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«Barbara E. Weißenberger / Anne B. Stahl / Sven Vorstius Changing from German GAAP to IFRS or US GAAP: Objectives and achievements – An empirical ...»

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Improvement of product and brand recognition   Improved cooperation with foreign business partners   Acquisition of foreign companies   Improved cooperation with foreign authorities   Improved recruiting of international employees   Integration of internal and external reporting systems   Implementation of value-based management systems   Many companies believe that a change to an international GAAP regime will bolster their product and brand name familiarity and thereby improve their position on the sales market (Pellens, 2001: 90). Their reasoning is twofold. First, it is supposed that higher name recognition on international capital markets will carry over to markets of goods and services via investors’ consumption decisions. Second, the change to an investor-oriented international GAAP regime does not only give investors, but also other groups of stakeholders, e.g. suppliers or customers, better insights into the company, therefore encouraging an increasingly profitable exchange of goods and services.

In the context of internationalization strategies, the improvement or creation of new business cooperation projects, e.g. dealership agreements or joint ventures, in order to access new markets can play a major role. One objective of adjusting to IFRS or US GAAP might thus be to communicate a company’s economic situation to its business partners (Pellens, 2001: 11).

On the other hand, internationalization strategies can also be implemented by the acquisition of foreign business ventures. In this context, a major advantage of an international GAAP regime is the increased possibility of using one's own shares instead of cash as a means of payment, in international merger transactions. Moreover, an international GAAP regime facilitates communication with foreign local authorities (Siepmann, 2000: 1344).

Another operating business-type objective is the improvement of recruiting possibilities, especially with regard to international employees. Highly qualified personnel are supposed to be more attracted by a company preparing its financial statements under IFRS or US GAAP than under German GAAP; this is interpreted as an indication of a more international character (Lüdenbach, 2001: 22). Moreover, stock-based management compensation systems, e.g.

stock plans or stock-option plans, benefit from a change to IFRS or US GAAP. Particularly in the US, stock-option plans enjoy tax privileges only if the company’s shares are listed in the US.

Finally, the restructuring of the accounting and control systems, i.e. the integration of internal and external accounting, which in Germany are traditionally based on different sets of data, as well as the introduction of value-based management systems are important motivations for German companies changing to international GAAP regime (Kubin, 1998: 525;

Horváth and Arnaout, 1997: 255). The reason is that both IFRS and US GAAP focus more strongly on a dynamic portrayal of a company’s economic situation compared to GermanGAAP and therefore provide more relevant performance measures for decision-making, especially in the context of value-based management.

III. Methodology of the empirical study

The empirical study underlying our analysis is based on a survey of listed companies in Germany conducted between September 2000 and February 2001. At that time, a total of about 550 listed companies was subject either to § 292a HGB – a section of the German commercial code which since 1998 has allowed but not forced listed companies to prepare their consolidated financial statements to an international GAAP regime rather than to German GAAP – and/or to the regulations of the stock market segment known as the Neuer Markt, which required the financial statements being prepared to either IFRS or US GAAP as a listing precondition.

Our sample therefore comprises two groups of firms. Besides the companies listed in the Neuer Markt we included all companies listed in the DAX100. This is an index composed of the 100 largest companies listed in the stock market segment Amtlicher Handel, which at the time of our study was the only German stock market segment of major importance besides the Neuer Markt. From the companies listed in the Amtlicher Handel, the DAX100 comprised most of the non-Neuer-Markt-companies that at that time had switched to IFRS or US GAAP.5 We included only companies with headquarters in Germany as, unlike German companies, foreign companies did not face the decision to change their reporting system.

As a result our sample included 100 companies from the DAX100 and 259 Neuer Markt companies. These 359 companies were surveyed by means of a written questionnaire. The questionnaire was pre-tested with three DAX100 and three Neuer Markt companies to ensure comprehension and focus of the questions and the measurement constructs. Special attention was paid to the question of whether the list of possible objectives pursued by changing to GAAP was complete. The group of companies included in the final analysis was furthermore restricted to companies that had either completed a conversion to an international reporting system or at least intended to do so. Companies that had changed due to instructions received from a parent company were also excluded from our analysis.

After these exclusions, a total of 81 (23%) of the 359 companies returned an analyzable questionnaire. 31 companies were quoted in the DAX100 and 50 companies on the Neuer Markt. Of the 81 companies 70 (86%) had already adopted an international system, 11 (14%) planned to do so. The temporal distribution of the adjustments in the sample is shown in Figure 1.6 <

Insert Figure 1 here.

The distribution shows clearly that the majority of companies participating in the survey switched to international GAAP in 1999 and 2000. This has two methodological advantages

for the study:

The event is still present in respondents' memories.

Most of the companies in our sample do not belong to the precursor group (early adopters). We thus assume that in most cases the decision to change to an international GAAP regime was the result of a painstaking process in which careful consideration was given to the objectives pursued.

It should be noted that, as indicated in section 1, until our survey was closed there had been no clear tendency towards either joint relevance of US GAAP and IFRS for the US and European capital markets or the now effective mutually exclusive relevance of both types of GAAP on the respective capital markets.

–  –  –

Clusters A to D should be regarded as an approximation of the entire capital market. As the distributions in the different clusters are almost identical, they can be regarded as representative for the base population. Clusters E to G demonstrate the distributions of the samples in this study. The respective ratio of 59/41 for the IFRS/US GAAP distribution in the base population is comparable to the ratio of 51/49 in the sample. This similarity is considered to be sufficient.

In similar studies, comparable ratios were identified. The preference to choose one rather than another GAAP regime did not vary much over time or over market segments. A study conducted in September 1999 by Krawitz et al. (2000) determines a ratio of 46/54 on the Neuer Markt concluding a slight preference for US GAAP. In other stock market segments they find a small bias towards IFRS. Analyzing the Neuer Markt between June 1998 and October 1999, d'Arcy and Leuz (2000) identify an almost balanced distribution of GAAP regimes.

The quality of the questionnaires returned is dependent on the position of the respective respondent. An analogous verification shows that 48% rank among the top management and 18% among the upper management levels. 19% of the questionnaires were answered by the accounting department, 15% qualify as other respondents. Companies that were obliged to switch to an international system on the instructions of their parent companies were excluded from the analysis.

Companies were asked to indicate their degree of agreement with pre-phrased statements on a scale from 1 to 5. Answer 1 was "does not apply at all", 2 " applies only to a minor extent", 3 "applies in average", 4 " applies to a major extent", and 5 " applies totally".

IV. Objectives and achievements of international GAAP users: Results of the empirical study

–  –  –

The findings of our survey with regard to the different objectives companies might have when changing to an international GAAP regime are shown separately for DAX100 companies and Neuer Markt companies in Table 28.

By means of the Mann-Whitney-U-Test9 (Z-value) four items can be shown to display a significant deviation in the answers of the two company groups. Two of these deviations appear plausible; the other two deviations are not intuitive.

The aspect 'Improvement of comparability to industry peers' is a major goal (4,2/3,5) from the perspective of both company groups. Nevertheless, Neuer Markt companies attach significantly less importance to this item. The same is true of the item 'Enhancement of credit rating', which has a significantly lower relevance for Neuer Markt companies. The differing evaluations can be explained in both cases by the specific context in which Neuer Marktcompanies are embedded.

The objectives 'Planning of a foreign listing' and 'Acquisition of foreign companies' implausibly show significantly lower averages for DAX100 companies than for Neuer Markt companies. The level is even below 2.5, i.e. in the rejection range. One reason for this result may be the point in time at which the survey was conducted (year-end of 2000), which was marked by the beginning of a substantial decline in the initial public offering market as well as in the market for mergers and acquisitions.

With regard to the most important aspect both company groups are in agreement. The item 'Fulfillment of capital market expectations to a higher degree' is valued at 4,7/4,6 (DAX100/Neuer Markt) as a reason for changing the reporting system. From this follows an enhancement of the attractiveness of the stock for a wide range of investors, particularly institutional and foreign investors. Thus, objectives directly focused on the capital market are the main motives while business related objectives are substantially less important. However, respondents agreed on a positive assessment of most of the latter aspects (average 2,5) but the results are relatively weak in comparison to the investor-related items.

Insert Table 2 here.

From a conceptual point of view, an interesting result is the relatively minor importance of the objective 'Reduction of the cost of equity' (2,7/2,5). From an economic point of view, precisely this argument is most relevant for maximizing the value of a company and it is the basic principle for most of the other action-oriented measures.

2. Ex post evaluation of objectives

In a second step, companies were asked to evaluate whether their particular objectives had been achieved from an ex post point of view after changing to either IFRS or US GAAP.

Based on an overall assessment of the objectives achieved the result is positive in both company groups, i.e. the DAX100 companies evaluate the overall achievement of objectives at 4,0 and the Neuer Markt companies only slightly lower at 3,8.

Analyzing this question on the basis of the chosen GAAP regime we do not find a significant difference: the respective arithmetic mean of the assessment of whether the objectives have been achieved is 3.91 for IFRS users and 3.86 for US GAAP users; the Mann-WhitneyU-Test (Z = -0.281) indicates no significant difference. The assessment of the question if the same decision would be taken again results in arithmetic means of 4.23 (IFRS users) and 4.27 (US GAAP users) again without a significant Z statistic (-0.365). Satisfaction with the objectives achieved is therefore the same, regardless of the reporting system chosen.

Even though this indicates a high achievement rate, our detailed results prove such a conclusion to be premature, as can be observed by examining the results of the single aspects in detail. All data is provided in Table 3.

–  –  –

Once again the difference between the two company groups in the assessment of each aspect is analyzed by means of the Mann-Whitney-U-Test (Z-value). As can be seen in Table 3, there are only few deviations in the two groups’ evaluations of the various aspects achieved.

The assessment of the objectives achieved is thus much more homogenous than the evaluation of the importance of these aspects before the adoption of international reporting systems.

Using the Wilcoxon statistic10 (W-value) permits the comparison of the ex ante and ex post evaluations of the items for each group. A significant W-value indicates that the ex ante and ex post assessments are not equal. A positive or a negative discrepancy between the expectation and the realization can therefore be measured.11 The discrepancy for the eight items shown in Table 3 is pronounced, i.e. statistically significant. Eight of the fifteen tested aspects deviate, six of these eight deviate negatively and only two exceed expectations. In respondents' opinion neither better cooperation with business partners or local authorities nor an improved credit rating could be achieved. There is general agreement (Z-values are insignificant) with regard to increased diversification and internationalization of the investor base but the high expectations could not be met. A similar result is obtained for the item ‘increased attractiveness for institutional investors'. Only the positive effects that stem from improved comparability with industry peers and the advantageous integration of internal and external reporting systems are evaluated significantly higher from the ex post perspective. Both aspects apply in particular to Neuer Markt companies.

At the very least, therefore, a question mark should be placed against the positive response to the initial control question as to whether overall the objectives have been achieved. There may be various reasons for the deviating judgment of the control question. First, objectives that have not been achieved may have been given a lower weight in the overall evaluation.

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