to achieving IFRS convergence identified in large firm surveya
European country Complicated natureof particularstandards
Tax-driven natureof nationalaccounting regime
Disagreement withcertain significantIFRS
Insufficient guidanceon first-timeapplication of IFRS
Lack of Existenceof transactions of aspecific nature
New EU membersCzech Republic X X X X XEstonia X X X XHungary XLatvia X X X X XLithuania X X X X XPoland X X X X XSlovakia X X X XSlovenia
EU candidatesBulgaria X X X X X XRomania X X X X X
EEA membersIceland XNorway X X X
OtherSwitzerland X
Total 8 7 1 7 9 3 3 7a As of December 31, 2002.
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Table 4Accounting standards and areas perceived as barriers to convergence in surveya
European country Standards seen as too complicated or complex Standards where countryhas little experience withsuch transactions
FinancialInstruments(IAS 39)
Impairmentof Assets(IAS 36)
Deferred IncomeTaxes (IAS 12)
EmployeeBenefits (pensions)(IAS 19)
Other Pensions andpost-retirementbenefits
Other
New EU membersCzech Republic XEstonia X X Reporting by Retirement Plans (IAS 26),
Hyper-Inflation (IAS 29), Joint Ventures(IAS 31)
X
HungaryLatvia X X X X Construction Contracts (IAS 11), Leases
(IAS 17), Investment Property (IAS 40)X
Lithuania X X X XPoland X X Business Combinations (IAS 22), SIC 19
and SIC 30 (Reporting Currency)X Financial
InstrumentsSlovakia X XSlovenia
EU candidatesBulgaria X X X X Leases (IAS 17), Reporting by Retirement
Plans (IAS 26), Provisions (IAS 37)X
Romania X X Hyper-Inflation (IAS 29), SIC 19 and SIC30 (Reporting Currency)
EEA membersIcelandNorway X
OtherSwitzerland
Total 8 5 4 3 6a As of December 31, 2002.
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facilitated by changes in tax and other business legislation. In regard to the former, theWorldBank (2003a)has expressed concern that the Ministry of Finance drives both accountingregulations and the regulation and collection of taxes.
The survey noted that while new IFRS translations are usually prepared on an annualbasis, at year-end 2002, the most recent version of IFRS available in the Czech languagewas the 2000 version. Confirming the survey, theWorld Bank (2003a)notes that 2001 and2002 translations were not published. The World Bank further noted that the 2000 versionwas expensive and, therefore, not widely available. AnIASB (2004)approved 2003 Czechlanguage translation is now available.
5.3. Estonia—new EU member country
In 2005, Estonia will require all listed companies and all financial institutions to applyIFRS in their consolidated and individual financial statements (EU, 2004c). Non-listedcompanies may choose to prepare their consolidated and individual accounts using eitherIFRS or Estonian GAAP. Larger companies are expected to choose IFRS while smaller andmedium-size companies (SMEs) are expected to choose Estonian GAAP.
The new law states that standards of the Estonian Accounting Standards Board (EstonianGAAP) should be harmonized with IFRS and cross-referenced to applicable IFRS para-graphs. New Estonian GAAP should be in line with IFRS recognition and measurementrequirements. “Any differences in the local standards should be explained and justified”(DTT, 2003a). By mid-2003, most Estonian GAAP had been rewritten to conform with thenew law and IFRS.
Although new standards of Estonian GAAP are to be based on IFRS, they will require lessdisclosure and will allow simplified treatments in certain accounting areas. Several IFRSdeemed less relevant in the Estonian economic environment will not be covered by EstonianGAAP. Standards not expected to be adopted into Estonian GAAP in the near future includeIAS 19 (Employee Benefits), IAS 26 (Accounting and Reporting by Retirement Plans),IAS 29 (Hyperinflation), and IAS 31 (Joint Ventures). Estonian GAAP recommends thatcompanies follow IFRS where local GAAP is silent.
Convergence with IFRS is relatively widely supported by different authorities. The Esto-nian Accounting Standards Board understands that, for a small country like Estonia, IFRSis the most effective way of improving the quality of the accounting framework.
Unlike many countries, the Estonian survey response states that the national accountingenvironment is absolutely not tax-driven (there is no annual profit tax). Rather, asDTT(2003a)notes, corporate tax is based on dividends, not profit.
While considerable progress has been made, the survey identified several impedimentsto convergence. These include: (1) the complicated nature of certain IFRS, particularlyIAS 39 (Financial Instruments); (2) a relatively underdeveloped capital market, includingdifficulties in measurement of the fair value for items such as long-term investments andbiological assets; (3) the lack of existence of transactions of a specific nature, such as pensionfunds; and (4) translation difficulties.
IFRS were not translated into the national Estonian language at the time of the 2002survey. However, a translation was in process, and it was hoped that a completed text wouldbe published by the end of 2003 or the beginning of 2004.
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5.4. Hungary—new EU member country
In 2005, Hungary will require listed companies to prepare consolidated financial state-ments in accordance with IFRS, to the extent there is no conflict with national law. IFRSwill also be permitted, but not required, for preparing consolidated accounts of non-listedcompanies. However, IFRS will not be permitted for the individual accounts of listed andnon-listed companies unless the individual accounts also comply with the Hungarian Ac-counting Act (EU, 2004c).
Government Resolution No. 2099/2002 (dated March 29, 2002) sets out a detailed timeschedule of steps to harmonize Hungarian accounting legislation with the EU norms. Hun-garian national accounting standards will be based on IFRS, and the deadline for com-pletion is 2008. The standard-setting process was initiated by several meetings set upby the Ministry of Finance (which is responsible for the current accounting legislation)to discuss basic decisions regarding the standards. Attendees represented the Chamberof Auditors, the Association of Qualified Accountants, several Ministries, preparers andusers of financial statements, and Big 4 accounting firm representatives. The standard-setting process is intended to eliminate some allowed alternatives included in IFRS. Itis also expected that some additional rules will be incorporated to reflect Hungarianspecialties.
The tax-driven nature of national accounting requirements is seen as an impediment toconvergence. Previously,de Bruin (2000)noted that Hungary still had a “strong linkage toaccounting for tax purposes.” Also, the survey identified some concerns that IFRS are toocomprehensive and complex for owner-managed SMEs.
At the time of the survey, the most recent Hungarian version of IFRS was an unofficialtranslation prepared in 1994. The 2002 edition was expected to be officially translated by theend of 2003, and plans are to translate new IFRS as they are issued. With EU membership,it is believed that problems with translation availability should disappear.
5.5. Latvia—new EU member country
Legislation currently in force allows companies to use IFRS in the preparation of in-dividual and consolidated financial statements, but only to the extent it does not conflictwith the national Latvian accounting laws (EU, 2004c). Additionally, Riga Stock Exchangelisting rules currently require that all “Official List” companies prepare and submit financialstatements prepared in accordance with IFRS. However, for statutory reporting purposes,these companies are required to prepare another set of accounts prepared in accordancewith the accounting law.
Latvia plans to establish a board to develop Latvian standards in compliance with IFRS.At the time of the survey, the new accounting law was still in the process of approval. Theproposed law would require the Cabinet of Ministers of Latvia to mandate the process ofconvergence in accordance with EU requirements and IFRS, and it would apply to a longlist of companies and entities, including commercial companies, branches of internationalcompanies, not-for-profit organizations, permanent representatives of foreign companies,state and municipality organizations, public organizations, and individuals carrying outbusiness activities. However, the Cabinet of Ministers would have the authority to determine
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the mandatory Latvian accounting standards (which should comply with IFRS) and thescope of the entities to which the Latvian accounting standards apply.
While Latvian standards are to comply with EU regulations and IFRS, it is intendedthat Latvian accounting standards will be more simple, understandable, and easier to use.Thus, few international standards will be incorporated without changes. While there shouldnot be any real conflicts with IFRS, Latvian standards may ignore subjects not generallyapplicable to Latvia. When national accounting law does not make specific requirements,best practices of IFRS are to be followed, but this guidance is likely to apply only to large,local companies and foreign subsidiaries subject to the judgment of the auditor.
At the time of the survey, four national accounting standards had been issued by theFinancial Accounting Standardisation Technical Committee under the Latvian Ministry ofEconomics. These include: (1) Presentation of Financial Statements; (2) Inventories; (3)Cash Flow Statements; and (4) Net Profit or Loss for the Period, Fundamental Errors andChanges in Accounting Policies. These standards are not legally binding, although theyrepresent generally accepted practice and may be voluntarily applied.
Several impediments to convergence in Latvia were identified by the survey. One im-pediment is the lack of financial resources, including money to involve professionals in thelocal standard development process. The survey also revealed concerns regarding insuffi-cient guidance on first-time application of IFRS, although respondents noted there was noreason to believe such guidance could not be issued if necessary.
The Latvian survey respondents believe a separate system of accounting for tax assess-ment is a necessity. Under the existing system, application of IFRS influences calculationof the tax base. Tax adjustments needed when taxable profit is different than accountingprofit under IFRS had not been developed at the time of the survey.
Indeed, there is reluctance of national authorities in Latvia to accept standards basedon rules prepared by an international organization, such as the IASB. Until EU admission,Latvia could not directly incorporate IFRS in the Latvian legal system, which is based onContinental law principles. However, the survey suggested recent admission to the EU mayfacilitate inclusion of IFRS in Latvia’s legal system.
While the Latvian accounting profession is definitely interested in developing moresophisticated national standards, IFRS are generally viewed as too complex, especiallywith regard to extensive disclosures. Indeed, a major concern highlighted by the surveyis the complicated nature of some IFRS. Adoption of the following standards would becomplicated for SMEs (which constitutes more than 99% of enterprises in Latvia): IAS11 (Construction Contracts), IAS 12 (Income Taxes), IAS 17 (Leases), IAS 19 (EmployeeBenefits), IAS 36 (Impairment of Assets), IAS 39 (Financial Instruments), and IAS 40(Investment Property).
Three additional barriers to convergence were identified by the survey. Certain types oftransactions, such as pensions and post-retirement benefits, do not exist or are not commonin Latvia. Thus, a lack of applicability may impact the perceived need for standards in theseareas. Another impediment is the relatively undeveloped state of the Latvian capital market,which is seen as rather illiquid. Finally, translation difficulties were seen as a barrier.
At the time of the survey, the most recent translation of IFRS available was the versioneffective January 1, 2000 and published in 2001. Private organizations developed the 1997and 2001 translations, which were not officially sanctioned. In the past, limited financial
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resources were available for translation efforts. At the time of the survey, a translation ofthe 2002 version of IFRS was underway.
5.6. Lithuania—new EU member country
In Lithuania, as of January 1, 2004, IFRS are required to be used by all companies listedon the National Stock Exchange. By 2005, all listed companies and all banks (whether ornot listed) will be required to use IFRS to prepare both consolidated and individual financialstatements (EU, 2004c). Except for banks, all non-listed companies will be required to useLithuanian GAAP for both consolidated and individual financial statements.
A new national accounting standard-setting body has been established by law (WorldBank, 2002b). The Lithuanian Law of Financial Accounting specifically states thatLithuanian Business Accounting Standards (Lithuanian GAAP) should comply withIFRS. Lithuanian GAAP is being developed and is expected to be similar toIFRS.
According to the survey, several obstacles pose a barrier to convergence in Lithuania,including insufficient guidance on first-time application of IFRS, the tax-driven nature ofthe national accounting regime, and a relatively underdeveloped capital market. Certaininternational standards are also seen as being relatively complicated, including IAS 12(Income Taxes), IAS 36 (Impairment of Assets), and IAS 39 (Financial Instruments). TheWorld Bank (2003b)notes that the Bank of Lithuania prohibits banks from using IAS 39and has rules regarding consolidation that conflict with IFRS.
The survey also indicated that in Lithuania both accountants and financial directorsin most companies and the public in general have very limited knowledge of IFRS. Inaddition, up-to-date consolidation and equity methods of accounting were not required byLithuanian GAAP; therefore, companies do not have relevant experience. Another perceivedbarrier to convergence identified by the survey is the lack of existence of certain types oftransactions in Lithuania, particularly pensions for employees and other post-retirementbenefits. Derivative instruments, including embedded derivatives, are also not widely usedin Lithuania.
An official translation of IFRS in the Lithuanian language has been published. However,according to the survey, it is not easily available (expensive and sold only in certain places),and the quality of the translation is poor.
5.7. Poland—new EU member country
As of July 2004, Poland’s Parliament had a proposal pending on how to officially con-verge with IFRS (EU, 2004c). In light of Poland’s then anticipated accession to the EU,survey respondents expected that public companies would be required to produce IFRSconsolidated financial statements as of 2005. Expectations are that listed corporations willbe allowed, but not required, to use IFRS for their individual financial statements (EU,2004c). While non-listed banks are expected to be required to prepare their consolidatedaccounts using IFRS, few other non-listed companies will be permitted to use IFRS for theirconsolidated or individual accounts.
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Recent changes to the Polish accounting law (applicable from 2002) moved Polandsignificantly towards IFRS (e.g. long-term contracts, leasing, financial instruments). Polandalso adopted IAS 33 (Earnings Per Share). While not compulsory, Poland’s accounting lawstates that for issues where Polish GAAP is silent, IFRS may be used. Beginning in 2004,all public companies are required to produce a reconciliation of net profit and net assetsbetween Polish GAAP and IFRS.
The 2002 accounting law additionally created the Polish Accounting Standards Com-mittee (KSB). The Committee’s responsibilities include: (1) preparation of national ac-counting standards; (2) analysis of IFRS, other national standards, and EU directives; and(3) liaison with international bodies concerned with convergence of accounting standards.In practice, expectations are that IFRS will be a key benchmark used by the Polish Ac-counting Standards Committee when preparing Polish National Accounting Standards.However, at the time of the survey, many IFRS had not yet been addressed, includingIAS 1, IAS 8, IAS 14, IAS 17, IAS 19, IAS 22, IAS 26, IAS 29, IAS 36, IAS 38,and IAS 41. TheWorld Bank (2002c)has also expressed concerns about differences be-tween IFRS and Polish Accounting Regulations, including reporting under hyperinflation-ary conditions, revaluation of fixed assets, consolidation requirements, segment reporting,research and development, leasing, accounting for employee benefits, and many disclosurerequirements.
According to the survey, a positive move towards convergence was the change in theaccounting law that removed the remaining elements of tax-driven accounting. How-ever, according to the survey, there is some reluctance of national authorities in Polandto accept standards based on rules prepared by an international organization, such asIASB. The reluctance stems from a mixture of factors, including a nationalist fearof loss of sovereignty (i.e. decisions made outside of Poland) and the loss of sta-tus or position (full adoption of IFRS would make domestic legislators/standard settersredundant).
Other perceived impediments to convergence revealed by the survey include insufficientguidance on first-time application of IFRS and a lack of practical knowledge on IFRSapplication. There is also a general satisfaction with national accounting standards and alack of interest from investors and other users to change national standards. Indeed, thereis no significant demand from domestic investors for IFRS as opposed to Polish GAAPreporting. The relatively underdeveloped capital market in Poland is perceived as limitingthe number of potential users of IFRS.
According to the survey, some IFRS are viewed as being particularly complicated. Forexample, wide adoption of fair valuation causes problems with practical application, espe-cially in regard to IAS 22 (Business Combinations), IAS 36 (Impairment of Assets) and IAS39 (Financial Instruments). Also, the lack of existence of transactions of a specific natureis considered an impediment. For example, there are no defined benefit plans in Poland andfinancial instruments tend to be unsophisticated.
The most recent translation of IFRS into Polish appears to be based on the 2001 standards.While expectations are that translations will be conducted on an annual basis, the Polishexperience of the translation process suggests the time lag is likely to be significant. Anexample of the difficulties that can be associated with translating accounting concepts fromone language to another is provided byKosmala-MacLullich’s (2003) analysis of how
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the notion of “true and fair” has been translated into Polish and the Polish accountingframework.
5.8. Slovakia—new EU member country
In 2005, Slovakia will require all companies (both listed and non-listed) to useIFRS to prepare consolidated financial statements (EU, 2004c). Listed companieswill also be required to prepare individual accounts using IFRS. However, non-listedcompanies will be required to prepare individual financial statements using nationalstandards.
Slovakia wanted to implement all required EU legislation before joining the EU. There-fore, Accounting Act No. 431/2002 became effective on January 1, 2003 (PwC Slovensko,2003). The law is based on EU directives and incorporates many provisions similar to IFRS,including the True and Fair override principle. The survey indicates Slovakia’s goal is toadopt IFRS into national GAAP on a standard-by-standard basis and, whenever possible,to eliminate any differences between IFRS and Slovakian GAAP. The Ministry of Financecan also prescribe accounting rules, as was done in the case of consolidation methods(E&Y/Weinhold Legal, 2004).
Obstacles to convergence identified by the survey include the tax-driven nature of Slo-vakian accounting requirements, the relatively underdeveloped capital markets in the coun-try, the lack of existence of certain types of transactions, and the complicated nature ofcertain IFRS. Regarding the latter, areas of particular concern include deferred tax assetsand financial instruments. Another problem identified by the survey is the cost and financingof the convergence project.
A 2000 translation of IFRS in the national language is available. The only updatessince then are translations of IAS 40 and IAS 41. However, accounting firms are provid-ing some up-to-date information on IFRS (for examples, seewww.pwcglobal.com/skandwww.ey.com).
5.9. Slovenia—new EU member country
In May 2004, Slovenia continued to contemplate how to adopt IFRS. Expecta-tions are that IFRS will be required for use in the preparation of the consolidatedand individual financial statements of listed companies (EU, 2004c). For non-listedcompanies, Slovenia will probably require banks and insurance companies to useIFRS to prepare consolidated and individual accounts. All other non-listed companieswill be permitted to use IFRS in their consolidated and individual accounts (EU,2004c).
According to the survey, revisions to Slovenian accounting standards continue to alignthem more closely with IFRS. Presently, Slovenian Accounting Standards are nearly com-pletely in compliance with IFRS. The Company’s Act requires that Slovenian AccountingStandards comply with EU practice. EU requirements for listed companies are also to beadopted in Slovenia. Given the current state of Slovenian Accounting Standards, no ex-tensive plans are considered necessary because Slovenia sees itself as being in almost fullcompliance with IFRS.
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A 2001 translation of IFRS is available in the national language. There is usually atwo to three month time lag between the issuance and availability of a new standard orinterpretation after it has been approved by the IASB.
5.10. Bulgaria—EU candidate country
The Bulgarian Accountancy Act states that, effective January 1, 2005, all entities shouldprepare and submit both consolidated and individual accounts in accordance with IFRS.Since January 1, 2003, transitional provisions of the Act require that banks, insurancecompanies, and investment and pension assurance companies prepare both individual andconsolidated financial statements in compliance with IFRS. Since 2003, all Bulgarian com-panies have been allowed to use IFRS. The 2001 Accounting law requires full convergenceof Bulgarian national accounting standards with IFRS (seeWorld Bank, 2002a).
Until the enactment of IFRS, Bulgarian companies will apply national accounting stan-dards adopted by the Council of Ministers. In 2002, national standards were amended andbecame quite similar to IFRS. The objective is to have the requirements of local GAAP fol-low IFRS so that the transition is smooth. Until complete implementation of IFRS in 2005,the National Accountancy Council, as a consultative body to the Ministry of Finance, willassist in the preparation of the normative acts for the accounting activities in the country.
According to the survey, there are no longer significant disagreements between BulgarianGAAP and IFRS. Remaining differences relate to IAS 12 (Income Taxes), IAS 17 (Leases),IAS 23 (Borrowing Costs), and IAS 34 (Interim Reports). In addition, not all of the SICshave been taken into account by national standards. There are additionally specific nationalstandards which do not have an equivalent IFRS. These include national standards coveringfinancial statements of insurance companies, specialized investment companies, not-for-profit organizations, and accounting for environmental expenses. The Bulgarian accountingprofession will await guidance on international practice for the above-mentioned issues.
In Bulgaria, several items are perceived as impediments to convergence. These includeinsufficient guidance on first-time application of IFRS, the tax-driven nature of the nationalaccounting requirements, the underdeveloped nature of capital market, translation difficul-ties, and the complicated nature of particular IFRS. The survey respondents listed severalstandards as being complicated. These include IAS 12 (Income Taxes), IAS 17 (Leases),IAS 19 (Employee Benefits), IAS 26 (Accounting and Reporting by Retirement Plans),IAS 36 (Impairment of Assets), IAS 37 (Provisions, Contingent Liabilities and ContingentAssets), and IAS 39 (Financial Instruments). According to the survey, the nature of pensionsand other post-retirement benefits locally are different from international practice. Due tothe underdeveloped business environment and market, there are also difficulties with theapplication of IAS 36 and especially IAS 39.
The timely translation of IFRS into Bulgarian is a concern. At the time of the survey,a 2001 translation was available, but unofficial, and a 2002 translation was in process.TheWorld Bank (2002a)reports that translation efforts rely on the goodwill of committeemembers from academe and international accounting firms that have been working with theMinistry of Finance. The survey indicated there is often a 6–12 month time lag between theissuance of new IFRS and the availability of a Bulgarian translation.
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5.11. Romania—EU candidate country
After 2006, all companies, except small entities, will be required to use IFRS in Roma-nia. In 2001, the Ministry of Public Finance issued Order 94, which approved accountingregulations regarding harmonization with the Fourth EU Directive and IFRS. Order 94 re-quires a stepped implementation of IFRS between 2001 and 2006. Each year smaller andsmaller Romanian companies are required to use IFRS. For example, in 2003 (vs. 2004) [vs.2006], firms must use IFRS if they meet at least two of the following criteria: (1) revenuesof at least 7 (6) [5] million euros, (2) asset book value of at least 3.5 (3) [2.5] million euros,and (3) at least 150 (100) [50] employees (Ernst & Young Romania, 2003, World Bank,2003b).
The official IAS Romanian translation was incorporated into local legislation regard-ing financial reporting. However, the survey notes that some subsequent regulations andguidance are contrary to harmonization, such as one encouraging non-application of IAS29 (Hyperinflation). TheWorld Bank (2003b, pp. 1–2)is quite concerned that “the Ac-counting Law and secondary legislation include specific accounting requirements that mayconflict with IAS and undermine government efforts to implement reliable accountingstandards.”
The survey reports several obstacles to convergence in Romania, including insufficientguidance on first-time application of IFRS and the tax-driven nature of national accountingrequirements. An interesting point related to the latter is the fact that the Ministry of Financeis currently responsible both for setting accounting standards and for planning and collectingtaxes (World Bank, 2003b).
Another perceived barrier to convergence in Romania is the complicated nature of certainIFRS. The survey notes that IAS 29 (Hyperinflation), IAS 36 (Impairment of Assets), IAS 39(Financial Instruments), SIC 19 and SIC 30 (Reporting Currency), and standards referringto consolidation are particularly problematic. This may be a significant issue because, “inpractice, the imposition of complex IAS dealing with financial instruments, consolidation,and hyperinflation has been delayed” (World Bank, 2003b, p. 1).
According to the survey, there are also major disagreements with certain significantIFRS, including, but not limited to: (1) mandatory non-application of IAS 29 for financialstatements filed with the Ministry of Finance; (2) the basis for fixed assets valuation; (3)prescribed format for notes; and (4) non-application of SIC 19 (IAS 21) and SIC 30. Ac-cording toPwC (2004), several differences remain between IFRS and Romanian GAAP,including financial instruments.
The survey notes a reluctance of national authorities to accept standards based on rulesprepared by an international organization, such as IASB. Romanian authorities have atendency to try to amend the application of certain IFRS via detailed Ministry of PublicFinance Instructions. These instructions can, while officially requiring application of allIFRS, prescribe certain fixed format disclosures that might introduce contradictions toIFRS.
According to the survey, there is also a perception in Romania that financial statementsare for the fiscal authorities. The capital market is still evolving, resulting in less pressurefrom investors to achieve full IFRS compliance. So, another perceived impediment is dueto the relatively underdeveloped capital markets in Romania.
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The 2001 IFRS were translated into Romanian, and at the time of the survey, the 2002edition was being translated. TheWorld Bank (2003b)notes that while the Department forInternational Development in the United Kingdom is funding the translation, copies of thetranslation are considered expensive by local standards.
5.12. Turkey—EU candidate country
While not included in the 2002 convergence survey, Turkey is making many changes toconverge national rules with IFRS. Currently, Turkey permits domestic listed companiesto use IFRS (DTT, 2004b). Two regulatory bodies define accounting standards in Turkey:the Banking Regulation and Supervision Agency (BRSA) for the banking sector, and theCapital Market Board (CMB) for publicly traded companies (DTT, 2002). Effective July2002, BRSA requires a completely new set of standards to converge their standards withIFRS. These new standards closely conform to IAS 7, 8, 10, 16, 17, 20, 21, 22, 24, 27, 28,29, 31, 32, 36, 37, 38, and 39.
Historically, CMB accounting standards were quite different from IFRS. In 2002, theCMB translated IFRS into Turkish and proposed changes to CMB rules to make mostquite similar to IFRS. The effective date for these proposals was December 31, 2003 (DTT,2002).
5.13. Iceland—EEA member
In Iceland, at the end of 2002, there were no formal plans to converge Icelandic GAAP andIFRS in full or in part. However, a committee was reviewing the Annual Accounts Act (No.144/1994) on behalf of the Ministry of Finance. The review of the act focused on whetherIceland is in compliance with the EU’s Fourth Council Directive and the Seventh CouncilDirective, based on comments from the European Free Trade Association SurveillanceAuthority (ESA). AnEU (2004b)survey found Iceland was still in the Work Group Stage.
The EU survey suggests IFRS will only be required for the consolidated accounts oflisted companies in Iceland. Listed companies will also probably be permitted, but notrequired, to prepare individual accounts using IFRS. In addition, while not required, non-listed Icelandic companies will probably be permitted to prepare individual and consolidatedfinancial statements using IFRS.
The Annual Accounts Act and Regulation No. 696/1996 “Presentation and contents offinancial statements” are the primary sources of financial reporting requirements in Iceland.These acts and regulations do not refer to IFRS. However, because IFRS’ presentation andaccounting principles are more clear and accurate and give a better view of a company’sfinancial standing than national Icelandic GAAP, the survey states that companies usingIFRS fulfill all the requirements of Icelandic GAAP. Further, by the end of 2002, theIcelandic Financial Accounting Standard Board (a body set up by law) had issued fiverules for preparing accounts based on IAS 1 (Presentation of Financial Statements), IAS2 (Inventories), IAS 7 (Cash Flow), IAS 8 (Net Profit or Loss for the Period), and IAS 12(Income Taxes).
The survey indicates that major groups seen as influencing convergence in Iceland includeits accounting profession and Icelandic corporate executive directors. A major impediment
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to convergence according to the survey is the lack of interest of national standard-settingauthorities (the Icelandic Parliament). Beyond a general lack of interest, another imped-iment may be the relatively small and underdeveloped capital market in Iceland. Finally,while not considered an impediment, IFRS has not yet been translated into the nationallanguage.
5.14. Liechtenstein—EEA member
Liechtenstein was not included in the firms’ 2002 convergence survey. Although thecountry does not have an active stock exchange, Liechtenstein has passed laws regardingIFRS (EU, 2004b). All EEA countries are bound by treaty to require that listed corporations’consolidated accounts be prepared in accordance with IFRS. In addition, IFRS will bepermitted, but not required, in preparing individual accounts of listed companies and forboth the consolidated and individual accounts of non-listed companies.
5.15. Norway—EEA member
Norway, as a member of the EEA, is required to implement the EU accounting directives(Alexander & Schwencke, 2003; DTT, 2003b). The 2002 convergence survey found that aprocess had been started to evaluate whether the accounting act in Norway should be changedso listed companies—and perhaps other large companies—would be required to prepareconsolidated accounts in accordance with IFRS. TheEU (2004b)survey indicates thisprocess is continuing. Expectations are that IFRS will be allowed for preparing consolidatedaccounts of both listed and non-listed companies. For individual accounts of all companies,IFRS will not be required, and will probably not be allowed.
The Norwegian Accounting Standards Board has stated that one of its goals is toconverge with IFRS. Because EU regulations do not have the force of law in Norway,the Norwegian Accounting Act must be revised before implementation of IFRS wouldbe allowed. The government intends to follow the EU regulation and is consideringconvergence.
Norwegian standard setters are very aware of the fact that Norwegian companies operatein an international market. This fact, combined with the globalization of capital markets,has necessitated Norwegian GAAP adapting to IFRS. The survey indicates that apart fromsome circumstances where a requirement under IFRS would be prohibited under Norwegianlaw, Norwegian GAAP is in line with IFRS.
Alexander and Schwencke (2003, p. 563)confirm that new Norwegian accounting stan-dards “heavily rely” on IFRS but further state that some standards include “minor violationsof some explicit rules of the IASB.” These authors are more concerned about the Norwegianstandards’ direction because “Norway is probably the only country which has implementedthe EC directives without explicitly formulating a general prudence principle within the law”(p. 562). While noting this situation may violate the directive, Alexander and Schwenckeraise the larger issue that compared to IFRS, Norwegian accounting is giving more empha-sis to matching, as opposed to prudence, and the profit and loss statement, rather than thebalance sheet.
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Because Norway has a well-established GAAP, the survey finds that one impediment toconvergence is a general satisfaction with national accounting standards. Therefore, manycompanies have a lack of interest to change national standards. Conversely, taxes are not aproblem because tax and accounting rules are mainly separated in Norway.
Another impediment to convergence is the belief that insufficient guidance exists on first-time application of IFRS. Also, until clarification is provided as to exactly which companieswill be affected, companies are less willing to start the process to prepare for convergenceto IFRS. In addition, some IFRS are seen as particularly complicated, especially IAS 39(financial instruments).
The survey suggested that IFRS had not been translated into Norwegian; however, expec-tations were that IFRS would be translated into Norwegian in the future. Records indicatethat a Norwegian translation of IAS was available in 1995 (IASC, 1995).
5.16. Switzerland
Beginning in 2005, Swiss listed companies that are considered to be multinational willbe required to use either IFRS or US GAAP for consolidated accounts (DTT, 2004a). Allother listed companies will alternatively be allowed to use Swiss GAAP. Swiss GAAP willalso continue to be used by non-listed companies and for the individual accounts of listedcompanies.
For statutory (individual) accounts, Swiss companies do not adopt IFRS for tax reasons.Therefore, the tax-driven nature of the national accounting requirements is seen as animpediment to convergence. Income taxes are determined on an unconsolidated level andare based on the statutory accounts.
The Swiss standard setter has introduced many IFRS requirements to Swiss GAAP, andconvergence is anticipated to continue but only for consolidated accounts. All attempts tointroduce a true and fair view to Swiss GAAP for the preparation of individual accountshave failed.
According to the survey, Swiss investors and users are interested primarily in consoli-dated accounts. Also, as Swiss law allows different accounting standards for consolidatedaccounts, survey respondents see no real need to convert national GAAP to IFRS.
In October 2003, official translations were available in three official Swiss languages(German, French, Italian) through the EU. However, the survey noted that a one-year timelag often exists between the issuance of new IFRS and their translations being available inthe Swiss national languages.
6. Discussion and conclusion
6.1. Translation issues
An important issue affecting convergence with IFRS highlighted by the survey is whetheror not quality accounting materials are available in a country’s national language(s). Thesurvey emphasizes that, in recent years, IFRS either were not available or were not availablein a timely manner in the national language of several of the countries studied. While editions
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Table 5Translations of IFRS into national languages
European country Translation of IFRSavailable in country’snational language
Translation official(approved) or unofficial
Most recent IFRStranslation
New EU membersa
Cyprus Yes (Greek) Done by EU; not IASB October 2003 EUtranslation of all EUendorsed IFRS
Czech Republic Yes Approved 2003 standardsEstonia Translation was in
progress; expected in2003 or 2004
Hungary Yes Available, but not approved 2003 standardsLatvia Yes Available, but not approved 2001 standardsLithuania Yes Considered official by
2001 standards;translation of 2002standards expected byApril 2003
Romania Yes Approved 2002 standardsTurkey Yes Done by Turkish authorities;
not IASB2002 standards
EEA membersIceland NoLiechtenstein Yes (German) Approved October 2003 EU
translation of all EUendorsed IFRS
Norway Old translation; newtranslation expectedin future
OtherSwitzerland Yes (German, French
and Italian)Approved October 2003 EU
translation of all EUendorsed IFRS
Sources: Survey (December 2002),IASB (2004b), EU website (2004), and World Bank Reports (ROSC reports).Sometimes it is unclear whether the date referred to the date of the translation or the date of the IFRS edition thatwas translated.
a The EU expects to have all EU legislation and important documents translated into the nine new EU languagesby the end of 2004 (EU, 2004a).
of IFRS have been translated into all national languages of these countries except Estonianand Icelandic, many of these translations do not include all recent standards (seeTable 5).For example, until recently, Hungary was using a 1994 translation. Thus, most new EU andEU candidate countries do not possess complete IFRS translations and, accordingly, have
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had little opportunity to develop any significant experience using and implementing IFRS.Additionally, while the EU plans to translate all key materials into the nine new officialEU languages by the end of 2004 (EU, 2004a), as of May 1, 2004, EU approved IFRS hadnot been officially translated and published in the EU’s Official Journal. Unfortunately, thisleaves little time for developing a high level of familiarity with IFRS.
In general, the survey further reveals that significant time lags have often existed betweenissuance of a new standard or interpretation and its availability in the national languagesof these countries. This time lag varies greatly. Some countries report relatively short timelags, such as Slovenia (2 or 3 months), Bulgaria (6–12 months), and Switzerland (1 year).As Table 5shows, other countries have translations that are at least two years old. Once allexisting IFRS are translated, an important remaining issue will be how quickly proposedand new IASB standards and interpretations are actually translated into the languages ofnew EU members and EU candidate countries.
Despite the issues noted above, the large firms’ convergence survey indicates that, at thetime of the survey, most of the countries examined in our study did not view translationof IFRS as a problem. Of course, some of these countries have up-to-date translationsthat include all or most IFRS. For example, Switzerland has up-to-date translations in itsthree national languages, German, French, and Italian. The finding additionally suggeststhat, at the time of the survey, expectations were that EU translations would be issued in atimely manner in order to allow for sufficient preparation for 2005 implementation.8 Theseexpectations should perhaps be tempered by the findings ofAbd-Elsalam and Weetman(2003, p. 67). These authors studied implementation of IAS in an emerging capital marketand suggest two stages are important in this process: (1) “relative familiarity with thecontents of the IAS,” and (2) “the accessibility of IAS in the language of the country.” Abd-Elsalam and Weetman found that lower disclosure levels were “associated with relativeunfamiliarity with regulations and the non-availability of an authoritative translation” (p.80). Thus, while up-to-date translations of existing IFRS may be available by 2005 for mostcountries included in this study, the impact of “unfamiliarity” associated with a history oftranslation problems may hinder the effective adoption of IFRS. The impact of lags in thetranslation of new IFRS, especially those addressing complex reporting issues, is also anarea of concern, particularly in the case of developing countries with emerging transitionaleconomies.
6.2. The development of a “two-standard system”
All countries included in our study will either require or effectively allow listed com-panies to prepare consolidated financial statements in accordance with IFRS by 2005. Amajority of new EU members (Cyprus, Czech Republic, Estonia, Lithuania, Malta, andSlovakia) and EU candidate countries (Bulgaria and Romania) will also require IFRS forthe individual accounts of listed companies. This scenario differs from the plans of thefirst 15 EU members (Street & Larson, 2004) and may relate to the fact that most new EUmember and EU candidate countries have recently changed from a communist system to a
8 Seehttp://europa.eu.int/eur-lex/en/archive/2003/l26120031013en.htmlregarding language availability. EUendorsed IFRS in the 11 official languages of the first 15 EU member states were posted in October 2003.
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capitalistic system and are more amenable to new ideas. Additionally, our analysis revealsthat, in comparison to most of the first 15 EU states, the link between financial accountingand tax accounting, while existent, may not be as pronounced in some of the countriesincluded in this current study. Our analysis further finds that, similar to the first 15 EUmembers (Street & Larson, 2004), most European countries studied here currently do notplan to require non-listed companies to use IFRS.
InGAAP Convergence 2002,the firms caution that, while only requiring IFRS for listedcompanies may represent a logical transition towards convergence, a two-standard system,where some companies continue to use national GAAP, may be difficult to maintain inthe long-run. The firms recommend that governments and national standard setters developformal convergence plans to eliminate these dual standards.
6.3. Perceived impediments to convergence
Development of a “two-standard system” in several countries included in our studymay relate to the barriers to convergence identified by the large firms’ survey. The mostcommon impediments were limited national capital markets, insufficient guidance on first-time application of IFRS, the tax-driven nature of national accounting regimes (i.e., thealignment between financial accounting and tax reporting), and the complicated nature ofparticular standards. Several countries also noted concerns regarding applicability of IFRSfor SMEs.
Most perceived impediments to convergence were seen as more of a problem in the newEU member and EU candidate countries. For example, seven of these countries identified 12major IFRS they believed were too complicated (seeTable 4). These countries were partic-ularly concerned about IAS 39 (Financial Instruments), followed by IAS 36 (Impairment ofAssets), IAS 12 (Income Taxes), and IAS 19 (Employee Benefits/Pensions). In contrast, theonly concern about a complicated IFRS by EEA countries or Switzerland was from Norwayin regards to IAS 39 (Financial Instruments). In total, 8 of the 13 countries surveyed bythe firms specifically mentioned financial instruments as a barrier to convergence. As ofSeptember 2004, the EU still had not endorsed the IASB’s standards regarding financialinstruments. Even IASB Chair Sir David Tweedie admitted he might have to concede defeaton financial instruments since he was not confident the EU would adopt the IASB’s standard(Anonymous, 2004).
Several other impediments to convergence were mentioned by new EU member and EUcandidate countries. Six of the 10 surveyed by the firms noted that the “lack of transactionsof a specific nature,” such as pensions and other post-retirement benefits, represent a per-ceived barrier to convergence (seeTable 4). As companies evolve and begin to engage inmore sophisticated transactions, careful planning should be made to ensure that financialreporting staff are adequately trained in the proper accounting for these transactions and thataccounting systems are sufficiently updated. Additionally, six of the surveyed countries alsonoted that insufficient guidance on first-time application of IFRS was a concern. Hopefully,issuance of IFRS 1 (first-time adoption of IFRS) will provide some relief in this regard.
A review of explanatory material provided in the surveys for two barriers, lack of trans-actions of a specific nature and insufficient guidance on first-time application of IFRS,confirm that affirmative responses to these questions were at times associated with a lack
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of familiarity with certain accounting transactions and/or a lack of technical accountingexpertise. Therefore, these findings further highlight the need for timely up-to-date trans-lations of IFRS, and additionally draw attention to the need for high quality education andtraining materials in the national languages of these countries. As stated inGAAP Conver-gence 2002, the accounting profession and international organizations should devote moreresources to developing and providing quality IFRS education and training materials andprograms, and universities worldwide should include IFRS in the core accounting curricu-lum. Additionally, as the Trustees of the IASC Foundation currently consider the role, ifany, the Foundation will play in IFRS education, ample consideration should be given tothese findings.
While only Latvia and Slovakia specifically mentioned the cost of convergence givenlimited financial resources, several other countries implied that cost was an issue, especiallyin regards to having current and up-to-date IFRS translations available. Current nationallanguage translations are a necessity for the effective implementation of IFRS. Translationsof new IFRS must be done quickly, but even the EU admitted that its endorsement of mostIFRS in 2003 was delayed by six months because of translation problems (EC, 2003).
Eight of the 10 new EU member and EU candidate countries also indicated that theircountry’s relatively underdeveloped capital markets hindered convergence. Without activecapital markets, many listed companies have not been forced to produce financial statementsusing internationally recognized accounting standards.Woolfe (2004)agrees that a keyproblem for these countries is the “lack of liquid markets.” For example, it is hard to valuecompany shares for various financial reporting purposes when they have not been tradedfor long periods of time.
The study finds that the linkage between tax accounting and financial reporting in-fluences the reluctance of most studied European countries to converge national GAAPwith IFRS, particularly for individual accounts of non-listed companies. Among the newEU members and EU candidate countries surveyed by the firms, only Estonia, Latvia,Poland, and Slovenia did not cite the tax-driven nature of their national accounting regimeas an obstacle to convergence. These findings are consistent with prior research thatnotes the importance of the relationship between tax and financial reporting in manycontinental European countries and the resulting negative influence of this link on ac-counting harmonization (Guenther & Hussein, 1995; Lamb et al., 1998; Street & Larson,2004).
Survey comment’s indicated resistance from national accounting standard setters in atleast five countries. Some standard setters believe that accounting needs to be tailored to aparticular country’s environment, something which the IASB and EU oppose. While oneEEA standard setter simply expressed little interest in convergence, a couple of standardsetters appeared somewhat hostile to the idea that they may lose some or all of their decision-making authority. European accounting convergence is largely based on the legal authority ofthe EU. Therefore, the EU’s power to mandate and enforce regional accounting convergenceis at stake. The EU appears ready to force the issue. In July 2004, the EU dealt with non-compliance by formally asking seven EU countries to put in their national laws the 2001accounting “fair value” Directive (2001/65/EC) (Lymer, 2004). If a satisfactory response isnot received within two months, the EU may decide to take these countries to the EuropeanCourt of Justice.
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Several countries reviewed in this study also noted that for SMEs, IFRS are too com-plicated and require excessive disclosures. Consistent with a recommendation of the largefirms set forth inGAAP Convergence 2002, the IASB accelerated its project on SMEs. InJune 2004, theIASB (2004a)issued a discussion paper,Preliminary Views on AccountingStandards for Small and Medium-sized Entities. The proposed IASB SME standards arebeing designed for companies with “no public accountability” and may require less disclo-sure than IFRS. National regulators will establish their own size criteria to determine whichentities may or must use these standards. Comment letters regarding this discussion paperwere due to the IASB by September 24, 2004.
6.4. Conclusion
This research provides evidence both on the status of convergence with IFRS and onissues perceived as affecting the drive toward accounting convergence in 17 Europeancountries. Issues including complicated standards and linkages between tax and financialreporting appear to be creating a situation whereby IFRS will be required for listed compa-nies’ consolidated accounts while another basis of accounting will frequently be used fornon-listed companies and/or individual accounts. This finding provides further evidenceof the emergence of a “two-standard” system of financial reporting in many Europeancountries.
The finding regarding complicated standards also emphasizes the significance of theEU’s reluctance to adopt IAS 32 and 39. Summarizing a recent report issued by the Federa-tion des Experts Comptables Europeens (FEE), the organization’s President, David Devlin,stated,
As a general principle, FEE calls for global standards. As a consequence, we emphasisethe need for ‘endorsed IFRS’ to be the same as ‘IFRS’. The endorsement process shouldnot be used as a means to create European standards. Only global standards will meetthe wider objectives of financial stability, efficiency and transparency and provide thebenefits of increasing confidence in financial markets, reducing the cost of capital andfacilitating global investments.
There would be serious drawbacks if elements of IFRS were not to be endorsed asEU standards would be seen as very much a second best. There would also be seriousimplications for audit reporting if ‘endorsed IFRS’ were different from ‘IFRS’: IFRScould no longer be referred to as the reporting framework (FEE, 2004).
FEE’s position is consistent with the large firms’ view that the “ultimate goal of eachcountry’s convergence plan should be to adopt IFRS, supplemented only in rare instancesfor national issues” (BDO et al., 2003, p. 8). If convergence and proper implementationof IFRS are to become a reality, all parties should work toward a reasonable solution. Thecurrent situation creates major uncertainties for preparers and compounds existing barriersto convergence.
The study’s results highlight the need for more research in the area of convergence. Inparticular, the roles of national GAAP requirements, stock exchange listing requirements,and the links between financial reporting and tax accounting merit further investigation.
116 R.K. Larson, D.L. Street / Jnl. of Internatonal Accounting, Auditing and Taxation 13 (2004) 89–119
These issues need to be better understood in order to determine if accounting convergencevia IFRS will become a reality or will remain an elusive goal within a “two-standard”system.
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