International Financial Reporting

Accounting regulation in Europe is undergoing a period of major changes. The introduction of International Financial Reporting Standards (IFRS) for financial reporting has added further impetus to the goal of convergence of international accounting rules. Since 1 January 2005, more than 7,000 listed companies are required to prepare their consolidated accounts using IFRS. Pressures to integrate capital markets in Europe have prompted the European Commission to introduce uniform financial reporting standards for listed EU companies (van Hulle, 2003).

Recognising the advantages of international financial reporting harmonisation for EU companies with listings outside the EU and admitting that no European Accounting in Europe, Vol. 2, 2005 Correspondence Address: Pascale Delvaille, ESCP-EAP, 79 avenue de la Re? publique, 75543 Paris, Cedex 11, France. E-mail: [email protected] net; Gabi Ebbers, Allianz AG, Ko? niginstr. 28, 80802 Mu? nchen, Germany. E-mail: Gabi. [email protected] de; Chiara Saccon, Universita` Ca’ Foscari di Venezia, Dipartimento di Economia e Direzione Aziendale, San Giobbe – 30123 Venezia, Italy.

E-mail: [email protected] it 0963-8180 Print=05=010137–28 # 2005 European Accounting Association Published for the European Accounting Association by Taylor & Francis DOI: 10. 1080=09638180500379103 Downloaded by [Macquarie University] at 05:59 12 October 2014 accounting standards could be used for this purpose, IFRS were introduced as mandatory standards (van Hellemann and Slomp, 2002). The legal instrument of an EU Regulation (No. 1606/2002)1 was adopted by the European Commission in order to have a direct effect on listed companies.

However, member state options were permitted for the application of IFRS in individual company accounts and in the consolidated accounts of non-listed companies. When comparing developments and the approaches used to integrate current accounting reforms in France, Germany and Italy, it becomes evident, that although the internationalisation process of financial reporting has accelerated considerably in these countries in recent years, the impacts are different and the processes vary in speed in each of the countries.

Research in comparative international accounting developed a contingency perspective on accounting system differences which suggests that accounting is influenced by its environment (Hopwood, 1991). Among the factors that are suggested as influencing financial reporting, comparative studies usually refer to the capital market and the role of finance, the impact of the state and the role of the accounting profession as well as the influence of commercial and tax law.

Taking these different factors into account contingency studies suggest systematic differences in national accounting frameworks and, for Europe, typically distinguish the Anglo-Saxon from Continental Europe group (Nobes and Parker, 2000). Whilst the Anglo-Saxon group is characterised by a capital market and shareholder orientation with a strong accountancy profession, the Continental Europe group is characterised by a tax and legal orientation and creditor protection. The countries selected for this paper are generally categorised as belonging to the Continental Europe accounting group (Choi and Mueller, 1992; Nobes, 1998).

However, whilst France and Italy are suggested to be more influenced by tax law, Germany is suggested to be dominated by commercial law (Nobes and Parker, 2000). But all three countries are suggested as being opposite from the Anglo- Saxon approach to accounting and it seems therefore interesting to analyse how these countries adapt to the EU strategy of convergence to IFRS and the integration of capital markets in Europe, in particular as current IFRS have been predominantly established by the Anglo-Saxons (Flower and Ebbers, 2002, p. 56).

Meek and Saudaragan (1997) suggest that for companies competing for capital in international capital markets, the pressures for convergence build a counterweight to the causes of accounting diversity at national level and they predict these would be a primary cause for mitigating accounting differences. In Germany, whilst the traditional national approach to financial reporting is fundamentally different to IFRS, companies are playing a leading role in the globalisation of the world economy. Notably, the merger between Daimler-Benz and Chrysler had a particularly important impact on German financial reporting.

German corporations realised that the traditional German approach to financial reporting is inadequate in the face of the demands of globalisation and this was a driving factor for accounting reforms (Bruns, 2001). Out of the top 50 multinational enterprises (MNE) in Europe, 12 are based in France, 12 are based in Germany and 4 are based in Italy. Furthermore, Germany, France and Italy rank among the countries with the largest stock exchanges in Europe, after London. The purpose of the paper is firstly to describe the regulatory accounting changes that are taking place in the three countries which are the focus of this paper.

Secondly, it is to evaluate the impact of those changes on reporting practice based on an empirical research of accounting rules applied in consolidated financial statements of major listed companies in Germany (DAX 30), France (CAC 40) and Italy (S&P/MIB) in the financial years 2002 and 2003. Thirdly the paper analyses the environmental factors for change and the motives for differences and similarities in the French, German and Italian approach of convergence to IFRS. 2. France Since the mid-1990s, the French financial reporting system has been constantly developing with a view to improving transparency of published

information, in response to market pressure. In particular, the larger French enterprises that were able to use some options opened by the 1986 decree on consolidated accounts, enabling them to converge towards internationally accepted accounting standards, were lobbying the government for permission to draw up their accounts directly in accordance with these standards. The government finally agreed to this demand and passed the law of 6 April 1998, by which French listed enterprises were no longer obliged to follow French law for the preparation of their consolidated accounts.

However, the necessary decree for application prepared by the Comite? de la Re? glementation Comptable (CRC, French Accounting Regulation Committee) was not published prior to 2005 which coincided with the application of the EU Regulation. 2. 1. Recent Changes to the French Accounting Regulation Framework In 2003, the publication of the Loi de Se? curite? Financie`re (LSF 2003-706, Law on Financial Security) introduced a number of important changes.

This law resulted not only from changes introduced by the European Commission but also as the consequence of the American Sarbanes Oxley Act, since it implemented new procedures for the regulation of financial markets, the audit profession and financial information, in order to improve transparency and control over financial reporting and securities transactions. The LSF comprises 140 clauses under three sections, comprising: . section I: modernisation of control and supervisory authorities for insurance, banks and investment companies; . section II: investor protection; and International Financial Reporting Convergence 139

Downloaded by [Macquarie University] at 05:59 12 October 2014 . section III: modernisation of financial statements, legal control and transparency. The main changes for companies and auditors are first, the creation of a new financial markets oversight body, the Autorite? des Marche? s Financiers (AMF, Financial Markets Authority); second, the creation of the Haut Conseil du Commissariat aux comptes (HCCAC, Audit Supervisory Board), under the authority of ‘Garde des Sceaux’ (Ministry of Justice); and third, a new obligation is to improve transparency in terms of corporate governance and

financial reporting. 2. 2. Accounting Regulation Committees The CRC plays a central role in the French accounting system. It was created in 1998 to provide government endorsement of the pronouncements of the Conseil National de la Comptabilite? (CNC, National Accounting Council). Its 12 members include two government ministers (Justice, Economy and Finance), two senior judges, and the heads of the CNC, the AMF (formerly the Commission des Ope? rations de Bourse, COB), the Compagnie Nationale des Commissaires aux Comptes (CNCC) and the Ordre des Experts Comptables (OEC).

The principal function of the CRC is to issue all government decrees relating to accountancy and financial reporting. The aim of creating the CRC was to concentrate the power to issue financial reporting decrees in a single body, so as to achieve better coordination of the government’s actions. Given the eminence of its members, its decrees carry great authority (Ge? lard, 2001, p. 1023; Colasse, 2003, p. 79). Since 2003, the government has enabled the CRC to accelerate the necessary accounting reforms.

In fact, the rules on group accounts have significantly evolved since 1999, in particular through new regulations and interpretations not only of the CRC, but also the CNC and its Comite? d’Urgence (Urgent Issues Committee). The reform process has in most cases integrated international accounting rules into French law. The principle of ‘substance over form’ for example has been adopted in the Re`glement CRC 99-02 on consolidated accounts, even if its application is not yet compulsory for all significant measurement items (Eglem et al.

, 2001, p. 472; Richard, 2001, p. 1147). The LSF requires companies to provide a report on the organisation of the board and on the internal control procedures it has implemented. The LSF makes it compulsory to consolidate ad hoc vehicles (SPE) in group accounts when exclusive control exists, even if no shares are held. 2 This provision is the application of the modified 7th Directive (Directive 2003/51/CE, 18 June 2003) which is intended to eliminate the incompatibility with IFRS, in applying IAS 27 and SIC 12.

This new requirement permits the same accounting treatment as US GAAP for French groups listed on an American stock exchange. In contrast, French rules for individual accounts will probably not change so significantly until tax accounts can be disconnected from financial reporting accounts. A current debate forces the different actors to slow down their 140 P. Delvaille et al. Downloaded by [Macquarie University] at 05:59 12 October 2014 efforts for convergence in France (Taly and Lebrun, 2003).

The problem identified by the authorities, and especially by the tax authorities, at the beginning of 2003 was that no impact studies on the consequences of new accounting rules on tax returns have been made. A report on the tax impact of IFRS was published recently by the CNC. 3 It describes in detail the main differences between tax rules and IFRS, for example, the use of fair value and leasing contracts. In France, it will be necessary to obtain the acceptance of the tax authorities before publishing any revised accounting standard for individual entity accounts.

In order to achieve this objective, two working groups (one on ‘accounting and taxation’ and one on ‘accounting and law’) must give their opinion before the adoption of any new rules. 4 2. 3. Securities Regulation and the AMF Another change to the regulatory framework is the institution of the AMF. Until the end of 2003, the COB regulated the securities market in France and sought to improve the quality of accounts by issuing recommendations on financial reporting for listed companies.

The recommendations of the AMF are generally in alignment with the standards that are accepted in international capital markets (Lacour, 2002). For example, in its recommendation for the preparation of annual consolidated accounts for the year to 31 December 2003, the AMF asked companies to provide information on the transition project to IFRS with commentaries on the main differences between IFRS and French GAAP as well as an opening balance sheet under IFRS as soon as possible.

As mentioned above, the AMF is the new authority created by LSF, following the merger of the COB and two other stock exchange bodies: the Conseil des Marche? s Financiers (CMF) and the Conseil de Discipline de la Gestion Financie` re (CDFG). It aims to reinforce the efficiency and transparency of the French financial market at European and international levels. Among its new responsibilities are: . the control of the Conseillers en Investissement Financier (CIF, Financial Investment Experts);

. the supervision of rating agencies: the AMF will issue an annual report on their activities; and . the publication of an annual report on Internal Control (see new obligations for listed companies). The AMF is the French representative in the global and European forums for securities regulators. Furthermore, the AMF will be the enforcement body in charge of the control of financial statements as required by the Committee of European Securities Regulators (CESR) in its first standard on financial information published in April