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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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Second, important objectives may have been omitted. Nevertheless, we feel that this is probably not the case as we placed special focus on giving the companies as complete a list as possible of conceivable objectives, not only by means of extensive analytical research and discussions during the pretest phase but also by allowing the companies to name other reasons in the survey, which they rarely did. We therefore believe that the divergence of positive overall assessment and negative assessment in detail is probably due to a response bias: an overall judgment such as that demanded by the control question results in higher uncertainty with respect to respondents’ ability to assess this question, which leads to a positive response bias (Krenz and Sax, 1987: 575).

V. IFRS versus US GAAP users: different objectives behind the choice of GAAP regime As a number of studies have documented, there had been no explicit trend towards the choice of one of the two alternative international reporting systems in Germany by 2002. Thus, it would be interesting to discover if a specific reporting system is chosen in view of the objectives indicated by the respondents in this survey. The intention of this third part of the analysis is to determine the motives that might lead to the adoption of IFRS or US GAAP and to test whether discriminating items can be statistically validated. We shall therefore first focus our attention on the specific considerations that might have influenced German companies to choose IFRS rather than US GAAP or vice versa, and then in the second part of this section we shall present the results of our empirical analysis.

1. Analytical considerations of the choice between IFRS and US GAAP

When our survey was conducted, the choice between one of the two international reporting systems was open to all companies with only one constraint – a company might have been obliged to switch to one particular system by its parent. Moreover, listing on the US American capital market compels a company to report according to US GAAP as the SEC has not yet accepted IFRS as a reporting framework. Nevertheless, this did not automatically result in companies’ abandoning IFRS. Schering, for example, began reporting according to IFRS in 1994 and contined to use IFRS even after its listing on the NYSE in 2000; the US American reporting requirements are fulfilled by means of a reconciliation.

Other decision parameters influencing the choice of IFRS or US GAAP are opinions with respect to the global recognition of a system, the degree of influence on the standard setting process of a system, expected difficulties in using the system and the expected implementation effort. A number of parameters are discussed below which favor the adoption ofeither IFRS or US GAAP.

US GAAP were regarded as the most efficient reporting system,at least until the time of the Enron debacle when this survey was carried out. One of the main reasons for its prestige was the reduced number of explicit earnings-management opportunities in comparison to other reporting systems (d’Arcy and Leuz, 2000: 388; Krawitz et al., 2000: 547). Many interpretations and implementation questions with regard to IFRS were open and thus allowed additional windows of opportunity for earnings management. In recent years, these flaws have been removed by the IASC’s Core Standard Project in order to gain the IOSCO approval for IFRS and the introduction of the SIC/IFRIC. At the same time, the revision of existing IFRS has led to a clear convergence of IFRS towards US GAAP (Bruns, 1998: 398), yet from the standpoint of European companies their influence on the design of IFRS is disproportionately stronger compared to lobbying opportunities in the US (Breker et al., 1999: 188).

Of major significance for the relevance of IFRS as a global reporting system is the continued reluctance on the part of the US American Security Exchange Commission (SEC) to accept it and thus open the most important capital market of the world. The first step towards the global acceptance of IFRS was only taken in 2000 when the IOSCO recommended the approval of IFRS for cross-border listings. The SEC has not yet undertaken formal steps to implement this recommendation, so that if and when IFRS will finally be accepted on the US capital market remains an open question.

One of the main reasons for the SEC’s refusing this recognition is the lack of a comparable enforcement mechanism. From today’s perspective, it is debatable whether this attitude will change in the near future as IFRS-enforcement institutions will be established as a result of the CESR consultancy paper. On the other hand, EU Regulation No. 1606/2002 which excludes US GAAP from European capital markets may well delay the process of approval by the SEC. It is important to note with respect to our study that neither IFRS enforcement nor the existing EU regulation were subjects for discussion during our survey.

Besides easier access to the US capital market, there are other specific reasons for choosing US GAAP. These can result from a company’s current business situation or general business intentions, e.g. to produce in the US or to develop sales in the US market.

For companies whose interests are less focused on the US, IFRS might be preferable, as their use is spread throughout Europe, Asia and Africa. In addition, from a German perspective there are greateropportunities for lobbying activities designed to promote the future development of the system compared to US GAAP. German delegates are members within the organizational body of the IASC.

Quite apart from the development of the global domination of one or the other reporting system, the implementation costs have to be considered. German managers are skeptical with respect to the multitude of case rules within US GAAP ('Cookbook Accounting', Lüdenbach and Hoffmann, 2003: 387). In comparison to US GAAP, IFRS system appears more systematic and concise. The great amount of detail required by US GAAP is one reason why, taking cost aspects into consideration, so many companies prefer IFRS.

As we have seen, companies assign different attributes to the two international reporting systems. The empirical study by Horváth and Arnaout (1997) identifies the following items as

influencing the decision:

Companies choosing IFRS expected lower costs for the implementation and maintenance of the system. At the time our study was conducted results were driven by the association of greater earnings-management opportunities within IFRS and the sentiment of a higher similarity between IFRS and German GAAP than between US GAAP and German GAAP, making a transition from German GAAP to IFRS easier and also less costly.

The recommendations of external advisers (e.g. auditors, banks, management consultants) have influenced some decisions significantly.

In Europe the acceptance and use of IFRS is more widespread than that of US GAAP.

Companies preferring US GAAP have a strong interest in US markets.

An accurate assessment of the future global dominance of the chosen system seems to be particularly relevant for decision-making. Companies selecting IFRS, for example, assume that IFRS will become the global system. However, German managers believe US GAAP provide them with more information. Empirical results exist only for the years 1997 and 1998. The study of Horváth and Arnaout (1997), for example, shows that 75% of companies regard US GAAP as the future global system and only 63% expect IFRS12 to fulfill this role. The study by Peemöller et al. (1999) indicates that in 1998 Neuer Markt companies expected US GAAP to be dominant in the future. In the same study, however, IFRS users expect an increasing influence of IFRS. Förschle and Glaum (1998) obtained similar results in 1997: the majority of German companies included in their survey had been expecting to report under IFRS in 2002.

2. Empirical results

Although the literature has projected a detailed opinion, it has not yet provided statistical validation for the various objectives being able to discriminate effectively between the users of IFRS and US GAAP. In order to analyze this question, the companies in our survey were asked to evaluate seventeen items. These were designed to mirror the context and form of both GAAP regimes, the necessary adjustment process, and the strategic goals associated with either IFRS or US GAAP. By means of a logistical regression the significant items in the decision process can be identified in relation to the decision taken by the respective company.13 The seventeen statements that were polled are briefly illustrated. For contextual and formal criteria, the rate of change of a reporting system was first evaluated. Then the rigor and completeness of the reporting system and the limitations of alternative reporting options were considered together with the question of the flexibility of the reporting system. The similarity to the German GAAP then had to be assessed and the question answered of whether the SEC is likely to accept IFRS in the near future.

The questions with regard to the adjustment process focused on for issues: The impact of external advisers, the complexity of the process, the cost incurred by changing the GAAP regime, and the availability of sufficient practitioner literature for the respective reporting system.

The questions on strategic goals asked whether, in the company’s opinion, the respective reporting system would become the global standard and if so how its acceptance in Europe or worldwide would be assessed. In addition, the possibility of influencing future regulations was to be judged. Finally, companies were asked to evaluate their intention to expand on the US market, the possibility of their being more easily benchmarked against competitors, improved relationships with business partners and substantial existing business of a subsidiary in the US.

In order to construct a concise model a method was chosen that includes variables stepwise. The inclusion of a variable is based on the Wald test, which uses a likelihood statistic with conditional estimators.14 IFRS users were assigned the internal value 0 and US GAAP users the internal value 1 as input parameters.

Table 4 shows the results of the estimation. The model correctly detects 37 of 40 IFRS users and 33 of 39 US GAAP users; in other words, almost 90% of cases are accurately assigned. Within the estimation six items are identified as being responsible for the precise discrimination of IFRSand US GAAP users. These items are shown in Table 4.

Insert Table 4 here.

¢ The column labeled e explains the direction and the strength of the independent variable in the logistic regression. The value of 3.479 for example for the item 'US GAAP acceptance and employment is globally stronger' changes the probability of being a member of the US GAAP group (cf. internal value equals 1). In the neutral case the probability of being a member of each group is 1:1 (US GAAP user : IFRS user). If the assessment of the answer to the statement 'US GAAP acceptance and employment is globally stronger' is increased by one unit on the given five-point scale, the probability of being a member of the US GAAP group becomes 3.479:1. A different result is achieved if the answer to the statement 'IFRS acceptance and employment is in Europe stronger' is increased by one unit on the five-point scale.

In this case, the probability of being a member of the US GAAP group decreases to 0.393:1.

¢ As no independent variable has an e value that is near zero, the probability is definitely ¢ changed by each of the six items. Consequently, an e value 1 identifies a motive for choos¢ ing IFRS, whereas an e value 1 indicates a motive for choosing US GAAP.

¢ The characteristic of the e value with respect to the chosen reporting system is in all cases in line with expectations. Thus, it can be demonstrated that a decision in favor of US GAAP will be taken primarily by companies which intend to expand in the US, attach more importance to the global acceptance and prevalence of the respective reporting system and do not believe the SEC is likely to approve IFRS in the near future. Companies that have opted for IFRS on the other hand perceive a strong similarity between IFRS and the German GAAP, have the focus of their business activities in Europe and attach higher value to the possibility of exerting influence on the development of the reporting system.

In the context of the logistic regression model the remaining eleven items are not important for the decision on the respective reporting system. This shows, for example, that the costs for the adjustment process are assumed to be equal regardless of the reporting system chosen.

VI. Conclusion

German companies started to report in accordance with international GAAP regimes in addition to their consolidated German GAAP statements some ten years ago. In 1998, German legislation introduced an amendment to the Commercial Code (§ 292a HGB) enabling listed companies to report consolidated financial statements under either IFRS or US GAAP. Until EU Regulation no. 1606/2002 became effective, listed companies were mainly free to decide which GAAP regime to choose depending on the specific objectives pursued inchanging the GAAP regime.

Our study picks up the arguments associated with a change of GAAP regime theoretically by first analyzing in detail the objectives pursued by German companies within the framework of a survey. In a second step, comparisons are made between the ex ante (pre transition) and ex post (post transition) evaluations of the respective objectives and their achievement. In a third step, specific motivations are identified that were crucial for the final decision on which GAAP regime to choose.

To our mind, our results indicate that the change to an international GAAP regime was motivated primarily by the expectation of attaining improved standing on the capital markets, i.e.

by financial motives. Other motives were an improved supply of information, the diversification and internationalization of the body of investors and increased comparability with industry peers. Motives related to operating business aspects (e.g. improved cooperation with local authorities, the planning of a foreign listing or improved recruiting of international employees) only played a minor role in the decision process.

Ex post evaluation of the achievement of these objectives provides an ambiguous picture.

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