«Barbara E. Weißenberger / Anne B. Stahl / Sven Vorstius Changing from German GAAP to IFRS or US GAAP: Objectives and achievements – An empirical ...»
Barbara E. Weißenberger / Anne B. Stahl / Sven Vorstius
Changing from German GAAP to IFRS or US GAAP:
Objectives and achievements
– An empirical survey of German companies –
Working Paper 1 / 2004
– Arbeitspapiere Industrielles Management und Controlling –
Herausgeber: Professur für Betriebswirtschaftslehre mit dem Schwerpunkt Industrielles Management und Controlling (Prof. Dr. Barbara E. Weißenberger) Justus-Liebig-Universität, Gießen http://wiwi.uni-giessen.de/controlling/ JEL-Classification: M41 We would like to thank two anonymous referees for helpful comments and discussion Angenommen in: Accounting in Europe, Special volume edited by the European Accounting Association, Summer 2004
Changing from German GAAP to IFRS or US GAAP:
Objectives and achievements – An empirical survey of German companies – Since 1993 an increasing number of listed German companies have been publishing their consolidated financial statements in accordance with either IFRS or US GAAP. In 1998 this was approved as a substitute for the consolidated German GAAP financial statements of listed companies (§ 292a HGB). Our study surveys the motives that led these companies to opt for international reporting systems (IFRS or US GAAP) rather than German GAAP and considers whether these objectives have been achieved. Rather surprisingly, we find that even though companies state that their overall expectations have been met to a satisfactory degree, a detailed analysis shows that several of the ex ante objectives have not been achieved from an ex post point of view. Additionally, we use logistic regression analysis to show that companies choosing IFRS rather than US GAAP and vice versa differ distinctly in the objectives they pursue with their choice of international GAAP.
I. Introduction Nearly a decade has passed since the first German company began publishing its consolidated financial statements according to an international GAAP regime, namely IFRS or US GAAP.
However, until EU Regulation No. 1606/2002 was published there had been no clear tendency in favor of one of these two international types of GAAP. The following paper discusses three major empirical questions.
First, we consider in detail the objectives German companies have pursued in pub lishing their consolidated financial statements in accordance with either IFRS or US GAAP.
Second, we assess how far these objectives have been achieved from the companies’ point of view.
Third, we analyze whether the motives for choosing one of the two international re porting systems rather than the other are in accordance with strictly discriminating preferences considering the objectives that motivated the use of a particular GAAP regime.
To date, the accounting literature has not provided an in-depth analysis of these research questions. Even though there have been several papers on accounting choice, e.g. Ball et. al.
(2000), these cover the general legal environment and other institutional factors to which all companies in a given setting are subject to, but not companies’ individual objectives. Moreover, these papers cover a wide range of countries and therefore do not provide an in-depth analysis of the specific situation in Germany. Leuz and Verrecchia (2000) have discussed the effects on German companies of changing to an international GAAP regime, but their empirical analysis does not extend to companies’ motives for this change. German papers by Krawitz et al. (2000) and by Spanheimer and Koch (2000) are the first empirical studies of the process of adaptation to international GAAP regimes by German companies. Yet they focus merely on a descriptive record and there is only some explorative documentation on the motivation for adopting either IFRS or US GAAP. Both papers find that the prime motives for German companies were the need to meet capital market expectations together with a desire for increased international comparability of their respective financial statements.1 The research questions raised in this article have to be viewed together with EU Regulation No. 1606/2002, which makes consolidated financial statements prepared under IFRS mandatory for capital-market-oriented companies with effect from 2005. The decision, therefore, on whether to change to an international GAAP regime and, if so, to which type, is no longer subject to listed companies’ discretion but depends on whether the US or the European capital market is used. Nevertheless, this important institutional development has no impact on either the execution or the relevance of our study.
First, our study was conducted between September 2000 and February 2001. At that time, there had already been an announcement in May 2000 by the EU Commission with regard to the possible implementation of an EU regulation making IFRS mandatory. On the other hand, there had been an SEC discussion paper in late 2000 regarding the possible acceptance of IFRS in the US. Therefore, joint acceptance of IFRS and US GAAP in both the European Union and the US was a plausible future development, just as the exclusion of US GAAP for European capital-market-oriented companies which had come into effect by 2002. In our opinion, companies’ decisions to switch from German GAAP to either IFRS or to US GAAP at that time were not influenced by foreseeable institutional regulation. This notion is supported by the fact that the number of companies using IFRS and US GAAP at that time shows no clear bias towards one or the other.2 Second, our results show that not only have several objectives pursued by changing to either IFRS or US GAAP not been achieved from an ex post point of view, but also that there are marked differences in the motives of IFRS and US GAAP users with regard to the use of an international GAAP regime. Even under the existing EU regulation, these results are useful to European companies that are planning to use IFRS as the main GAAP regime in the near future, as well as to companies intending to prepare two sets of financial statements, i.e. according to both IFRS and US GAAP. The results indicate that a change to a given GAAP regime does not suffice in itself as a means to pursue a set of given goals. They also show that there is consistent reasoning with regard to attitudes and objectives on the part of companies adopting either IFRS or US GAAP, which may serve as a guideline for the future decisionmaking of companies contemplating the use of the US capital market. Moreover, our results are also relevant for further analysis of the choice of accounting systems. There is a striking divergence between analytical reasoning (what one would expect) and business reality (what is actually perceived) with regard to companies’ objectives in changing to international GAAP and this aspect must be explored in more detail.
The structure of our paper is as follows: in section 2 of our paper we shall establish the objectives companies might follow in adopting an international GAAP regime from an analytical point of view. Section 3 presents the empirical research design and conception of our study. Section 4 discusses the first and the second research questions, i.e. the ex ante and the ex post evaluation of objectives pursued in changing from German GAAP to IFRS or US GAAP. Section 5 first discusses on an analytical basis the arguments that are relevant for the choice of IFRS rather than US GAAP and vice versa and then empirically analyses the third research question of whether a concise differentiation of companies adopting IFRS or US GAAP is possible with respect to their underlying objectives.
II. Objectives pursued by changing from German GAAP to IFRS or US GAAP: an overview The objectives pursued by German companies in changing from German GAAP to an international GAAP regime fall into two groups. On the one hand, there are objectives which apply directly to a company’s relationship with investors and the capital market. These we shall therefore refer to as financial objectives. On the other hand, there are objectives that primarily target other groups of stakeholders, which we shall refer to as operating objectives.
It should be noted that besides these two groups there are two overriding factors that must be taken into account when discussing the objectives involved in a change in the GAAP regime.
First, some companies did not choose to adjust of their own free will but were obliged to do so as a consequence of their lack of independence, i.e. the obligation to follow a group consolidation of the parent using either IFRS or US GAAP. Such companies have been eliminated from our analysis.
Second, since 1997 the use of international reporting systems has been a precondition for listing in only one specific stock market segment, i.e. the Neuer Markt in Germany.3 This is taken into account by segmenting the data base in our analysis into the two relevant types of stock market segments, i.e. DAX100 vs. Neuer Markt.
International reporting systems such as IFRS or US GAAP are viewed as capital-marketoriented systems whose main feature is the supply of relevant information for investors. Extensive reporting obligations as well as requirements of fair presentation and decision usefulness result in a more transparent exposure of the economic situation of a company compared to German GAAP, which in contrast are characterized by creditor protection, limitations on profit distribution and linkage with tax-reporting requirements, making both the balance sheet
as well as the income statement less informative for investment decisions (Breker et al., 1999:
148; Niehus and Thyll, 2000: 558).
Comparison with peer-group firms plays a major role in the context of company financial analysis. In most cases, ratios derived from the analysis of financial statements can be interpreted thoroughly only with reference to the respective industry sector (Ordelheide, 1998: 16;
Auer, 1999: 378): The better a company can be analyzed against its peers, the more useful are the reported data to its investors. Particularly in industry sectors where companies are compared with international peers, such comparison is enhanced by reporting in accordance with IFRS or US GAAP.
Another objective that may determine the decision to switch to an international GAAP regime is the desire to enlarge and diversify the investor community. It is assumed that this will both create greater interest in the company’s shares and reduce share price volatility, thereby improving the stock market performance of the shares. This objective is also important if a company plans to issue new stocks or bonds in future periods (Förschle et al., 1998: 2281).
Moreover, a company might not only want to diversify its investor base in its home country but also abroad. One reason may be the fact that its domestic capital market is too limited for current or future capital needs.4 Another aim is the reduction of stock price volatility by scattering investors geographically. The use of international GAAP is usually a sine qua non if foreign investors are to be attracted (Weißenberger, 2002: 184). Companies may also use a change to a GAAP regime in order to prepare a listing on a foreign stock exchange. Any company desiring a US listing is obliged to change from German GAAP to US GAAP or provide at least a reconciliation to US GAAP as on the US capital markets only US GAAP are accepted for the publication of financial statements.
Additionally, institutional investors play a specific role within the investor community.
Important members of this group are, for example, Anglo-Saxon pension funds with considerable volumes of investment as well as insurance companies or investment funds. Institutional investors are a relevant investor group from a capital-market standpoint as they usually trade substantial volumes of shares. Moreover, they typically follow long-term investment strategies that have a stabilizing effect on stock and bond prices. It must be noted, however, that some institutional investors are subject to legal restrictions that constrain their choice of investments. Some US-based insurance companies and pension funds are, for example, only allowed by their statutes to invest in stocks listed in the US. A company’s specific interest in this type of investor would imply a decision in favor of US GAAP.
In some circumstances, the change to an international GAAP regime is motivated less by direct benefits for the investor community than by a desire to reduce the cost of equity and thereby increase market value. This reasoning is based on the belief that higher transparency and better information will reduce the risk premium demanded by investors and thereby decrease the cost of capital (Leuz and Verrecchia 2000: 91).
Finally, switching to an international GAAP regime may have a positive impact on the credit rating of a company. This can be attributed to the fact that rating agencies acknowledge transparency, details and comparability in financial reporting. A higher level of documentation could be rewarded if long-term opinions with respect to the solvency of a company are generated.
2. Operating business objectives
In addition to financial objectives, several other motives for the use of an international GAAP regime can be identified which are mostly related to operating business objectives. In this case, the use of an international GAAP regime then serves as "a key to the implementation of
strategic steps" (Kagermann, 1999: 346). The following are typical operating business objectives: