The impact of IFRS adoption in a pocket multinational company

Master’s Degree programme – Second Cycle (D.M. 270/2004) in Accounting and Finance Final Thesis The impact of IFRS adoption in a pocket multinational company The case of Brovedani Group SPA Supervisor Ch. Prof. Chiara Saccon Graduand Isacco Colussi Matriculation Number 851381 Academic Year 2015 / 2016

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AbstractDuetoglobalization,internationalaccountingisbecomingincreasinglyimportant.Evenacompany,operatingwithinthebordersofitsowncountry,isnolongerisolatedfromthe internationalaccountingcontext. Inthe last threedecades,ademandforaunique,well-recognized and high-quality international accounting framework has risenattentioninordertoovercomeaccountingdifferencesoriginatedbynationalaccounts.After having understood that the environment is one of the main causes of thesemodifications, it is possible to classify the accounting systems. International FinancialReportingStandards(IFRS),developedandmaintainedbytheInternationalAccountingStandards Board, is the most famous and used set of rules and practices.Harmonizationis the process of diminishing superfluous or contradictory standards.Obviously, the adoption of IFRShas both beneficial anddetrimental effects: academiadoesnotprovideaclearanswer.TheconceptsanalysedinthefirsttheoreticalpartareillustratedinanItalianmediumfirmcalledBrovedaniSPA.Asemi-structuredinterviewand a simulation helped to access practically the impact of IFRS adoption, from theculturalpointofviewtothegenuineaccountingeffects.

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IndexABSTRACT..........................................................................................................................................3

INDEX...................................................................................................................................................5

LISTOFFIGURES...............................................................................................................................7

LISTOFTABLES................................................................................................................................9

INTRODUCTION..............................................................................................................................11

1 INTERNATIONALACCOUNTING...................................................................................13

1.1ACCOUNTINGDIVERSITYANDENVIRONMENTALINFLUENCES............................15

1.1.1Economicenvironment................................................................................................16

1.1.2Politicalenvironment...................................................................................................17

1.1.3Legalandtaxenvironment.........................................................................................17

1.1.4Professionalenvironment..........................................................................................18

1.1.5Businessenvironment..................................................................................................18

1.1.6Culturalenvironment...................................................................................................19

1.1.7Institutionalenvironment..........................................................................................21

1.1.8Educationalandinternationalenvironment......................................................22

1.2DIFFERENTACCOUNTINGCLASSIFICATIONS..................................................................24

1.2.1Accountingpracticesandenvironment................................................................24

1.2.2Legalsystemandculture............................................................................................31

1.2.3Geographyandprinciples..........................................................................................33

2 IFRSADOPTION.................................................................................................................39

2.1INSTITUTIONALTHEORYANDISOMORPHISM...............................................................49

2.2COMPARISONBETWEENNATIONALGAAPSANDIFRS...............................................51

2.3TRANSITIONTOANEWACCOUNTINGFRAMEWORK.................................................57

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2.4ACCOUNTINGHARMONIZATION............................................................................................59

2.5BENEFITSANDLIMITATIONSOFIFRSADOPTION........................................................64

3 BROVEDANIGROUPSPA.................................................................................................93

3.1HISTORYOFTHEGROUP............................................................................................................94

3.2PATHTOINTERNATIONALIZATION..................................................................................100

3.3INTANGIBLES’RECLASSIFICATION....................................................................................103

3.4SEMI-STRUCTUREDREVIEW.................................................................................................118

4 CONCLUSIONSANDFINALREMARKS.......................................................................127

5 ACKNOWLEDGEMENTS................................................................................................129

6 REFERECES.......................................................................................................................131

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Listoffigures

FIGURE1:ENVIRONMENTALINFLUENCESONACCOUNTING...................................................16

FIGURE 2: THE RELATIONSHIP BETWEEN INSTITUTIONS, NATIONAL ACCOUNTING

ANDNATIONALECONOMICCULTURE...................................................................................................21

FIGURE3:ENVIRONMENTALDIFFERENCESCONTRIBUTINGTOCOMPLEXITY...............23

FIGURE4:DOUPNIKANDPERERA’SACCOUNTINGMODEL........................................................27

FIGURE5:MULTIDIMENSIONALSCALING,TWO-DIMENSIONALSOLUTION......................30

FIGURE6:IASBSTRUCTURE.......................................................................................................................40

FIGURE7:FACTORSAFFECTINGINSTITUTIONS..............................................................................50

FIGURE8:HOWACCOUNTINGITEMSCHANGEACCORDINGTONATIONALGAAPSAND

IFRS.........................................................................................................................................................................55

FIGURE9:CHANGESSCALEDBYNATIONALGAAPS......................................................................56

FIGURE10:MATERIALANDFORMALHARMONIZATION.............................................................64

FIGURE 11: RELATIONSHIP BETWEEN COMPARABILITY, TRANSPARENCY AND

DISCLOSURE.......................................................................................................................................................67

FIGURE12:DATAONBILATERALEXPORTSOFGOODSANDONBILATERALFOREIGN

DIRECTINVESTMENTSFLOWS.................................................................................................................68

FIGURE13:LIQUIDITYINCREASEDINIFRSCOUNTRIES..............................................................70

FIGURE14:DESCRIPTIVESTATISTICSOFACCOUNTINGQUALITY.........................................73

FIGURE 15: THE EVALUATION OF ACCOUNTING QUALITY BETWEEN THE PRE- AND

POST-ADOPTIONPERIODSFORVOLUNTARYADOPTERS............................................................74

FIGURE 16: ACCOUNTING QUALITY BETWEEN THE PRE- AND POST-ADOPTION

PERIODSFORRESISTERS.............................................................................................................................75

FIGURE17:FOREIGNANALYSTBETWEENPRE-ANDPOST-ADOPTIONPERIODS..........77

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FIGURE18:EFFECTSOFTHEIFRSADOPTIONONTHERESISTERS........................................84

FIGURE19:DETERMINANTSOFACCOUNTINGQUALITY.............................................................87

FIGURE20:THEHEADQUARTERSOFSANVITOALTAGLIAMENTO(PN),ITALY.............93

FIGURE21:HISTORICALKEYPOINTS....................................................................................................94

FIGURE22:BROVEDANIGROUPTODAY...............................................................................................96

FIGURE23:BROVEDANI’SPRODUCTIONFACILITIES.....................................................................97

FIGURE24:BROVEDANI’SPRODUCTS...................................................................................................98

FIGURE25:THEACTUALCUSTOMERBASE........................................................................................99

FIGURE26:BROVEDANISTRATEGY.....................................................................................................100

FIGURE27:SUPPLYCHAINAUTOMOTIVEINDUSTRY.................................................................101

FIGURE28:THEGLOBALPRODUCTIONTRIAD..............................................................................102

FIGURE29:THEAUTOMOTIVEINDUSTRY’SNUMBERS.............................................................103

FIGURE30:BUSINESSOVERVIEW.........................................................................................................104

FIGURE31:ORGANIZATIONALCHART...............................................................................................105

FIGURE32:GLOBALSTRATEGY.............................................................................................................106

FIGURE33:BROVEDANI’SFUTURECHALLENGES........................................................................123

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Listoftables

TABLE1:PRICEWATERHOUSE’SDATABASE......................................................................................29

TABLE 2: COUNTRIES RANKED ON THEIR DISSOCIATION FROM THE BRITISH

MODEL..................................................................................................................................................36

TABLE3:IFRSADOPTIONAROUNDTHEWORLD............................................................................48

TABLE4:DESCRIPTIVESTATISTICS.......................................................................................................51

TABLE5:ABSENCEANDDIVERGENCEINDEXES..............................................................................52

TABLE6:NATIONS’BEHAVIOURLINKEDTOABSENCEANDDIVERGENCE........................53

TABLE7:VARATIONSINACCOUNTINGCONSERVATISM.............................................................67

TABLE8:BROVEDANI’SCONSOLIDATEDBALANCESHEET.....................................................110

TABLE9:INTANGIBLEASSETSFOLLOWINGITALIANGAAPANDIFRS..............................111

TABLE10:RESEARCHANDDEVELOPMENTCOSTS.....................................................................112

TABLE11:ASSETSINCONSTRUCTION...............................................................................................113

TABLE12:BROVEDANI’SOTHERINTANGIBLEASSETS.............................................................114

TABLE13:DEFERREDCHARGESLINKEDTODEVELOPMENTCOSTS.................................115

TABLE14:INTANGIBLES’VARIATIONSDUETOIFRSADOPTION.........................................115

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IntroductionAccounting has gradually evolved with man. The Romans had developed verysophisticatedformsofaccountinginsimpleentryinordertocalculateforexampletheprofitsofthefarms.IntheMiddleAges,especiallyinItaly,balancesheetswerecreatedin order to keep track of the assets. Furthermore, double-entry bookkeeping systemswere invented: precursors of accounting were Fibonacci, Cotrugli, Fra Luca Pacioli,Crippa, Villa and Cerboni. In the seventeenth century, the first public subscription ofequity capital took place in the Netherlands. In the nineteenth century, the auditprofessionwasdevelopedinEngland.Manycountriescontributedtothedevelopmentofaccounting:Germany,Scotland,ItalyandFrance.Thelatter,duringtheperiodofColbert,haspioneeredthelegalcontrolofaccountingpractices,thenincludinganobligationtodraft financial statements formany industrial activities.During the twentieth century,theUnitedStateshavegivenrisetoconsolidation,analyticalandmanagerialaccounting,leases’ capitalizationanddeferred taxes’ accounting.Theevolutionand the increasingglobalization of financial markets in the last thirty years have led many countries,including the European Union and its member states to open discussions, convertedsubsequentlyintolaws,aboutcommoninternationalfinancialreportingstandards.Theprocess was done in order to ensure an increasing comparability of the companies’balancesheetsaswellasanefficientfunctioningofthecapitalmarkets.Newregulationsforlistedcompanieshavebeenprovided.TheaccountingsystemthatactuallyseemstoprevailintheworldscenarioiscalledInternationalFinancialReportingStandards:high-qualityaccountingstandardsprovidetransparencyandcomparabilitybetweenfinancialstatements in order to facilitate decision-making for operators in the capitalmarkets.The Inter-Agency Standing Committee, later replaced by the International StandardBoard,hasnowbecome the creatorand themainpromotingentityof IAS/IFRS. Sincethelateeighties,ithasundertakenaprocessofnegotiationwiththemainregulatorsofstockmarkets.IntheEU,alotofcompanieshavesetfinancialstatementsinconformitytoIFRS.Despitethedifferencesbetweencountries,someorganizationshavebeentryingto harmonize (with a supranational legislation enacted in the EU) and to standardize(withIASB)theaccountingpractices.Soastointerprettheimpactthattheadoptionofinternational accounting standards led to the financial statements of European andItalian companies, it is necessary to emphasize the sources, the stages of their

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application inEurope, theentitiesbehind thisaccounting framework, thebenefitsandlimitations highlighted in the literature. A combination of economic, historical,institutional and cultural factors originates every national accounting framework: thedifferencesrecordedincompanyaccountingaremainlyduetoavariationinreportingrequirements and in dissimilar rules. Environmental differences are, therefore, one ofthe main limitations of IFRS adoption: there have been anyway some moves toharmonize and converge accounting practices globally. Theoretical and empiricalresearchhavediscoveredthepotentialadvantagesanddisadvantagesfacedbynationswhen they decide voluntary or not to adopt IFRS.By implementing them, firms cansurely face a larger basis of investors due to the increased comparability reached.Additionally,multinationalcompaniesarehelpedbecausetheycanspeakonlyone,well-recognizedandhigh-valueaccounting language.Could, therefore, this frameworktrulyovercome national accounting approaches? It seems that many researchersunderestimate the limitations, the obstacles that a massive adoption of these newstandardscouldprovoke:acertainlevelofqualitycouldbelostwithafullacceptanceofIFRS. Big multinational companies with strong ties in the international market ofcapitals and a solid culture closer to the Anglo-Saxon world are the target of thisframework: an Italian economic environment, dominated by small and mediumenterprises,civillawandhistoricalcostsisclearlyveryfar.Thus,adoptinganewsetofaccountingstandardsisnoteasy,duetotheovercomingconvergenceandenforcementcosts.Inordertoshedlightthetheoreticalconcepts,acaseanalysishasbeendone.ThechosentargethasbeenanItalianmediumfirmcalledBrovedaniGroupSPA.Itliesinthenorth-eastofItalyandithasbecomeapocketmultinationalcompany.ItoperatesintheautomotivesectorandithasopenedfactoriesinItaly,SlovakiaandMexico.TheimpactofapossibleIFRSadoptionhasbeenmeasuredthroughasemi-structuredquestionnaireand an accounting simulation study linked to intangible assets. The methods havehighlighteda realityvery far from theonewhere IFRSwereborn, resistant to changeduetostrongenvironmentaldifferences.

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1 InternationalaccountingAccountingisavitalframeworkforthedailysociety’spreservation:themainrolecouldbeoutlinedasaninformationsupplierforcompaniesandtheirtransactionsinordertosimplify theiractivitiesand theresourceallocationassessmentsby theirstakeholders.Theconsistencyandeffectivenessoftheinformationdisclosedbydifferentlobbygroupsare positively associated with the resource allocations’ efficacy. The function ofinternational accounting, therefore,doesnotdiffer from theone just enlightened.Thedifferenceislocatedinthefocusofitslenses.Nationalaccountingusuallyemphasesonentitiesworkinginsidenationalborderswhileinternationalaccountingdealswithfirms,connections and operations exceeding national borders, laws and accountingframeworks.Firmsfunctioninginthisbackgroundarenamedmultinationalcompanies(MNCs).Theyhave todealwithmoreenvironmentdifficultiesdueto theobligationofreporting and adhering to different accounting standards and principles, dealingwithdifferentculturesandlanguagesandfollowingdifferentlawsandobligations.The meaning of accounting could be depicted as a tool to measure, to discloseinformationandtoaudit.Thefirstprocesscouldbesummarizedinthedocumentation,classification and quantification of the economic activities accomplished by the targetfirm.Atfirstglance,stakeholders,duetoaccounting,couldunderstanddeeplyhowthefirm’sprocessesarecost-effectiveandtheconditionoftheassets,liabilities,andequity,asreflectedinitsfinancialresults.Thesecondaccountingfunctionisrelatedbothontheinformationlinkedtothetargetstakeholdersandontheway,itisdisplayed,managingto respond thew-questions:what,when,howmuchand towhomhas tobe reported.The third process, namely auditing, is an almost compulsory function in everyaccountinglaw.Financialstatementsbecomeobjectofinvestigationandassessmentbyprofessionals which investigate if the records displayed denote impartiality andprecision of the transactions and,more generally, the situation of the firm. Normally,auditingisdonebothinternallybyemployees,respondingtothemanagementandtheproperty, and externally by outside firms, responding to the law and its nationalstandards and principles. Moreover, the auditors could attest the reliability of thecommunication,too.

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Duetoglobalization,internationalaccountingisgainingalwaysmoreimportance:evena firm functioning uniquely within the boundaries of its own country is no longerisolated. Suppliers and clients are usually international in order to contain costs andremain globally competitive. Anyway, accounting quantities may differ considerablyaccording to the national GAAP used. Furthermore, differences are triggered byvariations in culture, business practices, political and regulatory structures, legalsystems,currencyvalues,localinflationrates,businessrisksandtaxcodes:allofthesevariableinfluencesmultinationalcompaniesandhowtheyconducttheiractivities.Sinceaccounting has become the means of business, supranational economic connectionsdenotethataccountingreportspreparedinonecountrymustincreasinglybeusedandunderstoodbyusersoftheothers(CHOIMEEK,2011,pp.1-2).Accounting can be appreciated as an institution, too. This term stands for an entityallowing less transaction information and coordination costs, less informationasymmetry, more property rights enforcement and protection, more deadweight lossprevention and internalization of externalities. Therefore, accounting is also aninstitutional mechanism that mediates between firms and other contracting partieswhilefacilitatesmorecomplextransactionsintheglobaleconomy,avaluefacilitatorinoneword(WYSOCKI,2011,pp.311-312).Internationalaccountingcouldbealso interpretedasa frameworkcreated inorder todescribe and compare accounting in different countries. Obviously, the firms’connectionsareoriginatedinabroadrangeofareasasfinance,management,auditandtaxation. Inthispaper, thefocusisprimarilyonexternal financialreportingwhichcanbedepictedas:

- supranationalaccounting,- companystandardsandguidelines,- comparativeaccounting.

The first level deals with standards’ compliance, guidelines and rules issued bysupranationalorganizations.Thegoalistocreateauniversalaccountingsystemsharedand used by all countries in the world. The second level refers to all accountingtransactions linked to foreign subsidiaries andparent companies, foreign investmentsandforeigncurrency.Thethirdleveldescribesrules,guidelinesandstandardsexisting

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indifferentcountries,created inordertocompareandevaluatedifferentnationalandsupranationalaccountingframeworks(MCLEAYRICCABONI,2012,pp.343-344).Toconclude,thegoalofinternationalaccountingsystemsistoprovideanenvironmentwheresimilaraccountingtransactionsaremanagedbycompaniesallovertheworldinthe sameway, increasing consequently the comparability, the efficacy and the value-relevanceoffinancialstatements(JENO,2010,pp.1-2).1.1 Accountingdiversityandenvironmentalinfluences

Every national accounting framework is originated by a composite interplay ofeconomic, historical, institutional, and cultural factors: diversity among nationalgenerallyacceptedaccountingprinciples(GAAPs)is,therefore,predictable.Avariationin accounting requirements can result in significant differences being recorded incompany accounting when they are required to report under the rules of differentjurisdictions.Moreover,factors,leadingthesedifferences,arealsorecognizedtobetheneedsforaccountinginformation.While there have been somemoves to harmonize, and converge accounting practicesandstandardsglobally,therearestillenvironmentalfactorswhicharelikelytoleadtodiversity around the world. They are mainly country-specific, namely linked to theenvironment inwhich financialreporting isapplied. In the lastyears, theaimofsomeresearches and supranational organizations has been to harmonize this differences,tryingtofosterauniqueframework.Intheliterature,environmenthasplayedamajorroleindeterminingthecausesofthisdifferentiation.Environmentalfactorscouldbedividedin:

- politicalsystem,- economicsystem,- legalandtaxationsystem,- businessenvironment,- professionalenvironment,- culturalenvironment,- educationalandinternationalenvironment.

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Figure1:ENVIRONMENTALINFLUENCESONACCOUNTINGSource:ALIABRANSON,2011,pp.1-31.1.1 Economicenvironment

The economic environment impacts accounting diversity through the compulsoryfinancial reporting frameworks’ information. Therefore, the factors to be taken intoconsideration are the level of privatization and international trade, the economicopenness,thestageofeconomicdevelopmentandtheinflation.Theextentoftheprivatesectorisfundamentaltoaccessthestateofhealthofthecompetitiveschemeofanation.Moreprivatizationdemandsmorefinancialinformationtobedisclosedpubliclybythefirms. Inanopeneconomy, firmscompetetoattract foreign investors: it is, therefore,requiredaproperfinancialreportingframeworkwhichguaranteesthequalityandthecomparability of financial statements. The stage of economicdevelopment is a crucialfactor because themore an economy is developed, themore capitals are needed, themorefinancialinformationisdemanded.Furthermore,thisfactorinfluenceswhichandhowbusinesstransactionsaremanagedand, therefore, themostprevalentones(ALIABRANSON,2011,pp.3-5).

Accounting system

Economic environment

Political environment

Legal & tax environment

Professional environment

Business environment

Cultural environment

Educational&

international environment

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To conclude, inflation deforms historical cost accounting by devaluing asset values,linkedexpenses,andexaggeratingtheincome.1.1.2 PoliticalenvironmentThe representatives of a country influence, with their choices, behaviours andinterventions, thefinancialreportingframeworkandhowtheeconomicrelationshaveto be managed. As a matter of fact, all developed countries have similar politicalenvironments: high levels of stability, freedom, democracy and accountability.Moreover,factorsthatarebelievedtobecrucialtoshapeindirectlythenationalGAAPsarethepoliticalstructureadoptedbythecountry,thelevelofpoliticalandcivilfreedom,thepoliticalparticipationandthelevelofdemocracy(ALIABRANSON,2011,pp.3-5).Accounting concepts and know-hows are, therefore, transmitted through occupation,tradeandsimilarconnections.Manydevelopingeconomieshaveadoptedanaccountingsystem thatwas created elsewhere, either because itwas required by external forces(e.g., India)orbytheirownchoice(e.g.,countriesofEasternEuropethatshapedtheiraccountingsystemswithEuropeanUnionguidelines).Economicintegrationthroughthedevelopment of international trade and capital flows is a powerful promoter for theaccountingharmonizationaroundtheworld(CHOIMEEK,2011,p.33).1.1.3 Legalandtaxenvironment

Legal and tax environment are believed to affect directly the financial reportingframeworks.Theroleoftheformerenvironmentistodefinethewayinwhichindividualentitiesandinstitutionsshouldandcould interact.Thedevelopednationshavemainlytwomodels: code (or civil) lawandcommon(or case) law. In code lawcountries, thesystemsderivefromRomanlawandtheCodeNapoléon:thegovernmentthoroughlawstrytocodifyeveryaspectofthelife,creatinganall-embracingsetofrequirementsandmethods.Accountingrules,therefore,tendstobehighlyrigidandbureaucratic.Onthecontrary, common lawcountriesare inspiredby theEnglishcase lawand theyhavealess exhaustive and more adaptable law system, encouraging testing and judgments.Accountinglawisdevelopedbyprivatesectorprofessionalorganizations:inthisway,itispossibletobemoreadaptiveandpioneering.

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Tosumup,thefocusoftheformerisonthelegalform,thesettingandtheenforcementofnationalaccountingstandardsthroughpublicentitieswhilethefocusofthelatterisontheeconomicsubstance,fairpresentation,transparencyanddisclosure.In many countries, tax legislation governs accounting standards because companiesmusttracerevenuesandexpensesintheiraccountstoclaimthemfortaxreasons.Thus,financial and taxaccountingare identical: this is the caseof civil lawcountrieswherefinancialaccountingbringsintolineitselftobusinessandtaxlaw,meaninganimportantinfluenceoftaxrulesonaccountingmeasures.However,inothercountries,financialandtax accounting are two different worlds: taxable profits are, for example, essentiallyfinancialaccountingprofitsrectifyinordertoadheretodeterminedtaxlaws.Ofcourse,even where financial and tax accounting are independent, tax regulation couldsporadically necessitate the application of certain accounting principles (CHOIMEEK,2011,pp.31-32).1.1.4 Professionalenvironment

Financialstatementsineverycountryareinclinedbythedegreeofdevelopmentoftheaccounting profession.More precisely, these indicators describe this relationship: thesuitabilityofaccountingstandards, thepresenceandreputationofprofessionalbodies(sizeandauthority),thecompetenceofaccountants’qualifications(mainlyexperience)and the availability of legal and regulatory backing. Every factor is determined byaccounting and economic traditions of the country and it defines in turn the ease ordifficultyofIFRSpenetrationandconvergence(ALIABRANSON,2011,pp.8-9).1.1.5 Businessenvironment

Thebusinessenvironmentisinvolvedinthedevelopmentofaccountingsystembecauseit influencesthe informationneededandthecontentof financialstatements.Tobettercomprehendthisendeavour,itispossibletoisolatethreefactors:firms’characteristics,thedegreeofcapitalmarketdevelopmentandtheprevailing typeof financingsystem.Firms’ characteristics could be summarized in size, industry sector, legal form,ownershipconcentrationandlistingstatus.Increasingthesizeofthefirmturnedouttoincrease the ownership base, resulting also in a larger demand of information. Each

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industrysectorhas itsownpeculiaritiessuchasdiversedegreesof informationneeds,differentaccountingpracticesandstandards.Moreover,afirmthatdecidestochangeitslegal form, going public and increasing the number of stockholders, normally faces ahigher demand of information disclosure. To conclude, more information is neededwhen firmsare listed,especially ifacross-listingoccurs.Sincecapitalmarkets tendtoinfluence accounting rules and enforcement practices, the degree of capital marketdevelopment is a fundamental aspect to describe the influence of the businessenvironment. The more the capital market is developed, the more information isdisclosedbythecompanies(ALIABRANSON,2011,pp.10-14).Thethirdandlastdeterminantofbusinessenvironmentisthetypeoffinancing:equityordebt-systems.Innationswithsturdyequitymarkets,characterizedbyacompetitiveand various investors’ base, accounting profitsmeasure how virtuousmanagement isrunningthebusiness.Accountingiscreatedtoaidinvestorsjudgethevalueofthefirmthrough future cash flow and its related risk. Disclosures arewidespread in order tomeettherequirementsofextensivepublicshareownership.Onthecontrary,incredit-basedsystems,wherebanks,throughlong-termdebtsandequityfunds,aretheleadingsource of finance. Accounting emphases, therefore, on creditor protection throughconservative earningsmeasures in order to decrease dividend pay-outs andmaintainsufficientresourcesforthesecurityoflenders.Becausefinancialinstitutionshavedirectentree to any data they want, broad public disclosures are not contemplated asnecessary(CHOIMEEK,2011,p.31).1.1.6 Culturalenvironment

Culturecanbeseenasasetofmindframeworksanditcomprehendstheprinciplesandapproachessharedbypeople.Culturalvariablesare inspiredbynations’ legalsystemsandbyotherinstitutionalarrangements,definingdifferentsocialgroupsandinfluencingpeople’sperceptionofsituationsandinstitutions.VeryimportantintheacademicworldarethestudiesofHofstedeandGray.Theformerhas highlighted five cultural dimensions among countries’ values related to financialreportingframework:

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- powerdistance,thedegreetowhichthelesspowerfulentityacceptsthatpowerisirregularlyconcentrated;

- individualism, in individualistic cultures there are few bonds beyond thoserelated to the nuclear family,whereas in collectivist societies people belong tosturdyandsolidin-groups;

- masculinity, inmasculinesocietiesmenareself-confident,strongandconcernedwithmaterialsuccess.Womenaremoreunassertive,caringandinterestedinthequalityof life. In feminine societies, bothare equally concernedwithqualityoflife;

- uncertaintyavoidance,theleveltowhichpeoplefeelendangeredbyuncertainorunknown situations. This is expressed in a need for formality, certainty andflawlessrules;

- long-termorientation, themagnitude towhich people favour a rational, future-orientedperspective-fosteringqualitieslikedeterminationandthrift-overshort-termrational(HOFSTEDE,1984,pp.83-84).

TheGray’smodelhastriedtodefinetherelationshipsbetweeninternationalaccountingdifferencesandculturalfactors,identifyingfourdimensions:

- professionalism versus statutory control, the inclination to choose betweenindividual professional judgment and professional self-regulation or to complywithprescriptivelegalrequirementsandstatutorycontrol;

- uniformity versus flexibility, an inclination for the implementation of uniformaccounting practices between companies and for the reliable use of suchpracticesovertimeincontrasttoflexibilityperceivedindifferentcircumstancesforthecompanies;

- conservatism versus optimism, a predilection for a precautious attitude tomeasurementsoastohandlewiththeimprobabilityofthefutureasopposedtoamorepositiveandrisk-takingapproach,

- secrecy versus transparency, a preference for discretion and the limitation ofdisclosure of information about the business only to those who are narrowlyinvolvedwith its administration and its supporters as opposed to amore see-through,exposed,andpubliclyaccountableapproach(GRAY,1988,pp.1-15)

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These twomodels have beenmerged and called theHofstede-Graymodel in order tocapture the links between international accounting differences and national cultures.Factorsformingculturalvaluescanbemoreorlessresistanttochange:oneofthemostrelevant in the former group is religion. This subset of culture can have a significanteffectonbusinesspractice insome jurisdictions:particularattentionhastobepaidtoIslamic nations, impacting directly in the way how accounting is pursued and howbusinesses aremanaged. Certain rules have, therefore, a direct impact on accountingpractices:forexample,theobligationtopayareligiouslevyandtheprohibitionofusury,in other terms the institution of an interest-free economic system (investors arecompensated by other means). To conclude, also the language has been particularlycrucial in order to access accounting harmonization due to possible translationproblemsofIFRS(DINGJEANJEANSTOLOWY,2005,pp.333-335).1.1.7 InstitutionalenvironmentNationaleconomicculture, throughthemediatingvariableof institutions,haveagreatimpact on accounting. Evenwith the same set of accounting rules and standards, thechangeinthewaypeoplethinkinanationorhowinstitutionsarefundedrespectedandoperateisnotautomatic.

Figure 2: THE RELATIONSHIP BETWEEN INSTITUTIONS, NATIONAL ACCOUNTING AND NATIONALECONOMICCULTURESource:CIESLEWICZ,2014,pp.515-516

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Institutionsare important inorder toovercomeproblemsofharmonization: it isverydifficult tomodify in the short term cultural factors, implying that culture influencesmostly accounting practices. They are products of the national economic culture andtheyactasmediatorsbetweenaccountingandsociety.Theserelationshipssuggestthatchangingnotjustaccounting,butalsosupportinginstitutions,shouldnotbeexpectedtobeassimpleassimplyadoptingcodesorattemptingtocopyregulatoryfunctions.Thisistrue because economic culture will continue anyway to influence institutions, whichtheywill continue to influence accounting.All of this only cause a facade adoption, inwhich the accounting frameworks will be changed but the difference that createddifferentapproacheswillnot.1.1.8 Educationalandinternationalenvironment

Complex accounting standards and practices are unusable if they are misread andmisused.Professionalaccountingeducationisproblematictoaccomplishwheregeneraleducationallevelsarelow.Toassess the levelofeducation, it ispossible toevaluate thegeneral literacyrate, thelevel of accounting university education and the level of accountants’ knowledge inpracticalandacademicrelated issues.The financial reporting framework is influencednot only by internal inputs of a country but also by external ones: the internationalenvironment, therefore, contribute heavily in outlining accounting practices andstandards.(ALIABRANSON,2011,pp.16-20).Big international accounting firms and international organizational such as theWorldBank,theIMFandtheWTOplayimportantrolesinaffectingthisenvironmentand,moregenerally,shapingthemaincharacteristicsoftheglobaleconomy:thisistrueespeciallyin developing countries inwhichwestern countries’ accounting frameworks are oftenadopted.Tosumup,environmentaldifferencescontributingtocomplexityinacompanyare:

- cultural(c),- legalsystem(l),- politicalrisk(p),- exporting/importingactivities(x),

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- subsidiariesoperatinginadifferentindustryorwithadifferentbusinessmodel(related-unrelateddiversification–r),

- geographicdistancefromparentandsubsidiaries(g),- informationinfrastructure/availabilityofnewsmedia(i),- investors’sophistication(s),- investors’nation(n),- analystrepresentation(buy/sell–b),- analysts’nation(n)

Figure3:ENVIRONMENTALDIFFERENCESCONTRIBUTINGTOCOMPLEXITYSource:RUNYANSMITH,2007,pp.574-575The on-going globalization and the resulting complexity of business make financialreporting a technically challenging and overwhelming procedure. Across countries,accountingstandardsdifferasaresultofexclusivecultural,political,legalandeconomicfactors.Effectiveandefficientfunctioningoftheinternationalmarketrequiresacertainstandardization in accounting principles and practices. At the current period,entrepreneursand investorsmustpayverymuchattentionto theexistingdifferences.Such dissimilarities, therefore, restrain the expansion of international businessactivities.

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1.2 Differentaccountingclassifications

“Classification is a basic intellectual abilitywhichproceedsby ordering or dissecting complexphenomena (e.g., a set of objects described by high-dimensional data) into small andcomprehensiveunits, classes, substructures, or partswhich serve for better understandingorcontrol,andtoassignnewsituationstooneoftheseclassesonthebasisofsuitableinformation.”(KLOESGENZYTKOW,2002,p.254)Classifyingaccountingsystemsshould,therefore,helpfirms’managersandresearcherstohaveabetterknowledgeofthesubjectinordertofindsolutionortobetterconducttheirbusiness.Thegoalsofthisprocesscouldbesummarizedindefining:

- theextenttowhichnationalaccountingsystemsaresimilartoordifferentfromeachother,

- thepatternofdevelopmentof individualnational systemswith respect toeachotherandtheirpotentialforchange,

- thereasonswhysomenationalsystemshaveadominantinfluencewhileothersdonot,

- the degree of usefulness for policymakers in the international harmonizationdebate,

- the effectiveness in developing countries, seeking to choose an appropriateaccountingsystem,

- thelevelofaccountants’andauditors’education.

International accounting categorizations comprehend very briefly two categories:judgmentalandempirical.Judgmentalclassificationsarebasedonknowledge,intuition,andexperiencewhileempiricalclassificationsusestatisticalmethodstobuilddatabasesofaccountingprinciplesandpracticesaroundtheworld.1.2.1 Accountingpracticesandenvironment

Itispossibletoclassifyaccountingsystemsbasedonhowtheyhavetreatedreal-world

problemsandwhichsolutions theyhavedeveloped, relyingexclusivelyonknowledge,

intuitionandexperience.

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One of the first classification used inWestern nationswas focused on the purpose ofaccountingframeworkcreationanddevelopment,interalia:

- macroeconomicapproach,- microeconomicapproach,- independentdisciplineapproach,- uniformapproach.

Themacroeconomicapproachaffirmsthataccountingpracticesareoriginatedtomeetnational economic goals: firms, therefore, align themselves to some sort of nationaleconomicguidelines.The focusof themicroeconomicapproach isexactly theoppositecompared to the former: accounting development follows individual firms’ ability tosurvive.Criticaltothecompanies’lifearethemaintenanceofthephysicalcapitalandaclearseparationbetweencapitalandincomeinordertocontrolaswellaspossiblethecorebusinessactivities.Thebestaccountingdimensions,abletosatisfytheseneeds,aretheonesbasedonreplacementcost.Thethirdapproachischaracterizedbyadisciplineoriginatedfrombusinesspracticesandanadhocandtrial&errorlogic.Thus,businesscreated the accounting discipline as a service in order to disentangle real-worlddifficulties and ever-present ambiguities through knowledge, practice and awareness.Under the last approach, accounting is as more uniform as possible: the centralgovernment uses it when it is strongly involved in the economic organization as anadministrative tool to stress, for instance, convergence for tax andplanningpurposes(CHOIMEEK,2011,pp.37-39).Being inspired by the mid-1960s classification, Doupnik and Perera offered their re-elaboratedversion,dividingitinclasses,sub-classes,familiesandconnections.Theaimoftheirworkhasbeentoinsulatethosecountries’financialreportingaspectsthatcouldprovokesignificantlong-runalterationsbetweennations.Usingthismodel, ithasbeenpossibletosetapartnineaccountingdiversity’sdeterminants:

1. targetusers’categoryofthelistedcompanies’financialdisclosure,2. law’sdetailsandjudgmentorientation,3. importanceoftaxrulesinaccountingmeasures,4. conservatism/prudence(e.g.valuationofassets),

26

5. degreeofhistoricalcosts’application(inthehistoricalcostaccounts),6. susceptibility to replacement cost adjustments in main or supplementary

accounts,7. consolidationpractices,8. willingnesstoinciteprovisions(asopposedtoreserves)andtosmoothincome,9. uniformitybetweencompaniesduringtherules’application.

Classes:

- micro-fair-judgmentalandcommerciallydriven,- macro-uniformgovernment-drivenandtax-dominated.

Sub-classes:- businesseconomicsandextremejudgmental(Netherlands),- businesspractice,professionalrulesandBritishorigin.

Families:- UKinfluencedandprofessionalregulated(Australia,New-Zealand,UK,Ireland),- USinfluencedandenforcementbySEC(Canada,Israel,USA).- code-basedandinternationalinfluenced(Italy),- plan-based(France,Belgium,Spain),- statue-based(Germany,Japan),-economiccontrolled(Sweden).

Connections:

- micro-fair-judgmentalandcommerciallydrivenclasscoverstwosub-classes:o businesseconomicsandextremejudgmental,o businesspracticed,professionalrulesandBritishorigin,

- macro-uniform,government-drivenandtax-dominatedclasscontentsfourfamilies:

o code-basedandinternationalinfluenced,o plan-based,o statue-based,o economiccontrolled.

27

The figure comprehends three of the major accounting models: the FairPresentation/Full Disclosure Model, the Legal Compliance Model and the Inflation-AdjustedModel(itdistinguishesitself,howeverthoughtheextensiveuseofadjustmentsforinflation,verycommoninSouthAfrica).

Figure4:DOUPNIKANDPERERA’SACCOUNTINGMODELSource:DOUPNIKPERERA,2007,p.34Theexpressionsmicro-basedandmacro-uniformlabeltheAnglo-SaxonandContinentalEuropeanModels, correspondingly. Each of them has two subclasses that are furthersplitintofamilies.TheNetherlandsistheonlynationlocatedinamicro-basedsubclassand inclined to follow heavily business economics and accounting theory: Dutchcompanieshavethepossibilitytoapplycurrentreplacementcostaccountingtoestimateassetsintheirprimaryfinancialstatements.Britishenvironmenthascreatedtheothermicro-basedsubclass:itischaracterizedbyamorepragmatismandbusinesspractices’orientation. Two families are originated by this British-origin subclass: the formergovernedbytheUKandthelatterinfluencedbytheUS.Onthecontrary,macro-uniformaccountinghasdevelopedtwowaysofconceivingaccountingprocess:thefirstbasedon

28

government and economics, the second relying on government, taxes and legality.Sweden has developed the former approach to accounting: for example, incomesmoothingisapprovedinordertofostereconomicstabilitywhilesocialaccountinghasbeen established to fulfil macroeconomic concerns. The latter is common amongContinental European countries which could be divided in two additional families.HeadedbyGermany,thelaw-basedfamilycontainsJapan.Thetax-basedfamilyentailsseveralLatincountries.Themajordifferencebetweenthemcouldbetracedbackintheprimarydeterminantofaccountingpractice:intheformeritistheaccountinglawwhileinthelattertaxlawdominates(DOUPNIKPERERA,2007,pp.33-36).Thismodel,therefore,shedslightonthehierarchicallinksbetweencountries,servingasablueprint for the financial statement comparability’sdetermination.To improve thisclassification, it ispossibleto insertdevelopingnation(theclassificationwas intendedtoanalyseonlydevelopednations): inorder todo that, itmaybeproper toaddotherdiscriminating factors, such as the degree of development of economy or nature ofeconomicsystems.Oneofthefirstattemptstoclassifynationsanalysinghowtheyapplyaccountinginthereal world was developed by Werner in 1973 using a database made by PriceWaterhouse.38nationsand233accountingprinciplesandpracticeswereanalysedandclassifiedasrequired,usedbyamajorityofthefirmsinthecountry,usedbyabouthalfof the firms, used by a minority of the firms, prohibited by law or professionalpronouncement,notapplicablebecause the specific typesof transactions involvedarenot found in the country. Afterwards, a factor analysis was run: each country wasassignedtothefactorgroupingonwhichitloadedthehighestcorrelation.Group1 Group2 Group3 Group4

Australia Argentina Belgium Canada

Bahamas Bolivia Colombia Germany

Ethiopia Brazil France Japan

Eire Chile Italy Mexico

Fiji India Spain Netherlands

Jamaica Pakistan Sweden Panama

Kenya Paraguay Switzerland Philippines

29

NewZealand Peru Venezuela UnitedStates

Rhodesia Uruguay

Singapore

SouthAfrica

Trinidad&Tobago

UnitedKingdom

Table1:PRICEWATERHOUSE’SDATABASESource:FRANK,1979,p.596Someofthecountriesexaminedshownotonlyahighlycorrelationwithjustonefactorbutalsostrongsimilaritiestoseveralgroupings.Thefour-factorgroupingcanbeviewedasaccountingmodels:BritishCommonwealthModel,Latin-AmericanModel,ContinentalEuropeanModelandUnitedStatesModel.Areasonwhythesegroupshavebeenformedcould be traced back to environmental factors. In this study the country’s officiallanguages, a group of variables linked to the country’s economic structure and onereflectingtradepatternsbetweencountrieshavebeenusedtodescribethesimilaritiesinaccountingconcepts(FRANK,1979,pp.600-601).The inner limitationsof judgmentalgroupingbasedonhowaccountingpracticeshavevariedinternationallyarethenon-homogeneitylinkedtotheattemptstoclusternationsbytheirdifferencesinaccountingpractices.Moreover,thereisnoconsensusregardingnational accounting clusters because temporal and unsystematic events can influencetheresults.D’Arcy,usingtheTRANSACCReferenceMatrix,developedclustersbasedonhowseveralitemsareaccounted. In thisway, ithasbeenpossible todevelopamethodwhichsetsout systematically the financial accounting rules and practices of several countries.Accountingprofessorsandprofessionalshavehadthepossibilitytodescribeaccountingproblemsand the related solutions for their respective countries in a systematicway.Themostdescriptivepracticestoappreciateaccountingdiversityturnedouttobe:

- recognitionofassetsandliabilities,- valuationofassetsandliabilities,- revaluationaccounting,

30

- fullandproportionalconsolidationset,- uniformityofaccounts,- foreigncurrencytranslation,- consolidationofcapital,- debtsandprofits,- equitymethodanddeferredtaxation(D’ARCY,2001,p.335).

Theresearchhasdemonstrated thatmostpairsof thecountriesexaminedareneitherextremely homogenous nor heterogeneous: Germany and Austria are very close, asBelgium and France. These four nations, together with others like Switzerland andDenmarkcreatethecontinentalEuropeangroup.Spain,JapanandSwedenformamoreheterogeneousgroupwhilemergingwiththefirstone.TheIASC,USandCanadashapetheNorth-Americangroup.Typicalcharacteristicsthatcausethemaindifferencesintheclustersofnationalaccountingsystemscanbecometheverticalandthehorizontalaxisofamultidimensionalscalinggraph.

Figure5:MULTIDIMENSIONALSCALING,TWO-DIMENSIONALSOLUTIONSource:D’ARCY,2001,p.343Theresultshavebeenscaldedusingtwodimensions:Dimension1canbeexplainedasthe “quality of the presentation of the participation structure”, showing clearly thedifferences betweenEuropean and theNorth-American clusters (goodwill accounting,

31

theapplicationof theequity-methodorthe fullconsolidationset).Thefirstdimensioncouldstandalsoforthelevelofthecapitalmarketorientationofanationalaccountingsystem. On the other hand, Dimension 2 describes certain types of provisions, theirdefinitionsandtherulesaccordingtothefullconsolidationset.1.2.2 LegalsystemandcultureAnother very common classification is the one originated by studying which form oflegalsystemprevailed:commonlawnationshavedevelopedanaccountingviewbasedon fair presentation while civil law countries have a more legalistic approach toaccounting. The former stresses the attention towards transparency, full disclosure, aseparation between financial and tax accounting, external investors’ protection andsubstance over form. Financial statements are, therefore, meant to support investorsamongtheassessmentofmanagerialperformanceandtheforecastoffuturecashflowsandprofitability.Commonlawaccountingisoftenentitledas“Anglo-Saxon”becauseitispeculiaroftheUnitedKingdomandalltheformerCommonwealthcountries.However,accounting developed in countries where the focus was more on accounting laws’adherence aims to protect creditors and fulfil government compulsory requirements,such as computing taxable income or observing the national government’smacroeconomic guidelines: in one word, legal compliance. These types of accountingframeworksendorseconservativemeasurementsinordertoensureprudentdividendstoshareholdersandcautiousbonusestomanagersandemployees.Sincefirmsusethesameframeworktoinformstakeholdersandtodeterminethetaxableincome,itisverycommon to appreciate smooth patter from year to year. This practice ensures morestable tax,dividendandbonuspay-outs.Theaccountingdevelopmentprocess isoftenmanaged by public entities and called “Continental” because most of continentalEuropeannationsandtheirformercoloniesadopteditsuccessfully(NOBES,1983,pp.1-19).Accountingdifferencesduetothisclassificationcouldbeappreciateintheseitems:

- depreciation, among fair presentation it is based on the decline in an asset’sutilityoveritseconomicuseful lifewhileamonglegalcomplianceit isusedtheamountallowedfortaxpurposes;

32

- leases,incommonlawcountriesprevailsthesubstanceovertheform,meaningthatleasesaretreatedaspurchasesofpropertywhileincivillawcountriestheyaretreatedasregularoperatingleases(itisaccountedonlytherentpayed);

- pensions funds, pensions costs are accrued as earned by employees (fairpresentation)orexpensedonapay-as-you-gobasis(legalcompliance);

- deferred income taxes, in systems based on legal compliance this topic neveroccursbecausetaxandfinancialaccountingareidentical;

- discretionary reserves, these itemsareoftenused to smooth income fromoneperiodtothenextamongcivil lawnations,makinglessinformativetheincomepresentation.(CHOIMEEK,2011,p.40).

Another focus of the analysis could be the culture: it has, therefore, an importantinfluenceonaccounting,implyingadirectrelationshipbetweenculturalgroupingsandaccounting systems’ correlations. The latter are usually linked to accounting systemcharacteristicsortothestructureofstandardsettingprocess.Oneofthemainlimitationtogroupingsbasedonculture is the trouble to justify the subjectivityof theelementsusedtodefineculturalareas.Anotheronecouldbeoutlinedasthetoughnesstodescribepunctuallythefunctionlinkingculturetoaccountingandwhichaccountingaspectsaremoreorlessrelatedtoit.Black,GrayandRadebaugh,startingfromthetheoriesofGrayandHofstede,developedaclassificationbasedonphysicalregionsandcommonculturalfactors:

- Anglo-American culture area (United Stated, United Kingdom and Britishcolonials),

- Nordiccountries(TheNetherlands,Sweden,Finland,Denmark),- Germanic accounting (Germany, Austria, Israel, Switzerland, and formerEuropeancoloniesinAfrica),

- Latin group (France, Italy, Brazil, Argentina, Belgium, Portugal, Spain, Chile,Columbia,Mexico,PeruandUruguay),

- Asianaccounting(China,Japan,India,Pakistan,HongKong,Singapore,Malaysia,andPhilippines).

Anglo-American andNordic areas are characterized by a low power distance, aweakuncertaintyavoidance,alowlevelofbureaucracy,aneconomybasedonfreetradeand

33

market exchange. German accounting is described by a low power distance, a stronguncertainty avoidance, a bureaucracy based onworkflows. The Latin group, however,hasahigh-powerdistance,astronguncertaintyavoidance,ahighlevelofbureaucracyand a pyramidal organization. To conclude, Asian area has a high-power distance, aweak uncertainty avoidance, an economy based on households and a bureaucracyheavilyinfluencedbypersonalities(BLACKGRAYRADEBAUGH,2006,pp.17-35).Ithasbeenshownthatenvironmental factorsare, therefore, important inprettymuchevery category developed by researchers. There is a strong connection betweenenvironment and accounting systems. Legal system, the providers of capital, the taxsystem, the influence of accounting profession, the importance of finance and capitalmarkets, the standards, the political system are the most frequently mentioned andstudied.Usingthemcreatesproblemstobesolved,anyway:forexample,itisnotclearthedirectionandthe intensityof the factors’ influenceonaccountingsystemsandthelinkedmechanismofcausation.Evenifacausaldependencewouldbeaccepted,itisnotpossibletocomparedifferentnationalaccountingsystemsduetotheassumptionofthesurvival of the fittest (most efficient). Game theory has shown that inefficientequilibriumsarealsopossible.1.2.3 Geographyandprinciples

A very simple classification could be traced back to the one that divides accountingsystems belonging to the European Union and to the Anglo-American sphere ofinfluence:thefirstgrouphasbeenregulatedbyEuropeanDirectivesanddominatedbytheprudenceprinciple,meanwhilethesecondhasbeeninfluencedbytheIASCandthefairvaluediscipline.Thisnotion,alreadysuccessfulininternationalaccountingdebates,hasbeenconfutedandjudgedasamyth:itonlymirrorssomehistoricalfindingslinkedtoboththeoriginsoftheaccountingprofessionsintheEnglish-speakingcountriesandcertainimportantsharedideasandinstitutionalcharacteristics.However,itfailstotakeinto account the fundamental differences in both thought and, even more, practice.Similarities between UK and US could be viewed, for example, in the capitalmarket-drivenaccounting, intheemphasis ledonconsolidatedfinancialstatements, investors’protection and capital market’s needs, in the shared history, in the independentaccountingdiscipline(fromgovernmentsandeconomictheories)developedinbusiness

34

and in the same legal system (common law). None of these four supporting theorieswithstands detailed examination: the first hypothesis underlines the substantialsimilaritybetweentheEnglishaccountingprinciple,“trueandfairview”(TFV),andtheAmericancounterpart,“fairpresentation”.UKcourtshavegivenalotofimportanceonexpertwitnessesindevelopingaccountingcaselaw.TFVstandsforwhateverthepillarsofaccountingprofessionofficiallydeclareittomean.Clearlythisindicatesthatwhatis“trueandfair”canchangeovertimeinordertofacilitatethealwaysevolvingopinionsandattitudeswithintheprofession.IntheEuropeansetting,thisprinciplehasbeenusedtojudgefinancialstatementswhile,intheUS,thegoverningcriterionis“presentfairlyinaccordancewithGAAP”(it isnotclear if thisGAAPis thepromulgatedone).However,thereisnoliteratureexplainingthedefinitionofit,meaningthatitwasdevelopedintheprivate sector,butneverusedbyprofessional and regulatorybodies.CanadaandSEChave expressed many times the intention not to use TFV as an override of theiraccountingprinciples.Thesecondhypothesisstatedthatthesamelegalsystemadoptedled similarities in the accounting system developed. This is not true: the same legalsystem has led different accounting approaches. In the UK accounting system is veryflexibleandresponsive,meanwhileintheUSitisverydetailedandrigidlyprescriptive.The third hypothesis was the same common predilection to develop conceptualframeworks in order to regulate accounting. This propensity is undeniably a sharedfeatureofUKandUSapproaches to accountingbutonly ideologically: for example, inFRS 10 it is stated that the accounting of goodwill has to be reported on the balancesheetofanasset,evenif itdoesnotconformtothecriteria forrecognitionofanassetgiven in the Statement of Principles (CF). Another example could be seen in SFAS 87about pension funds: it is clearly stated not to follow the CF criteria. The fourthhypothesisaffirmedthattheAnglo-Americangroupisoriginatedbyasimilarprocessinthesettingofaccountingprinciples. In theUS, theprocess iscomplex, involvingheavyinteractions among public and private regulators, companies, the public profession,investors’representativesofinvestorsandotherinterestedgroups.Moreover,itseemsthat the US system is significantly more public than the English counterpart. Theprincipal American enforcement agency is a body set up by a congress law withstatutorypowerstoimposepenalties,whileintheUKitisaprivate-sectorbodycloselyassociatedwiththeaccountingprofessionthatneedstoturneithertothegovernmentor

35

to the courts if companies refuse to do its building (ALEXANDER ARCHER, 2000, pp.539-553).ThestudyofDaCostasupportsthe ideathattheAnglo-Americanaccountingcluster isjust amyth. Using seven factors as proxies of his task (financial disclosure, companylaw’sinfluence,stressofreportingpracticesonincomemeasurement,conservatism,taxlaw’s influence, inflation’s influence, capitalmarket users’ orientation), he discoveredthreemainareasofaccountinginfluence:US,UKandEUgroup.

CountriesCoefficientwith

Group1 Group2

Group1

Japan 0,95 0,28

Philippines 0,94 0,28

Mexico 0,93 0,32

Argentina 0,93 0,32

Germany 0,90 0,42

Chile 0,90 0,41

Bolivia 0,89 0,43

Panama 0,89 0,45

Italy 0,88 0,43

Peru 0,88 0,43

Venezuela 0,88 0,46

Colombia 0,86 0,50

Paraguay 0,86 0,48

UnitedStates 0,86 0,05

Pakistan 0,85 0,49

Spain 0,85 0,49

Switzerland 0,84 0,53

Brazil 0,83 0,51

France 0,83 0,53

Uruguay 0,82 0,52

36

Sweden 0,81 0,59

India 0,81 0,57

Ethiopia 0,81 0,57

Belgium 0,79 0,60

Trinidad 0,76 0,65

Bahamas 0,75 0,65

Group2

UnitedKingdom 0,004 0,98

Eire 0,19 0,96

Rhodesia 0,48 0,87

Singapore 0,50 0,86

SouthAfrica 0,51 0,86

Australia 0,51 0,85

Jamaica 0,54 0,84

Kenya 0,57 0,81

NewZealand 0,62 0,78

Fiji 0,65 0,75

Unclassifiable

Netherlands 0,66 0,74

Canada 0,66 0,47

Table2:COUNTRIESRANKEDONTHEIRDISSOCIATIONFROMTHEBRITISHMODELSource:BOURGEOISDACOSTALAWSON,1978,p.79Accordingtothisstudy,theUSarethenationmoredisassociatedfromtheBritishmodel.The groups, therefore, mimic the three sphere of influence, determined by commonhistory:similareconomicdirection,aid,trade,investmentsandsocio-economicvalues.Classifyingaccountingstandardsservedalsotoshedlighttoaccountingdiversityanditslinked problems, especially nowadays where the economy is largely globalised. Themultinationalcompaniesarethemostinfluencedentitiesbecausetheyhavetoadhereto

37

everynationalGAAP linked to the country inwhich theyhave a subsidiary.Themainlimitations,therefore,couldbesummarisedin:

- accesstoforeigncapitalmarkets,- comparabilityoffinancialstatements,- lackofhigh-qualityaccountinginformation.

Thefirstproblemis linkedtothecommoncompany’sdesiretoobtainmorecapitalbysellingstockorborrowingmoneyinforeigncountries.Theheavyburdenisrepresentedby the obligation to draw up the financial statements according to every country inwhich the companywants to go public. The second problem is related to the lack ofcomparabilityoffinancialfactsandfiguresbetweencompaniesfromdifferentcountries,causing an adverse effect on corporationswhenmaking foreign acquisition decisions.The third problem associated with accounting diversity is the lack of high-qualityaccounting standards in some parts of the world. For example, there is a generalagreementthatthefailureofmanybanksinEastAsianfinancialcrisisin1997wasduetothreefactors:

1. ahighlyleveragedcorporatesector,2. theprivatesector’srelianceonforeigncurrencydebt,3. thelackofaccountingtransparency.

International investors and creditorswere, consequently, unable to adequately assessriskbecausefinancialstatementsdidnotreflecttheextentofriskexposureduetothefollowingdisclosuredeficiencies:

- the actual magnitude of debt was hidden by undisclosed related-partytransactionsandoff-balance-sheetfinancing,

- highlevelsofexposuretoforeignexchangeriskwerenotevident,- informationontheextent towhich investmentsand loansweremade inhighly

speculativeassetswasnotavailable,- contingent liabilities for guaranteeing loans, often foreign currency loans,were

notreported,

38

- appropriate disclosures regarding loan loss provisions were not made (JENO,2010,pp.56-57).

39

2 IFRSadoptionAccounting represents for firms, stakeholders, governors a homogeneous approach tolabel the financial results of a target entity. Accounting standards offer to financialstatementspreparesasetofclearrulesinordertocomplytotheregulationsinforceinthecountry(ies)analysed.Accountingframeworkis,therefore,awaytostandardizethemarket,providingclearrulesandpractices.International Financial Reporting Standards is a single set of accounting standards,developedandmaintainedbytheInternationalAccountingStandardsBoard(IASB):thegoal is to improve, preserve and apply these standards on an internationally reliablebasis, by industrialized, emerging and rising economies. Investors and other users offinancial statements can, therefore, assess and judge better financial performances ofpublicly listedcompaniesona like-for-likebasiswiththeir internationalpeers.Ontheotherside,multinationalcompanies,whentheyhavetoconsolidate,canuseasinglesetof accounting standards, saving time due to the lowered reclassifications andreconciliations.IFRSareprogressivelyacceptedaroundtheworldandtopaccountingofficersareveryapprovinginordertoimplementthemworldwide.Theyarenowauthorizedforusebymorethanonehundredcountries,includingtheEuropeanUnionandbymorethantwo-thirdsoftheG20.ThelatterandotherinternationalbodieshavesteadilysustainedtheworkoftheIASB:thestandard-settingbodyoftheIFRSFoundationandapublic-interestorganizationwithaward-winninglevelsoftransparencyandstakeholderparticipation.TheunitisresponsibleforallIFRSstechnicalmatterscomprising:

- full discretion in promoting and pursuing itstechnical program, constrained tothevetooftheTrusteesandthepublic;

- the preparation, issuing and drafting of IFRSs, always complying to the dueprocessstipulatedintheConstitution;

- the approval and issuing of Interpretations developed by the IFRSInterpretationsCommittee.

The IASB was born by the ashes of another private standard setting body calledInternationalAccountingStandardsCommittee(IASC):setupin1973attheinitiativeof

40

Henry Benson and of nine countries’ professional accountancy bodies, this entity haspromotedanapproachalternativetotheonehighlightedintheEuropeandirectivesandmorelinkedtotheAnglo-Americanapproach.Moreover,thebodyhasclosetieswiththeInternationalFederationofAccountantsanditmeetsonlyonceeverytwoandhalfyears.Themaintaskwastheamendments’approval to the IASCconstitutionandappointingmembersoftheIASC’sBoard.Eachboardmembercouldvoteonetimebuthe/shecansenduptotworepresentativesandatechnicaladvisertotheboardmeetings.Itisverycommonthatboardmembersandtheirstaffcomefromthe“BigSix”accountancyfirms.IASChadalso somepeopleworkingas apermanent staff inLondon.As the IASCand,consequently,theIASBareprivatebodies:theirmembersdonotrepresentanynationalgovernment, but rather they come from various national professional accountancybodies. However, depending on the nation, they are recognisedmore or less by theirgovernment(FLOWER,1997,pp.291-293).Onthecontrary,theIASBisstructuredunderanindependentfoundationcalledtheIFRSFoundation,asfollows:

Figure6:IASBSTRUCTURESource:DOUPNIKPERERA,2007,p.76The IASB and before the IASC have developed standards knowing that, without anyconceptual framework, accounting standards would be created chaotically while badaccounting practices will overcome good ones. Moreover, an agreed and stableframeworkcouldfixthesharedgoalsandaimsoffinancialreporting,thetypeofentities

41

thatshouldbeaccountable,recognitionandmeasurementrules.TheFrameworkforthePreparationandPresentationofFinancialStatementswasprimaryratifiedbytheIASCboardin1989andwasconfirmedbytherecentlycreatedIASBin2001.Itsgoalsaretodefine:

- objectivesoffinancialstatementsandcoreassumptions;- qualitativecharacteristicslinkedtotheeffectivenessoffinancialstatements;- explanation, classification and measurement of the financial statements

elements; - conceptsofcapitalandcapitalmaintenance.

Thepurposeof theFrameworkcouldbe summarized inassisting the IASBamong thedevelopment of future standards and the revision of the existing ones, helping theprepares and identifying stockholders, creditors, workers, suppliers, customers andgovernment agencies as target users of financial statements. A special emphasis isplacedamonginvestorsduetotheprimaryuseofIFRS:helpfirmstomakeinvestmentdecisions. The process is designed to increase understandability, relevance (used tomake predictions), reliability (neutral, free of bias, substance over form) andcomparabilityamongfinancialstatementsadheringtoIFRSs(DOUPNIKPERERA,2007,pp.80-82).IFRS were published on August 2010, containing also 41 revised InternationalAccounting Standards (IAS). Nowadays, approximately 30 IASs are still in force. IFRScomprises, therefore, a wide-ranging structure of financial reporting focusing fromaccountingforincometaxestothedetectionandfrommeasuringfinancialtoolstotheprovisionof consolidated financial accounts. Since the IASB is an independentprivatebody, it has no enforcement power among countries, its standards and principles aredeveloped for thepublicgoodandadoptablebyanycountryand firmand itappliesaprinciples-based approach, rather than a rules-based one, when it creates newstandards.Thisapproachismorefocusedonbothdeliveringrecognition,measurementand reporting requirements for the transactions considered and limit guidance forapplyinggeneralprinciplestotypicaltransactionsandencourageprofessionaljudgment(DOUPNIKPERERA,2007,pp.85-89).TherelativefreedominherenttoIFRScouldbeoutlinedintheadoptionmodality:

42

- all companies could adopt it if the target nationdecides to replace its national

GAAP;- parentcompaniescoulduseitonlywhentheyhavetoconsolidatewhilenational

GAAPremainsandadoptedinparent-onlyfinancialstatements;- IFRScouldbeusedonlywhenacompanywantstogopublicand,therefore,listed

in a stock exchangemarket,while non-listed companies continue to adhere tonationalGAAP;

- it is compulsoryonly for foreign companies thatwant tobe listedondomesticstockexchangewhiledomesticcompaniescontinuetousenationalGAAP.

This accounting framework has begun to raise importance among researchers,managersandstandardsetterswhile,atthesametime,providingamajorboosttotheefforts and thegoalsof the IASB,because it received two fundamental endorsements:one for cross-listing purposes by the International Organization of SecuritiesCommissions(IOSCO)andonefromtheEuropeanUnion.ThelattercamefromtheEU’schoicetoobligedomesticlistedcorporationstoadoptIFRSforconsolidation,startingin2005(DOUPNIKPERERA,2007,pp.96-98).Environmentaldifferencesamongnationscanexplainnotonlyinternationaldifferencesin accounting, but also why different degrees of IFRSs’ convergence exist. In somejurisdictions, IFRSs are required for all corporate reporting for listed and unlistedentities.Inothers,IFRSsarerequiredforconsolidatedreportingoflistedentities,whileunconsolidatedonestillcanorhastofollownationalrules.

Jurisdiction

Domesticlistedcompanies Domesticunlistedcompanies

IFRSsnotpermitted

IFRSspermitted IFRSsrequiredforsome

IFRSsrequiredforall

Auditreportstates

compliancewithIFRS

UseofIFRSsbyunlistedcompanies

AbuDhabi–UnitedArabEmirates X Yes IFRSsrequiredforallbanks,

permittedforothercompanies

Albania NostockexchangeinAlbania

IFRSsrequiredforfinancialinstitutions,subsidiariesof

internationallylistedparents,andlargecompanies

Algeria NostockexchangeinAlgeria IFRSsnotpermitted

AmericanSamoa NostockexchangeinAmericanSamoa IFRSspermitted

Angola FinancialInstitutionsfrom2016

43

Anguilla X Yes AntiguaandBarbuda X Yes IFRSforSMEs

Argentina X IFRSsnotpermittedArmenia X Yes IFRSsrequiredforallAruba X Yes

Austria XNo.'As

AdoptedbyEU'

IFRSspermittedinconsolidatedstatements,prohibitedinseparatestatements.

Australia X YesAustralianIFRSequivalents

requiredforsomelargeunlisted,permittedforothers.

Azerbaijan X Yes

SeparateIFRSfinancialstatementsrequiredforbanks(listedandunlisted)and,starting2008,forlargestate-ownedenterprises.Forothers,IFRSs

permitted.

Bahamas X YesIFRSspermitted.IFRSforSMEspermittedforallcompaniesthatdonothavepublicaccountability

Bahrain X Yes IFRSsrequiredforallBangladesh X Barbados X Yes CompaniesmaychoosefullIFRSs

orIFRSforSMEs

Belgium XNo.'As

AdoptedbyEU'

IFRSsrequiredinconsolidatedstatementsofunlistedbanksandcreditinstitutions,permittedforothercompanies.IFRSsnot

permittedinseparatecompanystatements.

Belarus Bankssince2008,allothers

from2017(withrestatementsof2016statementsatthattime) Yes IFRSsrequiredforbanks

Belize NostockexchangeinBelize

UnlistedcompaniesmayuseIFRSsorotherinternationallyacceptedstandards(particularlyUSGAAPorCanadianGAAP).

Benin X IFRSsnotpermittedBermuda X Yes Bhutan X Bolivia X Yes BosniaandHerzegovina X Yes Botswana X Yes IFRSsrequiredforsome,

permittedforothers

Brazil

Alllistedcompaniesandallfinancialinstitutio

nsstarting2010.Optionalforlistedcompaniespriorto2010.

Yes,exceptundecidedforunlistedbanksfor2010onlybecause,for

them,comparativeIFRSfinancialstatementsfor2009arenotrequired

IFRSsnotpermitted

BruneiDarussalam NostockexchangeinBrunei

IFRSsarepermittedbutnotoftenused

Bulgaria XNo.'As

AdoptedbyEU'

IFRSsrequiredinboththeconsolidatedandseparate

companyfinancialstatementsofunlistedfinancialinstitutionsandalllargeunlistedlimitedliability

entities.Otherunlistedcompaniesarepermittedtouse

IFRSs.BurkinaFaso X IFRSsnotpermitted

Burundi NostockexchangeinBurundi IFRSsnotpermitted

Cambodia X

44

Canada X Yes IFRSspermitted(starting2011)CaymanIslands X Yes Chile

Startingin2009 Yes IFRSsrequiredstarting2009.

China CoteD'Ivoire(IvoryCoast) X IFRSsnotpermitted

Colombia X IFRSsnotpermittedCostaRica X Yes IFRSsrequiredforall

Croatia X

No.'AsAdoptedby

EU'

IFRSsrequiredforallfinancialinstitutionsandlargeunlistedcompanies,permittedforothers

Cuba X IFRSsnotpermitted

Cyprus XNo.'As

AdoptedbyEU'

IFRSsrequiredforall

CzechRepublic X

No.'AsAdoptedby

EU'

IFRSsasadoptedbyEUpermittedinconsolidatedstatements.

CompaniesthatfollowIFRSsasadoptedbyEUfortheir

consolidatedfinancialstatementsandcompaniesthatarepartofagroupwhichpreparetheir

consolidatedfinancialstatementsunderIFRSasadoptedbyEUare

permittedtouseIFRSsasadoptedbyEUalsofortheirseparatefinancialstatements.

Denmark XNo.'As

AdoptedbyEU'

IFRSspermittedinbothconsolidatedandseparatecompanystatements

Dominica X Yes DominicanRepublic X Yes IFRSspermittedDubai–UnitedArabEmirates X Yes

IFRSsrequiredforallbanks,permittedforothercompaniesNote23

Ecuador Phase-in2010-2012

Yes IFRSrequiredforsomein2011,allin2012

Egypt X ElSalvador X Yes

Eritrea NostockexchangeinEritrea

IFRSsarerequiredforGovernment-ownedenterprises,newlyprivatisedcompanies(largetaxpayers,or'LTOs'),

banks,andinsurancecompanies.

Estonia XNo.'As

AdoptedbyEU'

IFRSsrequiredinbothconsolidatedandseparate

financialstatementsoffinancialinstitutions.IFRSspermittedinbothconsolidatedandseparatestatementsofothercompanies.

Fiji X YesIFRSsrequiredforgovernmentmajorityowned,banking,

financialinstitutions,mediumandlarge,andothers.

Finland XNo.'As

AdoptedbyEU'

IFRSspermittedinbothconsolidatedandseparatecompanystatements.

France XNo.'As

AdoptedbyEU'

IFRSspermittedinconsolidatedstatements,prohibitedin

separatecompanystatements.Gambia NostockexchangeintheGambia,however,banksarerequiredtoapply

IFRSsandallothercompaniesmayapplyIFRSs IFRSsarepermitted

Germany XNo.'As

AdoptedbyEU'

IFRSspermittedinbothconsolidatedandseparate

companystatements.Statutoryaccountsthatconformtonational

GAAParealsorequired.

Georgia X YesIFRSsrequiredinboth

consolidatedandseparatecompanystatements.

Ghana X Yes

IFRSsrequiredforunlistedbanks,utilities,brokerage,insurance,government-ownedbusinessesstarting2007.IFRSswillberequiredforallotherunlisted

45

entitiesstarting2009.

Gibraltar X YesIFRSspermittedexceptforsomeregulatedcompaniesthatwillprepareunderUKGAAP

Grenada X Yes

Greece XNo.'As

AdoptedbyEU'

IFRSspermittedinauditedconsolidatedandseparate

companyfinancialstatements.

Greenland NostockexchangeinGreenland DanishAccountingStandardsarenormallyfollowed,thoughIFRSs

arepermittedGuam NostockexchangeinGuam

IFRSsnotpermitted.UnlistedcompaniesfollowUSGAAP.

Guatemala X Yes IFRSsrequiredforall

Guyana X Yes CompaniesmaychoosefullIFRSsorIFRSforSMEs

Haiti X Yes IFRSspermittedforallHonduras X Yes IFRSsrequiredforall

HongKong X

YesforcompaniesincorporatedoutsideHK.

HKincorporatedcompanies

referto'HongKongFRS'

HongKongIFRSequivalentspermitted

Hungary XNo.'As

AdoptedbyEU'

IFRSspermittedinbothconsolidatedandseparate

companystatements.Statutoryaccountsthatconformtonational

GAAParealsorequired.

Iceland XNo.'As

AdoptedbyEU'


India

Permittedfor

consolidatedfinancialresultsonly

Yes IFRSsnotpermitted

Indonesia X IFRSsnotpermittedIran X IFRSsnotpermittedIraq X Yes Allbanksincludingunlisted.

Ireland XNo.'As

AdoptedbyEU'


Israel AllexceptBanks Yes IFRSspermitted(exceptbanks)

Italy XNo.'As

AdoptedbyEU'

IFRSspermittedinconsolidatedfinancialstatementsexceptforverysmallcompanies.IFRSspermittedinseparatecompanystatementsexceptforverysmall,insurancecompanies,andsome

regulatedcompanies.Jamaica X Yes IFRSsrequiredforall

Japan X Dependsonthestatusofdesignation

IFRSsnotpermitted

Jordan X Yes

IFRSsrequiredforsome(banks,insurancecompanies),allothercompanieshavethechoice

betweenIFRSsandtheIFRSforSMEs

Kazakhstan X Yes

IFRSsrequiredforallbanks,jointstockcompanies,andothersignificantpublicinterest

companies,includingextractiveindustrycompaniesand

companieswithGovernmentalownership)

Kenya X Yes IFRSsrequiredforall

Korea(South) X Yes

IFRSrequiredforfinancialinstitutionsandstate-ownedcompanies;IFRSpermittedfor

46

otherunlistedcompanies

Kuwait X Yes IFRSsrequiredforallKyrgyzstan X Yes IFRSsrequiredforallLaos X Yes

Latvia XNo.'As

AdoptedbyEU'

IFRSsrequiredforfinancialinstitutions,notpermittedfor

othersLebanon X Yes IFRSsrequiredforall

Liberia NostockexchangeinLiberia IFRSrequiredforallbanksfrom2012,mostothercompaniesuse

USGAAP

Liechtenstein XNo.'As

AdoptedbyEU'


Lesotho X Yes

Lithuania XNo.'As

AdoptedbyEU'

IFRSsrequiredforsomefinancialinstitutions,permittedforothers

Luxembourg XNo.'As

AdoptedbyEU'

IFRSpermitted,subjecttoapprovalinmostcasesNote22

Libya X informationnotavailable

IFRSsrequiredforcommercialbanksNote24

Macau NostockexchangeinMacau IFRSspermitted

Macedonia X Yes IFRSsnotpermitted

Madagascar NostockexchangeinMadagascar IFRSsrequiredforsome

Malawi X Yes IFRSsnotpermitted

Malaysia X MalaysianequivalenttoIFRSfor

SMEseffectivefrom2016Maldives X Yes IFRSspermittedMali X IFRSsnotpermitted

Malta XNo.'As

AdoptedbyEU'

IFRSspermittedforall

Mauritania NostockexchangeinMauritania IFRSsnotpermitted

Mauritius X Yes IFRSsrequiredforsome,permittedforothers

Mexico X Yes IFRSspermittedMoldova X IFRSspermittedMongolia X Yes IFRSsrequiredforallMontenegro X Yes IFRSsrequiredforall

Morocco

Banks/financialinstitutionsmustuseIFRSsstarting2008.ListedcompaniesotherthanbanksandfinancialinstitutionsmaychooseIFRSsorMoroccan

GAAP

Yes

Mozambique X YesRequiredforbanks(2007),largeunlisted(starting2010),and

medium-sizedunlisted(starting2011)

Myanmar X Yes Namibia X Yes

Netherlands XNo.'As

AdoptedbyEU'


NetherlandsAntilles X Yes Nepal X Yes IFRSspermitted

NewCaledonia NostockexchangeinNewCaledonia

AsaFrenchDepartment,NewCaledoniafollowsFrench

accountingrequirements.Thismeansthat,forunlisted

companies,IFRSsarepermittedinconsolidatedstatements,

prohibitedinseparatecompanystatements.

NewZealand X Yes NewZealandIFRSequivalentsrequiredforlargeunlisted,

47

permittedforothers

Nicaragua X Yes IFRSsrequiredforallNiger X IFRSsnotpermitted

Nigeria Starting2012

Tobedetermined

Norway XNo.'As

AdoptedbyEU'


Oman X Yes IFRSsrequiredforallPakistan X IFRSsnotpermitted

Panama X YesIFRSsrequiredforsome,IFRSforSMEsforothers.HoweverthelawrequiringIFRSsisunderlegal

challenge.PapuaNewGuinea X Yes Paraguay X Yes IFRSspermittedPeru X Yes Philippines X

Poland XNo.'As

AdoptedbyEU'

IFRSsrequiredforconsolidatedfinancialstatementsofbanks,permittedinconsolidated

financialstatementsofcompaniesthathaveappliedforstock

exchangelistingorwhoseparentusesIFRSs.IFRSspermittedintheseparatefinancialstatementsofcompaniesthathaveappliedforstockexchangelistingorwhoseparentusesIFRSs,prohibitedintheseparatefinancialstatements

ofothercompanies.

Portugal XNo.'As

AdoptedbyEU'

IFRSsrequiredinconsolidatedfinancialstatementsofbanksandfinancialinstitutions,permittedforothers.IFRSspermittedin

separatecompanystatementsofacompanythatiswithinthescopeofaconsolidatedgroupthatusesIFRSs,notpermittedforother

companies.Qatar X Yes IFRSsrequiredforall

Reunion NostockexchangeinReunion

AsaFrenchDepartment,ReunionfollowsFrenchaccounting

requirements.Thismeansthat,forunlistedcompanies,IFRSsare

permittedinconsolidatedstatements,prohibitedin

separatecompanystatements.

Romania XNo.'As

AdoptedbyEU'

IFRSsrequiredforconsolidatedfinancialstatementsofbanks,permittedinconsolidated

financialstatementsofcompaniesthathaveappliedforstock

exchangelistingorwhoseparentusesIFRSs.IFRSspermittedintheseparatefinancialstatementsofcompaniesthathaveappliedforstockexchangelistingorwhoseparentusesIFRSs,prohibitedintheseparatefinancialstatements

ofothercompanies.Russia X Samoa NostockexchangeinSamoa IFRSsarepermittedStKittsandNevis X Yes SaudiArabia X Yes IFRSsnotpermittedSenegal X IFRSsnotpermittedSerbia(Republicof) X Yes IFRSsrequiredforall

SierraLeone X Yes IFRSsrequiredforsome,IFRSforSMEsforothers

Singapore X No.SingaporeFRSsrequiredNote

13Slovenia X No.'As

AdoptedbyIFRSsrequiredforfinancial

institutions,permittedforothers

48

EU'

SlovakRepublic X

No.'AsAdoptedby

EU'IFRSsrequiredforall

SouthAfrica X Yes IFRSpermittedorIFRSforSMEs

Spain XNo.'As

AdoptedbyEU'


separatecompanystatementsSriLanka X Yes IFRSsrequiredforsome,

permittedforothersSuriname X Yes IFRSsarepermittedSwaziland X Yes

Sweden XNo.'As

AdoptedbyEU'


separatecompanystatements

Switzerland

Multi-national

mainboardcompaniesmustchooseeither

IFRSsorUSGAAPstarting2005

Yes

Taiwan X IFRSrequiredforsome,permittedforothers

Tajikistan X Yes IFRSsrequiredforall

Tanzania X Yes IFRSsrequiredfor'internationalcompanies'.

Thailand X IFRSsnotpermittedTogo X IFRSsnotpermittedTrinidadandTobago X Yes IFRSpermittedorIFRSforSMEs

Tunisia X IFRSsnotpermitted

Turkey X Yes IFRSrequiredforsome,permittedforothers

Turkmenistan X Uganda X Yes Ukraine X IFRSspermitted

UnitedKingdom X

No.'AsAdoptedby

EU'


UnitedStates X IFRSspermittedUruguay X Uzbekistan X IFRSsnotpermitted

Vanuatu NostockexchangeinVanuatu IFRSspermitted

Venezuela X 2004IFRSsrequiredstarting

2007.Vietnam X VirginIslands(British) X Yes

VirginIslands(US) NostockexchangeinVirginIslands(US)

IFRSsnotpermitted.UnlistedcompaniesfollowUSGAAP.

WestBank/Gaza X Yes Yemen NostockexchangeinYemen IFRSspermitted

Zambia X IFRSspermittedZimbabwe X Yes

Table3:IFRSadoptionaroundtheworldSource:Deloitte,2016

49

In this table,wecanseehowcountriescompete in thecapitalglobalmarket: theyarewillingto“trade”theirdomesticstandardsforamorecommonlyusedset.Countriescanbedividedintwogroups,dependingondifferentbehaviouradoptedduringtheseyears.The former is shaped by several lesser-developed countries (e.g., Nepal and Oman),which are perceived to have “lowquality” domestic accounting standards. They have,recently, adopted IFRS in order to be on common groundwith theirmore developedcounterparts.Thelatteriscomposedbycountrieswithperceivedhigh-qualitydomesticaccounting standards (e.g., Canada and Australia). They have either committed toadoptingIFRSorsignificantlyalteredtheirdomesticstandardstobetterreflectIFRS.2.1 InstitutionaltheoryandisomorphismStudyingtheinstitutionsinvolvedintheglobaladoptionofIFRScouldbetherightwaytoappropriatelyexplainingandpredictingwhatforcesspurorconstrainIFRSadoption.From an economic point of view, institutions are those entities that encourage themembersofthesocietytoengageeconomicactivitiesthatareeithergrowth-enhancingordegenerative.Institutionscouldbeformal(suchaslawsandregulations)orinformal(suchasnormsandconventions)andtogether they influencesocialbehaviour.Ontheother hand, sociologists have affirmed that organisations do not compete just forresources, but also for legitimacy and social acceptance. Moreover, they vary byfunction,size,structure,culture,andcapacityforchangeandtheyallinfluence,andareinfluenced by, their organisational fields (similar organisations) and institutionalenvironments, which are in turn affected by individuals or groups of institutionalsettings.

50

Figure7:FACTORSAFFECTINGINSTITUTIONSSource:JUDGELIPINSKER,2010,pp.162-163Themainassumptioncouldbe, therefore,describedas thepursuitof legitimacybyallsocialactorswithin the institutionalenvironment:ahidden force,called isomorphism,tryingtocreatesimilarities.Sinceaccountinginformationmustbeviewedaslegitimateandtrustedbyitsusers,itispossiblethatinstitutionaltheorywillbeausefulframeworkforpredictingtheIFRSs’patternadoption.Isomorphism could be depicted in: coercive, mimetic, normative. The first one isoriginated by the need of resources and legitimacy. Nations, like any otherorganisations, can be forced to conform to international standards due to coerciveinstitutions outside of the economy, mostly through foreign aid. The second form isoriginatedbytheinclinationofsocialactorstobeaffectedbyothers,suchasindividuals,organisations,nations,whicharerecognisedtobeatthetopofsomehierarchy.Thus,itisveryeasytounderstandthefundamentalroleofsuccessfulmultinationalfirmsintheprocess of IFRSs acceptability and adoption worldwide. It has become the mostfavourableandusedaccountingsystem,pushingindirectlycompetitorstoimitatethem.Thethirdandfinalformofisomorphismwithininstitutionaltheoryiscallednormativeisomorphism,referringtocollectivevaluesthatbringaboutconformityofthoughtsandactions.

InsitutionsGrowth

enhancing / degenerative

Formal / Informal

Legitimacy

Social acceptance

Resources Function

Size

Structure

Culture

Capacity for change

51

Judge, Li and Pinsker checked, using a sample of 132 countries, which kind ofisomorphism affects IFRS adoption. The control variables used have been marketcapitalisation and GDP growth because they are positively related with accountingquality andadoptionof IFRS.The study tried to revealwhich institutional factors canpredict the adoption of international accounting standards: in particular, foreign aid,import penetration and educational attainment can explain coercive, mimetic andnormativepressures.

Variables Meancorrelation

IFRSAdoption 2,75

ForeignAid -4,15

ImportPenetration 3,74

EducationLevel 72,79

MarketCapitalization 3,38

GDPGrowth 0,14

Table4:DESCRIPTIVESTATISTICS

Source:JUDGELIPINSKER,2010,p.167

Moreover,normativepressurewasthemostconvincingvariableinordertoexplainwhyand how a country and its firms decided to adopt IFRS. The explanation of thispredominance might be found in the marked relationship between accountingprofession and normative forces: professional norms and practices are supposed totranscendnationalbeliefs andcommonpractices(JUDGELIPINSKER,2010,pp.169 -172).

2.2 ComparisonbetweennationalGAAPsandIFRS

Someresearchestriedtocomparedomesticaccountingstandards(DAS)withIAS/IFRSin order to better understandwhy the latter has been adopted in somany countriesaroundtheworld.Ding, Hope, Jeanjean, Stolowy created two indexes to portrait differences betweennationalGAAPsandIAS/IFRS:absenceanddivergence.TheformercapturestherangetowhichtherulesregardingcertainaccountingissuesaremissinginDASbutarecovered

52

in IAS/IFRS. The latter describes a different approach used by IAS/IFRS and by DASregardingthesameaccountingproblem.Tryingtoinvestigateboththeimpactofcross-country variations in institutional frameworks on the differences between DAS andIAS/IFRS and the different impacts on financial reporting quality, the authors haveproved that absence is linked to the importance of equity market and the relatedownership concentration, while divergence is determined by the level of economicdevelopment, by the accounting’s profession importance and by the equity markets’magnitude.Thesamplewasbuiltinordertoinclude30countriesfortheyear2001andin order to focus on five different institutional factors: legal origin, ownershipconcentration, economic development, importance of the accounting profession andimportanceoftheequitymarket(DINGHOPEJEANJEANSTOLOWY,2007,pp.1-4).

Absence Divergence

Importanceofequitymarket N N

Ownershipconcentration P

Levelofeconomicdevelopment N

Importanceoftheaccounting

profession N

P=positiverelationN=negativerelationTable5:ABSENCEANDDIVERGENCEINDEXESSource:DINGHOPEJEANJEANSTOLOWY,2007,pp.31-32It is possible to divide the behaviour of the countries regarding their stage in theeconomic development: developed nations have triedwithmore effort to personalizetheiraccountingframeworksinordertosearchappropriateaccountingoptionsfortheirowncontext,withoutreferringtoIAS.AllofthishasbeentranslatedinmoredivergencebetweentheirDASandIAS.Onthecontrary,developingcountryadoptedinternationalaccounting standards in order to attract foreign investments. Furthermore, in nationswhere equity markets are developed it is likely to observe standards similar to IAS,confirmingtheideathatIAShasbeendevelopedmostlyforpubliclytradedfirms.

53

COUNTRY ABSENCE COUNTRY DIVERGENCE

Greece 40 Germany 38Austria 34 Italy 37

Denmark 31 Austria 36Malaysia 30 UnitedKingdom 35

Thailand 29 France 34

Portugal 29 Ireland 34Spain 28 Belgium 32Pakistan 27 Finland 31Italy 27 Spain 29Philippines 24 Greece 28

Finland 22 Sweden 26Belgium 22 Canada 25Australia 22 Netherlands 25France 21 Taiwan 23Taiwan 19 UnitedStates 23

Japan 18 Japan 22India 18 Portugal 22Germany 18 Australia 21Korea,Rep. 15 Denmark 21HongKong,China 14 India 19

Indonesia 12 Norway 17

Sweden 10 HongKong,China 15

Netherlands 10 Pakistan 14

SouthAfrica 7 Philippines 14Norway 7 Singapore 14UnitedStates 6 Malaysia 13Singapore 4 Indonesia 12Canada 4 Korea,Rep. 11

UnitedKingdom 0 Thailand 7Ireland 0 SouthAfrica 1N°ofcountries 30 N°ofcountries 30

Average 18.3 Average 22.6

Table6:NATIONS’BEHAVIOURLINKEDTOABSENCEANDDIVERGENCESource:DINGHOPEJEANJEANSTOLOWY,2007,p.9

54

As it is possible to appreciate in this chart, Italy has got one of the most divergentnational accounting framework in respect to IAS/IFRS, meaning the existence ofinconsistenciesamongItalianaccountingrulesregardingcertainaccountingissues.On the contrary, regarding the absence of accounting knowledge among nationalaccountingtheoryandpractices,Italygotascoresignificantlyhigherthantheaverage.TheresultsmeanthatItalyandItalianfirms,withadequateeffortsofpublicinstitutions,could benefit a lot if IAS/IFRS is adopted systematically. To conclude, absence ispositively related to earning management and negatively related to firm-specificinformationdisclosurewhiledivergenceislinkedtoricherfirm-specificinformationincapitalmarkets(DINGHOPEJEANJEANSTOLOWY,2007,pp.31-32).Culturalvaluescouldbethemostexplainingenvironmentalfactorsinordertodescribedivergencewhileabsencedoesnot seem tobe significantly relatedwithenvironment.Ding, Jeanjean and Stolowy used a sample composed of firms from more than sixtycountries: they were asked to benchmark the local written accounting requirementsagainsteightymeasures,focusingonstandards(bothIAS/IFRSandnational)inforceforthefinancialreportingperiodending31December2001.Tosumup,itispossibletosaythat the technical and the political dimensions of the international adoption debate,although fundamental, arenot theonly concerns involved.Obstruction to IAS/IFRS is,forexample,notdeterminedexclusivelybycontractualreasonsorbyaclaimedpracticalsupremacybut alsobydiversity in cultural factors (DING JEANJEANSTOLOWY, 2005,pp.343-344).If we deepen IFRS adoption analysis and the relative consequences in the economicnational environments, it ispossible tomeasure the impactson several firms’ entries.Capkun, Cazavan-Jeny, Jeanjean,Weiss, for example, have analysed a sample of 1.722European firms during their mandatory transition from local GAAP to IFRS in 2004-2005. In order to access the change in accounting quality, financial statements frombefore,duringandaftertheperiodofthechangewereused.Thisprocesshasbeenveryimportantformanyreasons:

- IFRSoffersmanyoptionduringthefirms’adoption,impairingtheoverallqualityof first IFRS financial statements andaffecting thequalityof theaccounts afterthetransition,

- iftherearerecognizedearningsmanagement(theactofpurposefullymodifying

55

the process of financial reporting to get someprivate benefit), it is possible tohave an insight into managers’ behaviour when they are faced with a majorchangeinfinancialstandards,

- earningsmanagementcandeveloptwodifferentandoppositeeffectsduringtheadoptionyearandafterseveralyearsandtheycandecreaseinthefutureiftheyareconvenientlyfoundduringthetransition,

- inordertobetterappreciatethemarketvaluationoftheearningsandbookvaluereconciliations, it is important to analyse financial statements when they areprepared following both local GAAPs and IFRS (CAPKUN, CAZAVAN-JENY,JEANJEAN,WEISS,2008,pp.1-7).

More specifically, the researchers found that during the shift total liabilities (TL) andequitydidnotshowanystatisticallysignificantchangebetweenlocalGAAPsandIFRS:thelatterincreasedfrom56,00%to56,33%whiletheformerdecreasefrom42,17%to42,16%.Furthermore,goodwill(GW)increasedonaveragefrom13,02%to13,63%andintangibleassets(INT)shiftedfrom16,06%to16,94%oftotalassets,showingforbothof the entries a statistically significance. Property, Plant and Equipment (PP&E)expandedfrom25,01%to25,50%whileshortterminvestments(STI)decreasedfrom4,53%to4,23%.Onthecontrary,longterminvestments(LTI)increasedfrom1,05%to1,30%. Cash assets and equivalents remained stable while short term debt (STD)experiencesastatisticallyincreasefrom7,46%to7,81%oftotalassets.

Figure8:HOWACCOUNTINGITEMSCHANGEACCORDINGTONATIONALGAAPSANDIFRSSource:CAPKUN,CAZAVAN-JENY,JEANJEAN,WEISS,2008,pp.20-21

0,00%

10,00%

20,00%

30,00%

40,00%

50,00%

60,00%

TL EQUITY GW INT PP&E STI LTI STD

GAAP IFRS

56

If we measure these changes scaling for Local GAAP assets, change in total assetsaccounted by 2.26% on average. Total liabilities increased by 1,93%,while equity by0,76%on average. Intangible, PP&E and goodwill had the biggest variations: the firstitemincreasedby1,28%whiletheothersincreasedrespectivelyby1,05%and0,55%.Current liabilities, short term debt and long term debt varied by 0,67%, 0,50% and0,34%. To conclude, shifting from Local GAAP to IFRS has on average a small butsignificant positive impact on the firms’ total assets and equity, with no impact onleverage(totalliabilitiesandequity).

Figure9:CHANGESSCALEDBYNATIONALGAAPSSource:CAPKUN,CAZAVAN-JENY,JEANJEAN,WEISS,2008,pp.21-26Manyemergingnationshave implemented IFRSwithslightornoamendmentas theirnational standards. For some of them, itmay have been a less expensive option thandevelopingtheirownstandards.Theneedtoattract foreigninvestmentalsomayhavebeenaninfluencingfactor.Countrieschangingfromcentrallyplannedtomarket-basedeconomiesalsohavefoundIFRSattractiveastheyofferaready-madesetofstandardstofacilitate the development of amarket system.Althoughmany countries donot allowdomesticlistedcompaniestouseIASBstandards,someofthesecountriesneverthelessallowforeigncompanies listedondomesticstockexchangestouseIFRSinaccordancewithIOSCO’srecommendation.Atthebeginningof2007,Chinaintroducedacompletelynewset of accounting standards that is intended toproduce the same results as IFRSwhileCanada,India,Brazil,KoreaandJapanadoptedIFRSin2011.

0,00%

0,50%

1,00%

1,50%

2,00%

2,50%

TA TL E INT PPE GW CL STD LTD

57

2.3 TransitiontoanewaccountingframeworkThetransitionfromlocalGAAPstoIFRShasbeensupportednotonlybymultinationalcompanies but also by the European Union through its directives. One of the mostimportant is the Company Law Directive (4th), enacted in 1978 and implemented bymemberstatesin1991.The“trueandfairview”(TFV)principlewasintroducedinordertogivemoreflexibilityamongmemberstates’differentlegislationsandtoportraitinthebestwaytheparticularcircumstancesofEuropeanfirms.Itsadoptionasanoverridingprinciple served as a promoter of more value-relevant accounting data. The FourthDirective gives, therefore, detailed measurement rules, formats for the balance sheetand incomestatementandrequirement foradditionaldisclosure.On thecontrary, theSeventh Directive, published in 1983, has been concerned on the preparation ofconsolidatedaccounts,thenotionofgroup,theequitymethod;theTFVhasbecometheoverridingrequirementoffinancialreportingintheEU(JOOSLANG,1994,pp.144-146).Even if there has been endorsement by important supranational entities, it is veryunexpected that governments have been so fond to adopt IFRS, outsourcing theregulation and standardization of financial reporting to a detached, professionalized,private sector organisation. The last two decades have been the most importantspreading period for IFRS because they have been characterized by globalization,depictedas:

- internationality,denotingtheincreasedvolume,intricacyandfrequencyofcross-borderinteractionsinproperties,servicesandpeople;

- liberality,resultingfromtherelativelowlevelofstatutoryimpedimentstocross-border streams in the form of tariffs, foreign exchange guidelines, capitalcontrols,visarequirements;

- universality,duetopracticeapproaches,symbolicitemsandexperiencesdiffusedworldwide. Examples are Arabic numerals, McDonald hamburgers, Chanelperfumes;

- supra-territoriality, meaning the multinational driving force of climate changeandtelecommunicationstoconnectpeopleinwaysthatbasicallyexceedregionallayouts.Suchconnectivityandinterdependenceoccurswithlittleregardtofixed

58

regional areas,boundaries andmaterial spaces (CHUATAYLOR,2008,pp.467-471).

Increased globalism led to an increased demand both for global governance and forcollaboration between nations, regarding especially financial disclosure and companylaw:governmentsarerequiredtocooperatenotonlyonalocalizedregionalbasis(suchas the European Union, ASEAN), but also on a larger one (for example, the UnitedNationsanditsassociatedagencies).Businessglobalizationhascreatedalargerdemandof global standards: this necessity is beyond the jurisdiction of a single governmentagency, addressed more to a coalition of powerful interest groups which includedregulatorsandtheaccountingandaudit industry.Thesupplying forces involvedcouldbe traced back in the historical institutionalization of Anglo-Saxon accounting self-regulationbackedbylocalaccountingprofessionalassociations.Inordertounderstandthe IFRS diffusion, it is possible to access that just a combination of politics andeconomicsseemstobeamodestreplytotheproblem.Duetoaseverecurrencycrisisoveradecadeago,thepoliticalresponsehasbeentranslatedpartlyintheproductionofinternational best accounting practices and in the development of internationalaccountingstandards.TheactorsinvolvedcouldbeoutlinedasthefinanceministersandcentralbankgovernorsoftheG7countriesandsupra-stateagencies.Thelatterseemtohaveplayedamainroleindemandingthatcountries,perceivedtoownfrailerformsoffinancial governance and surveillance, implement standards, possessing a globallyacknowledgedlevelofqualityandrightfulness.Theroleofsupra-stateorganizationsinthe diffusion of IFRS is clear in the 2002 pronouncement of the European Union:approximately7000listedcompaniesinitsmemberstatescouldreportusingIFRSfrom2005onwards.This couldhave led a ripple effect: once influential firstmovers act toapprovespecifictypesofconduct,thesecancometobetreatedasthefieldnorm,whileothershave followed the leaders inorder togain social legitimacywithin that fieldofaction. Standards arenot closely alignedwith the economicorpolitical institutionsofany particular nation, meaning an independency from the political lobbies. IFRS arebased strongly on investors’ protection, and within a particular mix of regulatorymechanisms and institutionalized governance technologies. As a consequence, theirefficacy differs regarding the operations of particular social, legal and politicalinstitutions.Moreover, it ispossibletosaythatIRFSmaybesodiffusedbecauseit isa

59

principles-based set of rules, enabling local customization and local translation. Thus,this flexibility is eitheranadvantageor adisadvantagebecausemore freedomamongnationscouldmeanmoreconsensusbutalsomoreproblemsofharmonization (CHUATAYLOR,2008,pp.469-472).2.4 Accountingharmonization

Worldwideaccountingdiversity imposessomesortof restraint linked to internationalbusinessoperationsandinvestments:itisbecomingverycostlyforfirmstoaccountforevery national jurisdiction that are involved in and to compare their own financialreportspreparedusingdifferentrules.Theever-increasingbusinessglobalizationputspressureonaccountingstandardsettersandgovernmentsinordertoreducediversityandalignaccountingrequirementsworldwide:thecomplexityofcommercialtradingofcompaniesandtheconcentrationofbusinessinglobalcompetition,therefore,hasledtoa greater need to raise funds with diversified investors. Governments, multinationalcompanies and private standards setter have tried to solve this situation foster theadoptionofIFRSanditslinkedharmonizationinordertocreateonesetofhigh-qualityaccountingrules.Theimportanceofthelatteriswidelyaccepteddueto:

- the rapid development of international capital markets strengthening theirdominant role as an economic resource distributor and the correlatedinformationdisclosuretryingtoensuremarketefficiency;

- theincreasecross-listingsofmultinational,generatinganurgentneedforasingleuniversalsetofaccountingstandards.Thesefirmscanbenefitbecausetheycanlower information production costs, sending out a unified, reliablemessage toinvestors;

- the activities internationalization of institutional investors, forcing domesticlisted firms to play the accounting game by global rules (DING JEANJEANSTOLOWY,2005,pp.326-328).

It is very important to define two important terms, oftenusedwrongly as synonyms:standardisation and harmonisation. The former is a process towards uniformity,implyingtheadoptionofthesameaccountingframeworkbyallmembercountries.The

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latterisamovementtowardharmony,suggestingareconciliationofdifferentpointsofview while allowing different requirements among countries and causing no logicalconflicts(CANIBANOMORA,2000,pp.351-352).Harmonisation is, therefore, used as a tool for reconcile different points of view: it ismore practical than uniformity, whichmay impose one country’s accounting point ofviewonallothers.Withthegrowthofinternationalbusinesstransactionsbyprivateandpublicentities,theneedtocoordinatedifferentinvestmentdecisionshasincreased.Thiswould also lead to the reduction of the information diversity betweenmanagers andinvestors.Theinformationdiversityiscostlyandcanbeblamedforthedecreaseofthemanagers’ bonuses, the increase of the equity’s cost and the inaccuracy of theeconomicalandthefinancialforecasts(JENO,2010,p.49).Numerousinternationalbodieswereinvolvedinharmonizationeffortseitherlocallyorglobally. One of the first attempt to harmonize accounting diversity worldwide wasdevelopedbytheInternationalOrganizationofSecuritiesCommissions(IOSCO). It isaunion of associations founded in 1974 which controls world’s securities and futuresmarkets. The entity is formed especially by accounting specialists, members of theSecuritiesCommissionandmembersofthenationalregulatorswhomeetseveraltimesper year at different locations around theworld. IOSCO proposes itself to support itsassociates to endorse high standards of regulation and act as a forum for nationalregulators to cooperatewith each other andother international organisations. IOSCO,amongitsmanygoals,triestoempowercross-bordersecuritiessubmissionsandlistingsbymultinational issuers.Many times, it has promoted the implementation of a set ofhigh-quality accounting standards for cross-border listings, supporting IASC’s andIASB’S efforts, too. Very important to the harmonization debate has been theInternational Federation of Accountants (IFAC): founded in October 1977 at the 11thWorld Congress of Accountants inMunich, it represents 2.5million accountants from123 countries and employed in various fields: from public practice to industry, fromcommerce to academia. The goals could be summarized in consolidating the globalaccountancyprofession,supportingtheexpansionofstronginternationaleconomiesbygenerating and endorsing observance to high-quality professional standards onauditing,ethics,educationandtraining.IFACendorsedaccountingharmonizationintwodifferent moments precisely: in 1999, it created the International Forum onAccountancyDevelopment(IFAD)inordertoencouragetransparentfinancialreporting,

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appropriately reviewed to high standards by a strong accounting and auditingprofession. Moreover, in 2000, it formed the Forum of Firms, designed to raisestandardsoffinancialreportingandauditinggloballyinordertodefendtheinterestsofcross-border investorsandstimulate flowsofcapitalworldwide.Toconclude,also theEuropeanUnionhascontributedtotheharmonizationprocessofaccountingstandardsand practices: the free flow of comparable financial information resulting from theharmonisationofaccountingis,therefore,anecessaryconditionforachievingacommonEuropeanmarket.Theglobalcapitalmarkethascreatedaforcepushingtothedirectionof the international harmonisation: companies whose shares are traded in differentmarketsareinvolvedinthisdemandofmorecomparabilityandinformationdisclosureamongdifferentaccountingsystems(DOUPNIKPERERA,2007,pp.67-71).The EU has recognised that global players struggle to account with different sets ofstandards and principles: this situation has not been satisfactory; it is costly and theprovisionofdifferentfiguresindifferentenvironmentsisconfusingevenforinvestors.TheEUCommissiondecidedtotakeactionbydevelopingthefollowingstrategy:

- theformalauthorityoftheEU’saccountingdirectiveshastobepreserved,- new directives or amendments have to be limited in order to avoid

renegotiations,- theEUistheprincipalrulessetter(FLOWER,1997,pp.286-288).

Ithasbeendecidednottosetupastandardsettingbodybecauseitcouldtaketoomuchtimeandresources:theEUCommissionacceptedtoadopttheInternationalAccountingStandards designed by the International Accounting Standards Committee. Thisinternationalentityin1998hasreachedanagreementwiththeUSGovernmentinorderto allow that the accounts, drawn up in accordancewith IAS, should be accepted forforeign listings.Theagreementwasfollowedbyaperiod inwhichtheEUCommissionsearched for differences to be overcame and conflicts to be removedbetween theEUDirectivesandtheexistingIAS.TheCommissionhasconcludedthatbetweenthesetwoaccountingframeworksthereareonlyirrelevantdifferencesifalloptionsareavailable(FLOWER,1997,pp.294-303).TheEuropeanUnion,inordertoendorseaccountingharmonisationandtoprepareitselfto the subsequent IAS/IFRS adoption, has used mainly the Fourth and the Seventh

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Directivesasthemainpromotinginstruments:theformerattemptedtoharmonisethenational laws on accounting regulations, to simplify the reliability, understandabilityand usefulness of the company accounts while promoting fair competition amongEuropean companies. The latter, contrariwise, concerned consolidated accounting inmemberstates.TheapplicationofthesetwoDirectivescauseda(beneficial)sideeffect:manymemberstateschangetheaimoftheiraccountingframeworks,fromdeterminingtaxanddividendpaymentstoprovidingtimelyanduseful informationto investorsfortheir decision-making. Moreover, the Directives have had a positive but moderateimpact in the quality of financial reporting due to the inclusion of numerous optionsleadingdifferent interpretations.TheEUhas,withoutnodoubts,made improvementstowards harmonisation, but its requirements through Directives are minimal andinsufficient to achieve the desired comparability. The EU commission has, therefore,adoptedthestrategyin2002toobligeconsolidatedfinancialstatementstobereportedfollowing IAS/IFRS frameworks. All EU listed companies must prepare their balancesheets and profit-loss reports in accordance with IFRS from the 2005 fiscal yearonwards.Asaconsequence,about7.000EUlistedcompanieswererequiredtopreparefinancialstatementsaccordingtoIAS/IFRS.Additionally,EUcountrieshavetheoptionofrequiring/permitting IFRS for unlisted companies and parent company(unconsolidated) financial statements, leading to heterogeneity in the status of theimplementationof IAS/IFRS in theEuropeanUnion (MARQUEZ-RAMOS,2011,pp. 43-45).Accordingly, to the literature, it is possible to outline two types of harmonisation:material and formal harmonisation. The former stands for the more comparabilitycausedbymoreconformityinpractices,whilethelatterreferstotheharmonisationofregulations.Formalharmonisationcouldbefollowedbymaterialharmonisation:thisisnottherulebytheway,becausemoreharmonisationamongregulationcanleadalsotomore dis-harmonisation of the standards, allowing more options for companies.However, the other way around can occur: material harmonisation can be increasedwithout an increase in the formal harmonisation. This phenomenon is calledspontaneousharmonisation.Both formalandmaterialharmonisationmayrefer to thedegree of disclosure or to the accounting method selected. The former is calleddisclosure harmonisation and the latter measurement harmonisation (CANIBANOMORA,2000,pp.351-353).

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Figure10:MATERIALANDFORMALHARMONIZATIONSource:CANIBANOMORA,2000,p.352In the field of the measurement of harmonisation researchers, who studied formalharmonisation,useddifferentstatisticalmethodologieswhileempiricalstudiesfocusondefactoharmonisation.ThemethodusedbyCanibanoandMoraistheC-Index:ameasuredevelopedinordertobeabletoincludemultiplereportingandreconciliationdatainthenotesofthefinancialstatements.Thepurposeof thestudy is to focus theattentionon the firms’behaviourregarding certain alternatives, trying to isolate the national context effect. After thecalculation of the C index for four accounting issues in two periods (1991/1992 and1996/1997), the changes have been analysed by using a bootstrapping procedure inordertounderstandifthechangesarestatisticallysignificant.Thesampleusedincludes85companiesfrom13Europeancountrieswhosesharesaretradedinternationally.Theindices show a clear increase in the deferred taxation comparability, in the financialleasescomparability,inthegoodwillcomparability(companiespassedfromwritingoffthe goodwill in the year of acquisition against income or reserves to alternatives inorder to amortise the goodwill in more than five years) and in the foreign currencytranslation(companiesincreasedthepracticesofaccountingexchangegainsandlossesas income/loss for theyear).The results corroborate theevidence that theprocessofspontaneousharmonisationmadebyEuropeanglobalplayersissuccessful.TheformalharmonisationthroughEuropeanDirectives,onthecontrary, isnotsufficientforthese

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firms inorder toreach thedesiredcomparabilityanddisclosure.Theexistenceof thismaterialharmonisation,however,putspressuretoachieveformalharmony,atleastforthoseorganisationslessinfluencedbyspecificnationalfactors(CANIBANOMORA,2000,pp.355-367).2.5 BenefitsandlimitationsofIFRSadoption

IFRS continues to be implemented bymore than 12.000 firms in over 100 countries:thus, it is becoming the universal standard for that preparation of monetary andfinancialaccountingreportsofpubliccompanies.Lately,theG20leadershaverequiredsubstantial improvement towards shifting to one unique group of high-quality globalaccountingstandards.Theoreticalandempiricalresearchhaveshedlighttothepossibleadvantages and disadvantages faced by nationswhen they decide to adopt IFRS. Theresultsarenotclear,anyway:morestudiesandapproacheshavetobedeveloped.By implementing IFRS, firmscanshowtheir financialstatementsonthesamebasisastheir foreign competitors, making evaluations and comparisons easier. Additionally,companieswithsubsidiariesinnationsrequiringorpermittingIFRSmaybeabletouseonlyoneaccountingcompany-widelanguage.Companiesalsohavethenecessitytoshiftto IFRS because they have become subsidiaries of foreign companies, obliged to usedIFRSbytheirstakeholders.CompaniescouldbebenefitedbyimplementingIFRSiftheyhave the intention to raise funds abroad, especially where IFRS are obliged orconsideredhigherquality,anyway.Theadvantagescouldbebrieflylistedasfollows:

- to improve a unified and more comparable set of accounting and reportingstandards;

- tocreateasingle,highquality,transparent,understandable,globallyenforceableandacceptedfinancialreportinglanguage;

- toincreasecrossbordertransactions;- increasedaccesstointernationalfundsandinvestments;- increasedconfidenceofglobalstakeholders;- tofacilitateinternationalacquisitionsandmergers;- the adoption, by developing countries in particular, ofwell-codified accounting

standards,

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- the enhancement of a more globalised capital market due to the increasedcomparabilityof financial statementsand thedecreased investors’ risk throughinternationaldiversification,

- firmscouldbearlesscostsoffinancialreportpreparationiftheydecidetocross-list indifferentstockmarket, increasingtheabilitytoseeklessexpansivefundsand the ability to reduce the costs associated with investors acquiring acompany’sshares,

- investorsmaybeadvantagedbythelesstransactioncosts,byanincreaseofthecompanies’ information disclosure and by a decrease in the asymmetryinformationinordertogathermoreaccurateinformationoncompanyprofiles,

- in case of consolidated accounts book-keeping will be facilitated and will alsoresultinreducedtransactioncosts.Nomoreadjustmentswillbeneededinordertomakefinancialreportsofcompaniesinternationallycomparable,

- anincreaseinthedivisionoflabour,- adecreaseintheearningsmanagement,moreearningsandmorevaluerelevance

ofearnings.Creatingasingle internationalandcomprehensivesetofstandardscouldenablemoreprecise cross-border evaluations of financial data, letting predictors and otherstakeholders tobetteruse their know-how to examine companies fromothernations.Adoptingauniqueaccounting frameworkshouldpermit to loweraccountingstandardvariancesinfinancialreportingacrossnationswhileeasingcross-borderevaluationsoffinancial figures. Additionally, themore inclusive disclosure requirements under IFRSrelative tomost localGAAPsmakeearningseasier tocomprehendand forecast,whichshouldpersuadeexperts tocovermore foreign firms(TANWANGWELKER,2011,pp.1307-1309). TherearemanyresearchesusefultoevaluatethepositiveimpactofIFRSadoption:forexample,AndrèP. andFilipA. have examined the impact of themandatory change toIFRS in 2005 by European firms on the level of accounting conservatism: it hasdecreasedaftertheadoption inmanycountries,even incode-lawsystems.Accountingconservatism,therefore,isanimportantmeasureofaccountingwithinaninternationalsetting. It estimates the accountants’ inclination to demand a higher degree ofconfirmationwhenrecognisinggoodnewsoverbadnews.Inaddition,conservatismis

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linked to the efficiency of stakeholders’ contracting. It limitsmanagerial opportunismand counters managerial bias which is beneficial to firm value since it constrainsopportunistic payments to management itself or other parties such as shareholders.Moreover,itcanlimitlitigationcostswhicharemorelikelywhenoverstatingafirm’snetassetsandcanreducethepresentvalueoffirm’staxes.Toconclude,lessconservatismcanreducethepoliticalcoststostandardsettersandregulatorsfromcriticismif firmsoverstate net assets. So, the main hypothesis of this study was to understand if themandatory adoption of IFRS in 2005 led to an overall decrease in accountingconservatism and a decrease of differences in conservatism across countries andlegal/institutional regimes post-IFRS. The sample used derives from the databaseWorldscope: 2477 European firms shifting from national GAAPs to IFRS in 2005(ANDRE’FILIP,2012,pp.1-5).In the tablebelow, it ispossible toappreciatewhere theaccountingconservatismhasbeendecreasedafterIFRSadoption.Themodeliscomposedbythenetincomeoffirmiin year t, scaled by beginning of the period market value, the expectation operatorwithin two-digit industry code in order to compute unexpected earnings, themarketreturnover18months’netofdividendsandcapitalcontributions.Moreover,adummyvariable indicating the firms’ reactionoverbadandgoodnews, adummyvariable forIFRSadoptionovertheyearsandadummyvariableindicatingifthefirmbelongstothetarget country or not were used. To conclude, it is possible to say that accountingconservatism is decreased in the majority of the European members but, mostimportant,differencesamongEuropeannationsarereducedconsiderably.

Before After Variation

AUSTRIA 0,362 0,344 -0,018

BELGIUM 0,202 0,114 -0,088

DENMARK 0,165 0,176 0,011

FINLAND 0,061 0,152 0,091

FRANCE 0,365 0,148 -0,217

GERMANY 0,422 0,157 -0,265

GREATBRITAIN 0,242 0,144 -0,098

GREECE 0,110 0,149 0,039

IRELAND -0,107 0,082 0,189

ITALY 0,175 0,067 -0,108

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NETHERLANDS 0,855 0,110 -0,745

NORWAY 0,139 0,171 0,032

PORTUGAL 0,639 0,167 -0,472

SPAIN 0,034 0,106 0,072

SWEDEN 0,144 0,125 -0,019

SWITZERLAND 0,616 -0,051 -0,667

Table7:VARATIONSINACCOUNTINGCONSERVATISMSource:ANDRE’FILIP,2012,pp.50-52Increasing comparability, transparency and disclosure of financial information couldimpactpositivelyintheforeignactivities,asdescriedwellinthisfigure:

Figure11:RELATIONSHIPBETWEENCOMPARABILITY,TRANSPARENCYANDDISCLOSURESource:MARQUEZ-RAMOS,2011,p.44ThefigureshedslightonthetwodifferenteffectsoriginatedbytheIFRSadoptionandtheresultingdecrease incountry level informationasymmetries:atransparencyeffect(i.e., compared to local GAAP, the transparency of financial statements increases) andcomparability, andhence, familiarity effects of IFRS adoption (i.e., firms in countries iand j use the same accounting standards). The transparency effect, as a strongerrelationship between reported financial information and the firm’s value, implicitlyassumes that accounting quality increases by switching from local GAAP to IFRS.

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Additionally, it reinforces the comparability effect, which in turn increases thefamiliarityrequiredtoallowmarketstooperatemoreefficiently.Boththetransparencyandcomparabilityeffectsdecreasetheinformationaldifferencesofdomesticandforeignagents and are expected to have a positive effect on foreign activities (MARQUEZ-RAMOS,2011,p.44).AnalysingdataonbilateralexportsofgoodsintheEUfrom2002to2007aswellasdataonbilateral foreigndirect investments flows for thesameperiod in theEUand in themost relevant countriesaround theworld, the results indicate that theharmonisationprocess in Europe have led to a reduction in information costs and unfamiliaritybetweencountriesandanincreaseininternationaltradeandforeigndirectinvestments(FDI).

FDI=foreigndirectinvestmentsEQ=equityRE=retainedearningsBIA=beforeIFRSadoptionAIA=afterIFRSadoptionFigure 12: DATA ON BILATERAL EXPORTS OF GOODS AND ON BILATERAL FOREIGN DIRECTINVESTMENTSFLOWSSource:MARQUEZ-RAMOS,2011,p.53The regression used takes into account the problem of bias and inconsistency of theestimates in the presence of endogenous variables, as well as similarities in history,traditions, culture, and institutional relationships among countries by adding properproxycontrolvariables.ForFDIregressions,thecomparabilityeffectofIFRSadoptionispositiveandsignificantforequity,retainedearningsandloans.Thecomparabilityeffect

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ofIFRSadoptionhasincreasedFDIinEuropebyalmost22percent.Theseresultsshow,therefore,highertransparencyinthetargetedcountry(thusshowingashrinkageinthenumber of firms that account less sales for tax purposes), leading to an increase ininvestmentflowsfromabroad.Atthecountrylevel, thestudytestedtheexistenceofapositive transparency and comparability effect. Furthermore, uncertainty-adversecountries benefit themost from IFRS adoption in terms of FDI. Therefore, accountingstandardharmonisation canbe considereda strategy to reduce theperceived risksofinvesting abroad. In summary, adopting a high-quality set of harmonised accountingstandardsfosterstradeandFDIastheimprovementinaccountinginformationinturnfostersfinancialtransparencyandcomparabilityandreducesinformationasymmetriesandunfamiliarityamongagentsindifferentcountries(MARQUEZ-RAMOS,2011,pp.52-56).OtherbenefitslinkedtotheIFRSadoptioncanbefoundintheincreasedmarketliquidityand equity valuation of the adopters: the study of Daske, Hail, Leuz and Verdi, forexample, analysed a large sample of firms from 26 different countries from 2001 to2005inwhichIFRShavebecomemandatory.Theyfoundoutthatthevaluerelevanceofearnings increased while the cost of capital declined but only if the effect occurredbefore the official adoption date. The lattermay suggest that themarket predicts theeconomic consequences of the mandate. This means that the most benefits areaddressedtothevoluntaryadoptersandinanenvironmentwherefirmshaveincentivesto be transparent and where legal enforcement is strong. However, positive capitalmarketeffectsaremoresignificantinmandatoryadoptersthaninvoluntaryones:thisistrue just because the latter has benefited earlier the IFRS’s switch. To sum up thefindings,itispossibletosaythat:

- comparability benefits are fundamental because the increased comparabilityaffectsboththeearlyandthelate/mandatoryadopters;

- capital-market effects for voluntary adopters are likely to be provoked by thecollateralenforcementandgovernancechangesthatsomecountriesintroduceinorder to maximize IFRS adoption’s benefits. These changes should, therefore,affectallthefirmsintheenvironment,bothmandatoryandvoluntaryplayers;

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- mandatoryIFRScouldspurearlyvoluntaryadopterstoincreasethecommitmenttothem,thuseliminatingdualreportingpracticesandtheoptiontoreversebacktolocalGAAP;

- liquidity improvements’ results emerge only if the effects are considered tohappen prior to the official IFRS adoption date, suggesting that the marketanticipates the economic consequences of the mandate (DASKE HAIL LEUZVERDI,2008,pp.1085-1095).

Asthefollowingfigureshows,liquidityincreasedonaverageinIFRSadoptioncountries,especiallyduringtheyearofthemandatorychange.Themeanproportionofzeroreturndaysinthepreadoptionperiodis31.2%anddecreasesto27.7%in2005.Overthesameperiod,thefirmsanalysedencounteradeclineinzeroreturndaysfrom35.2%to33.8%.However,thedecreaseinzero-returndaysissignificantlylarger(by2.1%)fortheIFRSadoptersthanforthebenchmarkfirms.

Figure13:LIQUIDITYINCREASEDINIFRSCOUNTRIESSource:DASKEHAILLEUZVERDI,2008,p.1106The overall results, however, vary a lot depending on the benchmark sample and thelength of the sample period: this variance should be interpreted as the trouble tobenchmark the economic consequences of a regulatory change that simultaneouslyaffectsall firms inaneconomy.However,even if thebenefitsare linkedverystrongly

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with the implementation efforts of every nation, the financial information providedbecomesanywaymoreuseful to investors(DASKEHAILLEUZVERDI,2008,pp.1130-1132).Christensen,Lee,WalkerandZengcorroboratedthe findingsofDaskeetal. (2008)byanalysing the accounting quality in Germany, especially during the mandatory IFRSadoption imposed by the European Union. In order to find the change of accountingquality occurred using these new set of accounting standards and principles theresearchers chose Germany because it is easier to identify managerial financialreporting incentives. Between 1998 and 2005, firms in Germany could choose tovoluntarilyadoptIFRS,andin2005compliancebecamemandatory.Themainfindingsarerelatedtotheaccountingquality’simprovementsmadebyvoluntaryadopterswhilethemost resilient firms have strict relationshipswith banks and inside shareholders,consistentwith lower incentives formore comprehensive accounting standards: IFRSpersedoesnot improveaccountingquality.Thus,accountingqualitycanbedescribedbythreedimensions:

- earningsmanagement, the exploit of deliberately manipulating the process offinancialreportingtogetsomeadvantage;

- timelylossrecognition,theprocesstoenablelenders,shareholdersandboardsofdirectors to better and faster recognise unprofitable projects in a timely waywhile supporting them to forcemanagers to terminate such plans before largevaluelosses;

- value relevance, the information capacity revealed by financial statements toseizeandencapsulatefirmvalue.Itcanbeassessedbymeasuringthestatisticalrelations occurred between information presented by financial statements andstockmarketvaluesorreturns.

Voluntary adopters are characterized by decreased earnings management, increasedtimely loss recognition and increased value relevance while mandatory adoptersshowed little or even no improvements. Adoption of IFRS does not, therefore,automaticallyleadtohigherqualityaccounting,atleastnotwhenthepreparershavenomotivations to become more transparent in their reporting (CHRISTENSEN LEEWALKERZENG,2015,pp.31-33).

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∆NIisthechangeinnetincome,scaledbyend-of-yeartotalassets.∆CFisthechangeinannualcashflowfromoperations,scaledbyend-of-yeartotalassets.ACCistheearningslesscashflowfromoperations,scaledbyend-of-yeartotalassets.CFisannualnetcashflowfromoperatingactivities,scaledbyend-of-yeartotalassets.SPOSisanindicatorvariablethatequalsoneforobservationswherenetincomescaledbytotalassetsisbetween0and0.01.LNEGisanindicatorvariablethatequalsoneforobservationsforwhichannualnetincomescaledbytotalassetsislessthan20.20,andzerootherwise.Risthefiscalyearreturnincludingdividend.NI/Pisthenetincomepersharescaledbyshareprice.∆NI/TAisthechangeinnetincomescaledbytotalassets.Pisshareprice6monthsafterfiscalyearend.BVPSisthebookvaluepershare.EPSisthenetincomepershare.LEVistheend-of-yeartotalliabilitiesdividedbytheend-of-yearbookvalueofequity.GROWTHisthepercentagechangeinsales.EISSUEisanindicatorthatequalsoneifthefirmissuedequity.DISSUEisthepercentagechangeintotalliabilities.TURNisthesalesdividedbytheend-of-yeartotalassets.SIZEisthenaturallogarithmofend-of-yearmarketvalueofequity.NUMEXisthenumberofexchangesonwhichafirm’sstockislisted.AUDisanindicatorvariablethatequalsoneifthefirm’sauditorisPwC,KPMG,ArthurAndersen,E&YorD&T,andzerootherwise.

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XLISTisanindicatorvariablethatequalsoneifthefirmislistedonanyUSstockexchange.CLOSEisthepercentageofsharesreportedtobecloselyheldinWorldscope.* Significanceatthe10%level(two-sidedtests).** Significanceatthe5%level(two-sidedtests).∗∗∗ Significanceatthe1%level(two-sidedtests).Figure14:DESCRIPTIVESTATISTICSOFACCOUNTINGQUALITYSource:CHRISTENSENLEEWALKERZENG,2015,p.43Thisfigureshowsdescriptivestatisticsonallvariablesusedintheanalysisofaccountingquality. The observations show important changes between voluntary adopters andresistersinoperatingcashflow(CF),proportionoflargeloss(LNEG),stockreturns(R),net income divided by price (NI/P) and earnings per share (EPS). Returns and netincome are on average higher for voluntary adopters than resisters, reflectingmaybeindustry variations. Meanwhile, the control variables indicate that, on average, thevoluntary adopters have higher growth, issue more equity and debt securities, havegreatersales,arelargerandlistedonmoreexchanges,aremorelikelytobeauditedbyalargeauditorandcross-listedintheUSA,andhavelesscloselyheldshares.

∆NI

,∆CF

,CF

andACCaredefinedastheresidualsfromtheregressionsof∆NI,∆CF,CFandACC.

SmallpositiveNIandlargenegativeNIarethecoefficientsonSPOSandLNEGinlogisticregressions.

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Forthetimelylossrecognitionareshowedthegoodnews(b2)andincrementalbadnews(b3)coefficientsarereported.Fortheearningspersistenceregressions,onlythepositiveincomechanges(l2)andincrementalnegativeincomechanges(l3)coefficientsarereported.Forvaluerelevanceregressions,thereareshowedcoefficientsonbookvaluepershare(d1)andearningspershare(d2).Pre-adoptionincludesallobservationsbeforefirmsvoluntarilyadoptIFRSwhilepost-adoptionincludesallobservationsafterafirmadoptsIFRS. Significanceatthe10%level(two-sidedtests). Significanceatthe5%level(two-sidedtests). Significanceatthe1%level(two-sidedtests).Figure 15: THE EVALUATION OF ACCOUNTING QUALITY BETWEEN THE PRE- AND POST-ADOPTIONPERIODSFORVOLUNTARYADOPTERSSource:CHRISTENSENLEEWALKERZENG,2015,p.45This figure displays the evaluation of accounting quality between the pre- and post-adoption periods for voluntary adopters. The variability of earnings (∆NI) growthsconsiderably in the post-adoption period, which is coherent with reduced earningsmanagement.Thechangeinthevariabilityofearningscouldbemotivatedbyunderlyingcashflows.Thenegativecorrelationbetweenaccrualsandcashflowsisalsodiminishedsignificantlyinthepost-adoptionperiod,whichdenoteslessearningsmanagement.Thecoefficient on small positive profits is negative,whichwould be dependablewith lessearningsmanagementinthepost-adoptionperiod.Moreover,thepositivecoefficientonLNEG implies that firms aremore likely to identify large losses in the post-adoptionperiod,althoughthisresultisnotstatisticallysignificant.Theincrementaltimelinessofbad news increases significantly from pre- to post-adoption period, which suggestsmoretimelylossrecognitionafterfirmsvoluntarilyadoptIFRS.

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Figure16:ACCOUNTINGQUALITYBETWEENTHEPRE-ANDPOST-ADOPTIONPERIODSFORRESISTERSSource:CHRISTENSENLEEWALKERZENG,2015,p.47This figure, however, illustrates the accounting quality’s association between the pre-andpost-adoptionperiods for resisters.Thechangeabilityofearnings (∆NI)decreasesmeaningfully in thepost-adoptionperiod,which is linked to an escalation in earningsmanagement. The variability of earnings relative to the variability of cash flows(∆NI/∆CF) means that the variation’s predominance in earnings is attributable tounderlying cash flows. The coefficient on small positive profits is positive andsignificant, which denotes more earnings management towards a target after IFRSadoption.TheappreciablynegativecoefficientonLNEGimpliesthatfirmsarelesslikelyto identify large losses in thepost-adoptionperiod.The incremental timelinessofbadnews is also lowered in the post-adoption period. Furthermore, the results display areduced persistence of losses in the post-adoption period. However, the difference inloss persistence is small and not statistically significant. A weakening in the valuerelevance of earnings per share from the pre- to post-adoption period occurred,although thedifferencebetween the twoperiods isnotsignificant.Overall, theresultsfor resisters generally denotemarginallymore earningsmanagement, less timely lossrecognition and even reduced value relevance in the post-adoption period although

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mostchangesarestatisticallyinsignificant.Theseconclusionsdivergeseverelytothosestated for voluntary adopters that revealed adecline in earningsmanagement and anintensificationintimelylossrecognition.Toconclude,itispossibletosaythat,whilethedecreased earnings management occurred normally during the post IFRS adoptionperiodarelinkedtoanincreasedvariabilityofearningandtoadecreaseinthenegativecorrelation between accrual and cash flows, the increased timely loss recognition isconnectedtoan increase in timelinesofbadnewafter theadoptionandadecrease inthepersistenceoflosses(CHRISTENSENLEEWALKERZENG,2015,pp.47-58).Other researchers focusedmoreon increased comparability causedby IFRSadoption:Wang, for example, analysing market reactions for a sample of 575 earningsannouncements fromglobal industry leaders for theperiod2001-2008, tried toprovethat transnational information transfer is not only facilitated by internationalharmonization but also it increases comparability among financial reportinginformation:mandatoryIFRSadoptershaveempiricallyshowedthattheypossessfastermarketreactionsto thereleaseofearningcomparedtopre-mandatoryadoption.This,however, has not occurred to non-adopters over the same period. More specifically,firms reporting in the same accounting framework have higher price and volumereactions to a foreign firm’s earnings announcement: higher correlation betweenmeasurement processes for accounting earnings imply more comparability.Stakeholderscan,therefore,evaluatebettertheinformationlinkedintheforeignfirms’earnings signals. To access that IFRS has effectively increased comparability, a newmeasurewasdefinedandbuilt:astatisticaldefinitionofcomparability,abletocapturetherelationshipbetweenthemeasurementerrorsfrominformationsignalsacrosstwofirms.Thecontext isusefulbecause it isa straight, short-windowanalysisofhowonefirm’sinformationsignalbiasestheotherfirm’sassessment.Thenon-announcingfirm’smarketreactionstotheannouncingfirm’searningsreportincreasewiththecorrelationbetweenthemeasurementerrors,asahighercorrelationallowsinvestorstoinfermoreinformation from the announcing firm’s earnings signal when valuing the non-announcing firm. The results from cross-sectional analyses showed that to reach thisresults a proper legal enforcement and reporting incentives for accomplishing therequired transnational comparabilityhave tobedeveloped: in fact, firmsdomiciled incountrieswithstricterenforcementregimesandstrongerreportingincentivesshowthemostsignificantinformationtransfereffect(WANG,2014,pp.1-6).

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Increased comparability givenby IFRSadoptionandaccountingharmonization is alsolinkedtofinancialanalysts.ManystudiesdemonstratedthatIFRSattractsthisparticulargroup of financial statement users, in particular those from countries that areconcurrently implementing IFRSandthosewithprior IFRSunderstanding.Thereasonwhythishappensislinkedtotheincreasedaccuracyofforeignanalysts’forecastduetoIFRSadoption.ThemagnitudeisrelatedtothedistancebetweenlocalGAAPandIFRS:themoredissimilartheyhavebeen,themoreanalystswillbeattracted.ThisincreaseisashighasthedistancebetweenlocalGAAPandIFRSpriortothemandatoryadoption.Thisprocessattractslocalanalysts,too:inparticular,thosewithpriorIFRSexperience.Thesemodificationsinforeignfinancialanalysts’marketcouldbe,therefore,connectedto an increased effectiveness of accountingdata after the IFRS adoptionbecause theycanmore accurately forecast earnings for the foreign firms they follow. Analysts are,indeed,linkedtofinancialdisclosureandtransparency:theresultsdocumentedbyTan,Wang&Welker,analysingasampleofalmost40.000equityanalystsand22.000firms,lead unequivocally to a positive relation between IFRS adoption and the reduction ofinformationacquisitionandprocessingcosts foranalysts(TANWANGWELKER,2011,pp.1307-1309).

Figure17:FOREIGNANALYSTBETWEENPRE-ANDPOST-ADOPTIONPERIODSSource:TANWANGWELKER,2011,p.1314

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Thesamplewasdividedindifferentgroups,whichare:

- all,foreignanalystsfromallofthe34countriesthathavealreadyadoptedIFRS;- ctry25, foreignanalystswhoare located in the25samplecountries supporting

IFRSadoptionduringtheperiodanalysed(1998-2007);- nctry25,foreignanalystsnotincludedinthe25samplecountriesrequiringIFRS

adoption;- ifrsexp,foreignanalystswithpriorIFRSexperience;- nifrsexp,foreignanalystswithnopreviousIFRSknowledge.

The numbers of foreign analysts from all of the 34 analyst countries, from the 25countries thatmandate IFRS adoption and thosewith prior IFRS experience, have allimproved from two years before the IFRS adoption date (pre-adoption) to two yearsafter the IFRS adoption date (post-adoption) for mandatory adopters: this is truelooking at the mean values of the chart. Similar growths are spotted for voluntaryadopters.Ontheotherhand,theaveragenumberofforeignanalystswithoutpriorIFRSexperiencehasdiminishedfromtwoyearsbeforetheIFRSadoptiontotwoyearsaftertheIFRSadoptiondateforbothvoluntaryandmandatoryadopters.Atthebottom,therearethechanges inearnings forecastaccuracy.Aswecansee fromthemeanvalues, inthe totalityof thesamples the foreignanalyst increasedafter the IFRSadoptionwhiledecreasedthenumberofforeignanalystswithnoIFRSskill.Thesamereasoningcanbedone taking into consideration foreign analysts’ accuracy: it has increased for thetotality of the samples. To sum up, embracing a unique and worldwide accountingframeworkmeans less frameworkstostudy, followand, fortheforeignanalysts,morefirms able to cover. In addition, their accuracy in forecast earnings increases becauseaccounting harmonization reduces forecast errors triggered by dissimilarities inaccountingstandard(TANWANGWELKER,2011,pp.1314-1328).Toconclude,otherstudiesunderlinedthebenefitsofincreasedcomparability:Brochet,JagolinzerandRiedl,forexample,analysedifIFRScompulsoryimplementationproducescapital market benefits through improved financial statement comparability. All UKlistedanddomiciled firms from2003 to2006wereusedasa samplebecauseEnglishGAAP is the most similar to IFRS, trying to isolate the advantages caused just byincreasedcomparabilityratherthantochangesincoreinformationquality.Inthisway,

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it ispossible to insulatemodifications in theaccuracyof across-firmreporting signals(i.e.,comparability)fromchangesregardingtheexactnessofinformationspecifictothecompany (i.e., core information quality). Increasing comparability means, therefore,decreasingtheinformationcompetitiveadvantagepossessedbytheinsiders,originatedfrom the access to firm-specific information about choices that may have affectedbusiness results and to a complex understanding of how firm performances areconnectedtotheresultsofotherfirms.Comparabilityenhancementsshould,therefore,increase stakeholders’ skills to comprehend firm’s comparative performances and,simultaneously,reduceinsiders’informationalbenefits.Inspecific,theresearchershavefoundthatabnormalreturns in thepre-IFRSperiodarehigherrelative to those in thepost-IFRSperiod:meanabnormalreturnsdecreaseafter IFRSadoptionfrom2,08%to0,68%fortheone-monthreturnwindow,4,01%to1,23%forthethree-monthwindow,and6,75%to2,09%forthesix-monthwindow.Then,fourdifferentproxieswerebuiltin order to classify which companies had ex antehigh quality core information andwhichhadnot.Lowchangeinaccruals,lowreconcilingitemsbetweenUKstandardsandIFRS, lowcloselyheldsharesandhighanalyst following,exhibiting thatadvantages toIFRSadoptionarenotrestrictedtonationsshowing largevariancesbetweendomesticstandards and IFRS, or to firms displaying low information quality. On the contrary,enhancements can also take place in locations where information quality is alreadyhigh-pitched and compulsory local GAAP are already analogous to IFRS (BROCHETJAGOLINZERRIEDL,2013,pp.1373-1383)SomeresearchersbelievethatnationalGAAPsremainthebestfitbecauseacertainlevelof qualitywill be lostwith full acceptanceof IFRS.Certain issuers,without significantcustomers or operations outside the national borders, may resist IFRS because theyhave not a market incentive to prepare financial statements according to IFRSprinciples.Asamatteroffact,theymaybelievethatthesignificantcostsassociatedwithadopting IFRS outweigh the benefits. Some other limitations, challenges anddisadvantagescouldbelistedasfollows:

- IFRS are designed for big internationalized companies while in many nations,Italyincluded,smallandmediumfirmscreatethemostpartofGDP,

- stated that IFRS are not rule based, it may cause problems during theimplementationphase,astrongenforcementisthereforeneeded,

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- first timeadoptionneeds tobeplannedquite inadvance, anydelayswilldelaydeployment.

Adopting a new set of accounting standards is not easy, especially becauseenvironmentaldifferencesexistamongnations.Thisistruenotonlyforthemagnitude,butalso for theovercomingcosts involved (when it ispossible) throughconvergence.Furthermore,difficultiescouldarisewhen,duetotheadoptionofIFRS,firmsdecideforexampletousethefairvaluemethodinnationswhereassetpricingmarketsarenotableto generate a reliable fair valuemeasure. In this case, artificial approaches are used,leadingtheproductionoffiguresthatlackincomparability.Moreover,IFRSsareheavilybasedon thecurrent financial reportingregulationsofcountriesandmarkets thataredesignedtowardoutsidecapitalproviders:thesecountrieshaveenforcementandotherentities thatcomplement thereportingregulationsdeveloped.Asamatterof fact, it isnotenoughadoptingauniformsetofaccountingstandardstoensurecomparabilityanddisclosureamongaccountingstandardsandpractices.Thissituationisgeneratedbythevariationofincentivesacrossfirms,industries,stockexchanges,countriesandpoliticalregions. To overcome the problem, it is necessary a convergence not only amongaccountingpracticesbutalsoonnationalinstitutions.The international accounting convergence could be beneficial for large multinationalentitiesandinstitutionalinvestorswhileitcouldbeharmfulforentitiesoperatingonlyin one jurisdictions and not seeking international sources of funds through globalmarkets. Inthiscase, the increasedcostsofcompliancecouldoutweighthebenefitsofconvergence(WYSOCKI,2011,pp.321-322).This is especially true for small and medium-sized enterprises (SMEs). To overcomeadoption problems due to the lack of funds and/or know-how the IASB issued aframework especially designed for them on the 9th of July 2009 after a five-yearconsultation.ItispossibletogodeeperandisolateprosandconsoftheuseofadifferentreportingframeworkforSMEs:infavour,therearedifferencesinuser’sneeds,accesstointernal information, complexity of transactions andhigher costs for small companiesrelativetotheirbenefits.Onthecontrary,limitsforauniquesetofaccountingstandardscould be seen in the fear of reducing the credibility, confusion among the statementusers, difficulties of defining the small businesses, the lack of consistency andcomparability. The development processwas inspired by the idea to develop an IFRS

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expressly designed tomeet the financial reporting needs of entities that do not havepublicaccountabilityand/orpublishgeneralpurpose financial statements forexternalusersasownerswhoarenotinvolvedinmanagingthebusiness,existingandpotentialcreditorsandcreditratingagencies.The Board firstly developed a discussion paper, inviting the surveyed entities tocommentandsuggesttheapproachtotheproject:thereplieshaveshownundoubtedlythatmostoftheSMEsdemandclearlyanIFRSandprefertoadoptglobalprivateentitystandards rather than locally or regionally developed standards. All thismaterialwasdiscussedfrom2005to2006and,in2007,anExposureDraft(ED)waspublishedbytheIASB.In2009,finally,afinalversionofIFRSsforSMEswaspublished.Oneoftheentitiesthat has expressed major doubts about this new set of standards is the EuropeanFinancialReportingAdvisoryGroup(EFRAG). ItsbasicremarksandobjectionsontheEDconcerned:

- sizecriterion,- users’needsandcost-benefitconsiderations,- modificationsoffullIFRS.

Thesizecriterion,notedtheEFRAG,cancreatemisunderstandings:thislabeliswidelyused internationally to refer to the size of entities in general. The commondefinitioncollidesheavilywiththeEDbecauseitisimpossibletofindreferenceslinkedtothesizecriterion,butonly linked topublicaccountability.Therefore, thesolutionproposedbyEFRAGwastochangethestandards’labeltonon-publiclyaccountableentities(NPAE).User’sneedsofNPAEsareclearlydifferentfromtheonestakenasamodelfornormalIFRS:thesedifferencesneededtobereflectedindifferentrecognitionandmeasurementprinciples. SMEs financial statements need to be easily understandable and everyunnecessarycomplexityorvarietyinaccountingtreatmentsmustbeeliminated.Themainsimplificationcouldbesummarisedin:

- reinstatingtheamortisationofgoodwillandotherintangibleassets,- promulgatingonlyone costmodel andone revaluationmodel fornon-financial

assets,- eliminatingthereferencetothenamefairvalue,

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- eliminating the recognition of equity settled share-based payments.

According to the researchperformedby theEuropeanCommunity, 13member states(Cyprus,CzechRepublic,Denmark,Estonia,Greece, Spain, Ireland,Malta,Netherlands,Poland,Portugal,Sweden,UnitedKingdom)thoughtthattheIFRSforSMEsarefeasiblefor application,while 9member states (Austria, Belgium, Bulgaria, Germany, Finland,France, Italy, Slovakia, Slovenia) have not considered them applicable in financialreporting of their SMEs. This debate complicates the cost evaluation for the IFRSadoption,especially inasmallormediumenterprise:moreresearchhastobedoneinorder to evaluate thematerial andnon-material impact of adopting anewaccountingframework(BALDARELLIDEMARTINIMOSNJA-SKAREPAOLONI,2012,pp.1-12).It is, therefore,possible toaffirmthat internationalharmonizationcouldnotbeusefuland desirable because GAAP are country-specific and developed within a politicalprocess,involvingeconomicenvironments,usersandobjectives.Some researchers have demonstrated that capital markets effects exist but could benegligiblebecausetoomodesttohavearealimpact.TheapplicationofIFRSassumesalot of judgment and private information, causing an increase in firms’ discretion. Theproblems, therefore, shifts to how these firms use the discretion. It could depend ontheirreportingincentives,whichareshapedbymanyfactors,includingcountries’legalinstitutions, various market forces, and firms’ operating characteristics. For manyreasonsa firmcouldbeopposed toanaccounting framework’sshift: thisbehaviour islikelytobetranslatedinnomaterialchangestoitsreportingpolicies.Thus,evenifthestandards themselves mandate superior accounting practices and require moredisclosures,itisnotclearwhetherfirmsimplementthesestandardsinwaysthatmakethereportednumbersindeedmoreinformative.Moreover, inmanycases, it isdifficulttoisolatetheIFRSseffectintheincreaseofafirm’stransparencyanddisclosure.Somefirms could, indeed, adopt IFRS as part of a broader strategy that increases theircommitment to transparency. For example, they may hire higher quality auditors,improve corporate governance, change ownership structures, or seek cross-listings instricterregimes,alongwithIFRSadoption.Asaresult,thecapital-marketeffectsaroundvoluntaryadoptionsarelikelytobelargerbuttheycannotbeattributedtoIFRSalone.Thatis,theeffectsmightreflectdifferencesintheincentivesforcrediblereporting,thecircumstances that lead to IFRS adoption in the first place, and a firm’s entire

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commitment strategy.Additionally, effects on increased liquidity andvaluation effectshavetobemitigatedandseparatedbyself-selection.Thishappening is linkedto firmsthat switch to IFRS reporting shortly before doing so becomes mandatory. Morespecifically, mandatory adopters do not gain just because they have adopted a newaccounting system: mandatory adopters confer positive externalities on voluntaryadopters by increasing the set of comparable firms, which in turn could lead toimprovedrisksharingacrossalargersetofinvestors.Besides,voluntaryadopterslikelyhavebetterreportingincentivestobeginwithand,hence,shouldbemoreresponsivetosuchinstitutionalchanges,whichcouldexplainstrongertreatmenteffects(DASKEHAILLEUZVERDI,2008,p.1129-1132).ItisbynowestablishedthatvoluntarinessandenforcementarekeypointsinthecorrectIFRSadoptionanditslinkedbenefits.Christensenetal.corroboratethisassumptionbyfinding littleevidenceofaccountingquality improvements for firms thatare forced toadoptIFRS.Theresultsof theirresearch, focusedonGermanfirmsandIFRSadoption,suggestthatadoptionofIFRSdoesnotnecessarilyleadtohigherqualityaccounting,atleastnotwhen thepreparershaveno incentives tobecomemore transparent in theirreporting. Themain reasons are twofold: in the state of art, IFRS provides toomuchflexibility, rendering ineffective earningsmanagement of firmswith low incentives tocomply.Secondly, theobservedaccountingquality improvementseffectsobservedarenotlinkedtoIFRSbuttochangesinreportingincentivesofthesefirmsaroundthetimeof their adoption. Normally, firms resistant to changes are those with closerrelationships with banks and, therefore, with less demand of company informationdisclosure. For such firms, financial reporting may primarily serve the purpose ofcontractingwithknowninsidersratherthanrelativelyanonymousoutsiders.Anyway,itis not so clear if firms adopt IFRS voluntarily because they want to increase theiraccountingqualityand,thus,theirabilitytoattractinvestors.Inordertoattractexternalfinancing, thereareessentially twoexplanationsshedding light the reasonwhya firmmayvoluntarilyadoptIFRSintheprocess.ThefirstimpliesthatIFRShasanincrementaleffectonaccountingqualitywhilethesecondsuggeststhatitisamanifestationofotherunderlying factors. The voluntary IFRS adoption could be beneficial because it canreduce earnings management and increase timely loss recognition. This may happenbecause IFRS limits the options available to managers. The alternative explanation

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suggests that voluntary IFRS adoption may simply correlate with other managerialmotives:

- firmscouldreachthesamelevelofinformationusinglocalGAAPbutthiswouldinvolve changing accounting choices and implicitly accepting that previouspracticeswerelessinformative.Differently,adoptingIFRSallowsfirmstoadoptnewpracticeswithouthavingtoacknowledge“thesinsofthepast”;

- adoptingvoluntarilyanewsetoffinancialreportingstandardscouldopenhigherprofile stock exchange segments, signalling a change in financial reportingincentives;

- before2005firmscouldshifttoIFRSbecausetheyknowthatinthefutureIFRSwillbecomemandatory.Thisadoptioncanbeseenasalong-termcostdecreasingresponse for firms that are undergoing change in their financial reportinganywaysincetheyknowIFRSwouldbemandatoryasof2005.

∗Significanceatthe10%level(two-sidedtests).∗∗Significanceatthe5%level(two-sidedtests).∗∗∗Significanceatthe1%level(two-sidedtests).∆NIisthechangeinnetincome,scaledbyend-of-yeartotalassets.∆CFisthechangeinannualcashflowfromoperations,scaledbyend-of-yeartotalassets.Figure18:EFFECTSOFTHEIFRSADOPTIONONTHERESISTERSSource:CHRISTENSENLEEWALKERZENG,2015,p.53

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The observations are limited to firms that have an equal number of pre- and post-observations. InPanelA, thereare firmsthathavedata theyearbefore IFRSadoptionand the year after, while in Panel B, there are firms that have data in the two yearsbeforeIFRSadoptionandthetwoyearsafter.InPanelC,thedifferenceinthepost-IFRSaccountingqualitychangesofresistersagainstthoseofvoluntaryadoptersasacontrolgroupareshowed.Itispossibletoappreciatehowthebenefit,especiallyforresistersofIFRS adoption, are not very significant. Hence, it is possible that the qualityimprovements are at least partly driven by changes to financial reporting incentivesratherthanIFRSperse.Adoptinganewsetofstandardscouldbeverycostlyforfirms,especially for the compliance: it is worth nothing if the organization does notincorporate in the rightway the new set of accounting principles. IFRS is consideredembeddedifitisusedforinternalreportingandifsystemsareadaptedtoautomaticallygeneraterequired information.Similarly, thedegreetowhichIFRS is integrated intheorganization is likely to affect compliance costs. Changing internal reporting andadapting IT systems are potentially costly. It is plausible that voluntary adopters thatperceive net benefits of IFRS aremore likely to embed IFRS in the organization thanresistersthatareforcedtocomplywithIFRS.Overall,theresultsforresistersgenerallyindicatemarginallymoreearningsmanagement, less timely lossrecognition,andevenreduced value relevance in the post-adoption period although most changes arestatistically insignificant. These findings are in sharp contrast to those reported forvoluntaryadoptersthatshowedareductioninearningsmanagementandanincreaseintimelylossrecognition(CHRISTENSENLEEWALKERZENG,2015,pp.57-59).Someacademics,giventheweakresultsoftheempiricalresearchaboutthebenefitsofIFRS adoption, have developed hypothesis explaining thewide use of this accountingframework and, mostly, the strong support received by many governments andsupranationalentities.ChuaandTaylor,forexample,statedthatthemostimportantreasonsforIFRSspreadingaround theworld have not been economical, rather social and political. IFRS confersinstitutionalized legitimacy because it possesses three characteristics required for aglobal governance tool: sponsorship by powerful interest groups/regulators,internationality and plasticity. Three key reasons for IFRS adoption are usuallyemployed: transparency, (increased) quality and comparability.On the first point, theauthorsnoted thatperiodic financial statementsare justone factorof the information

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setsusedtoassesstheperformanceofpubliclytradedfirms.Indeed,themostimportantsource of demand for financial reporting is likely to be the contracting role ofaccounting,ratherthanakeytoolforinvestmentevaluationbyoutsiders.Forthesecondtermutilized,thequalityofthefinancialreportingprocesshasusuallymoretodowiththeapproachofstandards’enforcementthanvariationinthestandardsthemselves.Itisalso tough to prove the outcomes of a change in accounting standards if theimplementation is not compulsory. Finally, the same reasoning could be used forcomparability:lotsofpracticalstudiesfocusedonthecomparabilityofotherproperties(e.g., value relevance and conservatism) rather than trying to outline and measurecomparabilityperse(CHUATAYLOR,2008,pp.464-467).Tosumup,theresearchershavenotedthatthemaineconomicjustificationsunderliningIFRS diffusion and adoption lack practical support. The emphasis was, therefore,addressedtotheroleofsocialandpoliticalfactors.Theyhavebeenplayinganimportantrole in clarifying the accountability for creating a set of international accountingstandards,aswellastheirdiffusion.Itseemsthatglobalgovernancetechnologiessuchas IFRSpersistasan instableanddelicatecombinationofdiversegoverningmanners.So,whilegovernmentsseemgraduallywillingtoauthorizecompulsoryadoptionofIFRSin their areas, they want to remain the final deus ex-machina of the IFRS adoptionprocess. Strong nation and supra-state agencies as the EU have already appropriatedthis right, implying that administrations could outsource the creation of IFRS if theyhave in their hand the final voice among their jurisdictions. The struggle betweendifferent regulatory groups probably confirm IFRS as a tool developed by politicalinterest of different stakeholders and by the governors of global business (CHUATAYLOR,2008,pp.471-472).A better accounting quality is perceived as one of themain benefit if a unique set ofaccountingworldwideisadopted.Someresearchersare,however,scepticalaboutthese“real” benefits, affirming that cross-country dissimilarities in accounting quality willpersist due to the accounting quality’s characteristics perceived as a function of thefirm’s overall institutional setting. Soderstrom and Sun have tried to summarize theimprovementsmadebyadoptingIFRSintwofactors:

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- changingaccountingframeworkwillincreaseaccountingquality,- the accounting system is complementary to the nation’s institutional system,

determinedbyfirms’motivationsforfinancialreporting.The interdependencebetweeneconomicand institutional factorswill, therefore,differthroughcountries(SODERSTROMSUN,2007,pp.675-684).

Figure19:DETERMINANTSOFACCOUNTINGQUALITYSource:SODERSTROMSUN,2007,p.688Theimageshowsaschematicframeworkdescribingdeterminantsofaccountingquality.IFRS adoption is going to affect financial reporting, but only due to one of thesedeterminants.Theotherswill,therefore,continuetodifferacrosscountries,limitingtheinternationalharmonizationandloweringtheeconomicbenefitsbroughtbyanewandhigherquality setof accounting standardsandprinciples.The imagemakes clear thataccounting harmonization has to be followed by changes in other environments thanjust IFRS adoption. However, reporting under a unique accounting frameworkmakesinvestorsmoreawareoftheadvantagesanddisadvantagesofthecompanies.Thelatterare, therefore, pushed to report truthfully because their information becomes morevaluerelevant.Thisprocessdoesnotproduceuniformresultsbecausesupplementaryinfluencessuchaslegalandpoliticalsystemsandincentivesoffinancialreportingmayinfluence earnings quality. Legal and political systems could affect accounting qualityindirectlythroughaccountingstandards.Thelatterareproducedbyapoliticalprocess,where standard setters are heavily influences by accounting users (tax authorities,

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banks, shareholders, managers and labour unions). The legal framework used in anation affects in turn accounting standards: in common law countries, they are setmostly by private organizations in order to satisfy private investor needs forinformation.Thisprocesswasdevelopedbytheideaoflawbaseduponissuesfromthecommon people. Code law countries follow, however, information demands of thegovernment,reflectingtheattitudeoftheadministrationtocontrolthesettingandtheinterpretation of laws. This extremediversification of legal systems caused in theEU,especially, different accounting systems and, consequently, different perceivedaccounting quality. Political systems influence, straightforwardly, accounting quality,too: political rent-seeking is very common where political systems are corrupt.Businessman and entrepreneurs have reasons to bribe politicians to seek favouritetreatmentand,consequently,thismotivatesthemtoomitsuchbehaviourfromfinancialstatements in order to elude political and social scrutiny. Moreover, companies innationswithagreater likelihoodofgovernment intrusionare likely reluctant to showhighprofitsinanefforttoavoidgovernmentexpropriation.Indirectlylegalandpoliticalsystemarelinkedtoaccountingqualitythroughfinancialreportingbenefits:theyregardboth supply and demand for information. One of them could be outlined as financialmarkets: the demand is originated by market participants and their need to reduceinformationasymmetry.Iftheycannotovercometheseproblems,theysimplyraisetheirinterestscausinghigherinvestmentcostsforfirms.Stockmarketscouldbebeneficialforinvestorsbecausetheyprotectthelatteragainstfirmswithpoorinformationdisclosure.Firm managers are, therefore, obliged to improve the quality of financial reporting.Moreover,legalandpoliticalsystemsaffectaccountingqualityindirectlythrough:

- financial market development, rules made up by financial market permit toattractmoreinvestors;

- capital structure, firmswith different financing needs have different incentivesforfinancialreporting.Forexample,divergencebetweencontrolrightsandcashflows, linkedtoconcentratedownership,discouragesnewstakeholderto investin a company. This happening is caused by an agency problem betweencontrollingandminoritystakeholders,generatingincentivestolowerdisclosureand to hide problems. In addition, controlling shareholders have incentives tosmoothearnings,becausetheyinvestwithalonger-termview;

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- ownership structures, legal system could be replaced by ownershipconcentration. If the ownership is less concentrated, especially minorityshareholdershavenottokeepaneyeonmajorityshareholdersandtheirlusttoexpropriate rights and, therefore, they aremore likely to invest. Governments’behaviourcouldalsoinfluenceconcentrationoftheproperty,especiallytryingtorent-seek;

- tax system, accounting quality could be influenced by the relation betweenfinancialaccountingincomeandtaxableincome.

Tosumup,accountingqualityafterIFRSadoptionisbasedonthreefactors:thequalityof the standards, a country’s legal and political system and financial reportingincentives.TheserelationscouldhidetherealeconomicbenefitsofIFRSadoptionsolely.Nowadays, no research, comprehending all of these factors, has been carried out(SODERSTROMSUN,2007,pp.688-695).Adoptingauniqueaccounting frameworkwill forsure increaseworldwide integrationof both markets and politics pushed by drops in communications and informationprocessing costs. However,mostmarket and political forceswill remain local for theexpected future, so it is very hard to forecast the convergence reachedby accountingstandardsandpractices.DespitethatabroadsetofhighqualityIFRSstandardshasbeendevelopedinordertoencouragealmostonehundredcountriestoimplementthemandto converge with essential non-adopters such as the US, problems with fair valueaccounting are foreseen. Moreover, there will be troubles especially with theimplementation,meaningthattheexpecteduniformityachievedwillbeveryweak:thenotion that uniform standards alone will produce uniform financial reporting seemsnaive.Potentialproblemslinkedtofairvaluecouldbeoutlinedas:

- spreadscausedby liquidmarketscouldadversely influencethevaluerelevanceoffinancialstatements;

- illiquidmarkets canbe easily controlledbymanagers, especially onprices andfairvalueestimates;

- fairvalueaccountinghasnotbeenalready tested insituationsof seriouscrisis.Specifically,ithasnotbeenwelltestedthereactionoflenderswhentheydiscoverthatfairvaluecouldmean“fairweathervalue”;

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- fair value accounting, when it deals with non-available liquid market prices,introducesestimatesandimperfections;

- fair value accounting increases opportunities for manipulation when “mark tomodel”accountingisusedtomimicmarketprices,becausemanagerscanaffectboththemodels’choiceandtheparameterestimates(BALL,2006,pp.12-13)

For what concerns the implementation and the linked uniformity, themotivations ofmanagersandenforcerspersistmainlyatadomesticlevel.Furthermore,powerfullocaleconomic and political forces regulate howmanagers, auditors, courts regulators andotherstakeholdersimpacttherules’implementation.Reachinguniformityinaccountingstandardsappearstobeeasyifitiscomparedtouniformityaccomplishmentsinactualreporting performance. The latter would require fundamental modifications in theunderlying economic and political forces that regulate actual conduct. Significantdimensions,whicharestillsubstantiallymorenationalthanglobal,incorporate:

- themagnitudeandtheenvironmentofgovernmentcontributionintheeconomy;- thepoliticsofgovernmentinvolvementinfinancialreportingpractices;- thelegalsystemsandthesecuritiesregulationandregulatorybodies;- thedepthoffinancialmarketsandthefinancialmarketstructure;- thepress’role;- thefinancialanalystsandratingagencies;- thesizeofthecorporatesectorandthestructureofcorporategovernance;- the extent of private versus public ownership of corporations, the extent of

family-controlled businesses, the extent of corporate membership in related-companygroups,theextentoffinancialintermediation;

- theroleofsmallshareholdersvs.institutionsandcorporateinsiders;- theuseoffinancialstatementinformationinmanagementcompensation;- thestatus,independence,trainingandcompensationofauditors.

Even if the economy goes always more global, most of the economic and politicalactivities involved in IFRS adoption remain confined in national borders for thepredictable future. Moreover, troubles are originated because the IASB is only astandard-setter, not having both an enforcementmechanism to its standards and the

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willingnesstofindasolution.Individualcountriespersisttobesupervisorsoftheirownfinancial markets, EU member countries too. That lets IFRS to the danger ofimplementationinnameonly.Worldwideregulatorybodies,astheIAASB,IFAC,IOSCO,PIOB and CESR, are seen just as toothless watchdogs, despite recent attempts tostrengthenthem(BALL,2006,pp.14-17).Supporters of IFRS have not considered that some of the benefits analysed are notintended, caused by luck or by chance. As a matter of fact, Brueggeman, Hitz andSellhorn stated that unintended effects, rarely studied and quantified, are originatedbecausenationalGAAPscannotbefullyreconciledwithIFRSregulation.Thedifferencelaysdowntothedistinctionbetweentheinformation(orvaluation)andcontracting(orstewardship) roles of accounting. It is, therefore, difficult to appreciate clearly anincrease in the comparability or transparency of financial statements. The positiveeffects on capital markets and at the macroeconomic level are easier to evaluate.However,unintendedresultsof IFRSadoption lacksupportandsignificantresearches.Then,theauthorsprovidetwopossibleexplanationsaboutthewarmintendedresultsofIFRSadoption.Anunderestimation is likely tooccurbecause theaccountingeffectsofmandatoryIFRSadoptionrelateonlyonaggregatemeasuresthatcaptureapartialclassof potential variations in financial reporting. Furthermore, there is likely to be anoverestimationamongcapitalmarketandmacroeconomiceffectsbecause it isdifficultto detach them from outcomes unconnected to financial reporting (BRUEGGEMANNHITZSELLHORN,2013,pp.1-12).Two limitations, not regarding solely IFRS adoption butmore the assessment of realdirect benefits, can be spotted in different firms’ incentives and environments. It hasbeenobservedthat,duringthevoluntaryapplicationofIFRS,theincentivescouldhavechanged between the pre- and post-adoption periods. The fact that firmsmight haveadoptedIFRSaspartoftheirresponsetochangesinincentivescouldindicatethateitherdomestic standards did not permit them to reveal their higher accounting quality, ortheyadoptedIFRStosignal theirhigheraccountingqualitybecausetheybelievedthatthe market perceived IFRS as higher quality than domestic standards. Both of theseexplanationsareconsistentwithIFRSbeingassociatedwithhigheraccountingquality.Anyway, regarding economic environment, firms may have adopted IFRS only toanticipateamandatoryadoptioninthenearfuture(BARTHLANDSMANLANG,2008,pp.467-472).

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IFRS offers some flexibility in application, assumed the clear and implied optionsencompassed in thestandards,discretion in interpretations,andneed forestimates tocompanies. Subsequently, the application of IFRS may differ from one company toanother,or fromonenationtoanother.Thus, it isuncertainwhetherIFRSareappliedreliably,i.e.whethertheharmonizationofaccountingguidelinesintheEUalsohasledtoharmonizedaccountingpractices.Country-specificfactorsaffecttheapplicationofIFRSinconsolidatedaccountsforseveralreasons(HALLERWEHRFRITZ,2013,pp.39-41).Examining whether publicly traded German and UK companies preserve nationalaccountingtraditionswhenpickingIFRSoptionsintheirconsolidatedaccountsin2005and 2009 have provided noteworthy confirmation that, when organizations embraceIFRS, they tend to endure with accounting policies needed or mostly chosen undernationalGAAP.Furthermore,thestudyimpliesthataccountingpolicychoiceunderIFRSdiffersbetweenGermanyand theUK forquestionswhere theirownnationalGAAP isdissimilar.Lastly,therehasbeennosigninmostcasesthateitherindustryorearlyIFRSadoption (in Germany) drive policy choice considerably. These results denote that inspite of harmonized accounting standards, comparability of financial reporting ofpubliclytradedfirmsacrosstheEUmaybeadverselyinfluencedbythecontinuedeffectof country-specific factors. Standard-setters should, consequently, tackle thisharmonization matter to develop comparability of financial reporting across nations.Eliminating or diminishing explicit options comprised in IFRS would be a politicaloption to lessen variances and endorse comparability (HALLERWEHRFRITZ, 2013, p.55).

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3 BrovedaniGroupSPA

Figure20:THEHEADQUARTERSOFSANVITOALTAGLIAMENTO(PN),ITALYSource:http://www.ilfriuli.it/writable/images/brovedani.jpgThischapterintroducesthecasestudyofBrovedaniGroupSPA.Afterabriefoverviewon company's history, it will be analysed the internationalization path of the group.Finally,theworkwillfocustowardsfinancialreportingandtheimpactofapossibleIFRSadoption.

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3.1 Historyofthegroup

Figure21:HISTORICALKEYPOINTSSource:BrovedaniinternalmaterialsIn 1947, in Pordenone, Silvio Brovedani founded a small workshop. Local firms asZanussi and knives’ manufacturers of Maniago (PN) were the main customers. Theguidelines, since its foundation, were related to the pursuit for high-precisionmechanical solutions. In 1972 the little companywasbought by a society foundedbyBenito Zollia and Felice Macuz. They wanted to give a new impulse to the companythrough the combination of their personal assets and experiences gained during thepreviousactivities.In1975Brovedanibecamealeadingcomponents’manufacturerforheatingelementswhile, thenextyear, thecompanymoved toSanVitoalTagliamento(PN) to improve its customer base and its production capacity. In 1978 the companystarted the production of automotive components and the following year became aproviderofPiaggio.Sincethe80’s,thecompanyhastheopportunitytoputintopracticeits technological expertise, becoming the components’ supplier of IBM: for two

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consecutiveyears,thecompanyreceivedfromIBMthecertificateofbestsupplier.InthesecondhalfoftheeightiesBrovedanistartedanintensecollaborationwithproducersofcomponents for the automotive sector, which have been playing an increasinglyimportant role in the worldwide economy. To support these relationships, it wasdecidedtoinvestheavily inordertocreatededicatedandautomatedproductionlines.The importance of the relationshipwith the automotive industry is also linked to theprofound and radical changes of the computers’ industry. The electronic componentswerebecomingmoreandmoreimportantthanmechanicalones,pushingBrovedaniinamarginalrole.Thehouseholdappliances’sector,therefore,providedlittleguaranteeoflastingprofitsbecauseitcouldbeeasilyattackedbycompetitors.itwasnotplacedinthefirstfirms’targets.Thestrategyadoptedhasledtogreatresultsnowadays:

- 40%ofthe75millionCommonRailDieselsystemsproducedworldwidecontainBrovedanicomponents;

- 50%ofthecarsproducedinEuropeareequippedwithBrovedani’smotorshafts.In the nineties, the company began to change its management and productionphilosophy:thenewmottois“qualityiscreatedanditisnotcontrolled”.Thisshifthaspermitted Brovedani to acquiremany important certifications as ISO 9002, QS 9000,VISION 2000, ISO TS 16949 and ISO 14001. In the same period, its customer baseincrease:havingclosetieswithMagnetiMarelli,SiemensandBosch,thecompanybeganthe production of the first module for Common Rail Diesel systems in 1998.Furthermore,Brovedanihadtoopentwonewplantstomeettheever-growingdemand:BariandPisawerechoseninordertostrengthentieswithBoschandMagnetiMarelli.In2000 components for the Common Rail Diesel started to be produced also for othergroups around the world. In these years, new technologies were developed. Someproduction lines were moved from San Vito al Tagliamento to Bari, especiallycomponentsofcommonrail injectionpumps. In2001, theproductivitywas increasingso much to force the company to acquire Depoisier Gervex (Marnaz-France), aspecializedinmechanicalcomponentslocatedin"thevalleyofmachining"andtomovethe plant from Pisa to Guasticce, Livorno. Even in San Vito another plant specializedmainly in the production of treeswas opened. In addition, Brovedaniwas chosen byEaton as a strategic supplier for the outsourcing of automotive components. In 2004

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BrovedanibecameaDieselsteeringsystems’supplierofDelphi,pushingthecompanytoincrease their investments. In 2005 a new plant in Galanta (Slovakia)was opened inorder to meet the ever-increasing demand of Eastern Europe. Four years later,Brovedani decided to create a joint venture with the Mexican company Reme(Brovedani75%,Reme25%).Thenewcompanywascreatedtorespondtothegrowingdemand in the field of precision mechanics in the American market. Nowadays,Brovedani Group comprises 3 companies and 6 production units: it functions inaccordance with shared guidelines and well-known values, resulting from a commoncultureandhistory.

Figure22:BROVEDANIGROUPTODAYSource:Brovedaniinternalmaterials

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Figure23:BROVEDANI’SPRODUCTIONFACILITIESSource:BrovedaniinternalmaterialsThemost importantkeyvaluesareitsorganizationanditscreativity,asdemonstratedbytheextraordinaryimprovementsthegrouphasbroughttothefieldofmechanicsforB2B, fromthe idea to the finalproductand fromthe teamdevelopmentofproductionprocesses to their industrialapplications.This innovativespirithascontributed to thesuccess of the Brovedani Group, which has become an essential supplier formultinationalfirmssuchasBosch,Continental,Daimler,Delphi,Eaton,Magna,MagnetiMarelli, Sanden, VCST and others. The Group has invested heavily in advancedmanufacturing and control systems for the mass production of technologicallysophisticatedmechanicalcomponentswithhighstandardsofquality.What’smore,theGroup’s advanced engineering services develop dedicated product-processes in areasthat include the design and construction of custom-built machines with integratedmultipletechnologiesandthemanagementofproductionlinesforoutsourcedproducts.As a result, Brovedani is a reliable, world-class partner offering a problem-solvingapproach to meeting the customer’s needs. Brovedani’s vast experience serves aworldwidemarketofprestigiouscustomerswithflexibilityandconstantinnovation.TheGroup’s products embrace a range of applications that include automobiles, electricalappliances, motor vehicles, building construction materials, hardware, and others. At

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present, its core business is the production of high quantities of components forautomotive use, including specialized solutions for injection pumps and for bothgasoline,directinjectionanddieselcommonrailsystems.

Figure24:BROVEDANI’SPRODUCTSSource:BrovedaniinternalmaterialsThemissioncouldbesummarizedas:

“Weareabletoapplyexcellencemethodologytorealizehighprecisionmechanicalpartsand assure the highest quality standards to produce low and high volumes. Ourflexibility, willingness to grow, interdisciplinarity, sharing of values and presence in

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many parts of the world assure a borderless partnership for our customers”(http://www.brovedanigroup.com/?page_id=455).

Whilethevisionis:

“A leadingcompanysupplyingsolutionsbasedonstateof theart technologies,presentall over the world where precision mechanics is a critical success factor. A companyfirmlyrootedinitshistoryandproudofitsvalues,madeupofpeopleabletogrowandjoin, open to new experiences and cultures to win the future”(http://www.brovedanigroup.com/?page_id=455).

ClientsandvaluechainCustomersatisfactionarecentralspointonwhichthecompanyfocuses its interests and energies, representing the reason behind its quest forcontinuousimprovement.

Figure25:THEACTUALCUSTOMERBASESource:BrovedaniinternalmaterialsThe dedication, creativity, innovation and professional ethics in which it intends toprogress,with the fullest involvement of its suppliers, is the basis of its TotalQualityproject,aimedatbringingaconstantseriesofadvantagestotheentirevaluechaininaspiritoftruepartnership.Everyemployeeisofferedthepossibilityofexpressinghis/hercultural,intellectualandhumanpotentialinacontextofequalopportunitiesandwhere

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differences are respected. This means encouraging teamwork between people andgroups and the development of individual leadership, with a human resource policyfocusedonlisteningtopeople,onconfidentiality,onthequalityofwork,ontraining,onprofessionalandcareerdevelopment,onevaluationandrecognition,makingitpossibleto delegate evermore responsibility to themost competent andmotivated resources.The organizational context should constitute the most congenial background for thesmoothintegrationoffunctionsandskillsorientedtowardssharedobjectives.

Figure26:BROVEDANISTRATEGYSource:Brovedaniinternalmaterials3.2 PathtointernationalizationIn the previous section, the path, leading Brovedani to be a global company, waspresented.Thissectionwill,instead,explainthereasonsbehindthecompanystrategiesand location choices. It is important to denote that the company has adopted aninternationalizationstrategyandnotofrelocation.Thischoicehasbroughtadvantagesnotonlyincountrieswherethecompanyhasinvested(SlovakiaandMexico),butalsoinItaly:bothsalesandhiringrateshavesteadilyincreased.

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Figure27:SUPPLYCHAINAUTOMOTIVEINDUSTRYSource:BrovedaniinternalmaterialsTheevolutionoftheautomotiveindustryhasledtothenaturaldivisionintothreemainareas:Asia,Europe,America.Thelattercouldbedividedatthemicrolevel inlow-costand high-cost countries. Tier-1 has adapted itself in order to follow the worldwidedevelopmentofOEMs,forcingTier-2toadoptamodelinwhichthecomponents’supplytakes place exclusively at the local level while themarket of finished goods and rawmaterials have remained globally. So, while the transfer of a component takes placelocally, i.e. inside the macro-areas, that of finished products and of raw materials itoccurs,asseeninFigure,evenglobally,includingmacro-areas.

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Figure28:THEGLOBALPRODUCTIONTRIADSource:BrovedaniinternalmaterialsA components’ supplier, as Brovedani,must have a physical presence in everymacroarea if it intends to develop itself outside of Europe in order to meet the needs ofcustomersoperatingondifferent continentsand topenetratenewmarkets.Often, thecustomersencouragesupplierstopositionthemselvesclosetothem.BoschisthelargestcustomerofBrovedani.Itsstrategyistoacquirealmost70%ofthevolumestopreferredsuppliers, pushingBrovedani to remain one of the top suppliers of this hugeGermanmultinational. In recent years, the automotive industry’s value chain has undergoneseveral changes. The OEMs have changed their needs, outsourcing some of theiractivities to their suppliers. In addition, more skills, investments and capitals arerequired:onlythose,whocanhandletheserequirements,areabletosurvive.Tier-1andTier-2 suppliers are increasingly becoming more fundamental: they are decreasingcontinuously,providingin2015adecreaseof50%ofthesupplierscomparedto2000’snumbers.Thelasttwopicturessuggestthatacomponents’supplier,wantingtosurviveand to prevail, must firstly be competitive in its domesticmarket, and then it has tochoose in a low-cost country’s location in order to exploit the advantages offered.Afterwards, it has to head to the global market, choosing and locating in those newmarketswhereitispossibletoconsolidatetherelationshipswiththeiroldclientsandtomeettheneedsofnewones.

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Figure29:THEAUTOMOTIVEINDUSTRY’SNUMBERSSource:Brovedaniinternalmaterials3.3 INTANGIBLES’RECLASSIFICATION

Brovedanihasbecomeawell-knownsupplierintheautomotiveindustry,tryingtouseitsknow-howandcompetenciesalsoinothersectors(thisisveryclearwhileobservingitshistory).Evenif itsufferedthefinancialcrisisespeciallyin2009(thepurchasingofautosarecloselyrelatedtotheconsumers’ income), ithasbeenabletorecoverandtobecome more powerful and conscious of its abilities. In 2015, it surpassed thepsychologicalbarrierof1.000employeesand100€Millionofturnover.Asitispossibletoappreciatefromthepicturebelow,evenifBrovedanioperatesinamaturemarkettheturnover has been always moderately growing. Investments have, however, beenfluctuatingbecausetheyarerelatedmainlytobusinesschanges(forexample,aftertheDiesel-Gate,theproductionofinjections’systemsshiftedfromDieseltogasoline)andtocustomerorders(inordernottolosethestatusof“preferredprovider”thesuppliersarealmostobligedtoaccepteveryprojecttheclientsask).

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Figure30:BUSINESSOVERVIEWSource:BrovedaniinternalmaterialsThe organizational chart used in Brovedani is one of themost popularmodel amongmanagement: the hierarchical structure. Employees are gathered having one clearsupervisor.Thegroupingisdonebasedon:

- function, employees are clustered according to the function they deliver.Examplescouldbefinance,technical,HR,sales,supplychainetc.;

- geography,employeesaregatheredbasedontheirarea/country(Italy,Slovakia,Mexico);

- product/client, especially due to production requirements, some offices aregatheredinordertofollowoneormoreproducts/clients(sales,purchase).

This is the dominant approach among large organizations. There are, however,manychallengeswiththismodel.Communication,typically,flowsfromthetoptothebottomwhich means innovation stagnates, engagement suffers and collaboration is virtuallynon-existent. This type of environment is riddled with bureaucracy and is extremelysluggish. The greatest strength and, at the same time, the greatest limitation is thestrong resilience: it is very reliable in order to maintain the status quo, but also soembeddedwhenacompanydecidestogetridof it.This iswhy,Brovedani istryingto

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empowereverycompanyleavingalwaysmorepowerlocallytothethreesocietiesandembracingtheleanstrategy.

Figure31:ORGANIZATIONALCHARTSource:BrovedaniinternalmaterialsTheorganizationalchartisfollowingareshoringstrategy:theaimistoproducelocallytheproducts.ItalywillserveclientsinWesternEurope,SlovakiainEasternEuropeandMexico in the Americas. The reason behind this choice could be traced back to thewillingness tobecloser to itscustomers, tohaveproduction facilitiesadjacent tocoremarkets, tosecureshort leadtimesandtoofferworld-classservicetoconsumers.Themostcompellingreasonsfordoingsoare,therefore,togainmarketaccess,proximitytodemandandmoreR&D.Brovedaniwillonlyaddproductioncapacityincertainlocationsifitmakessenseforcustomersandforthebusiness,changingthestrategyfrom“LocalforGlobal”to“LocalforLocal”.

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Figure32:GLOBALSTRATEGYSource:BrovedaniinternalmaterialsOne way to support achieving these goals is to adopt a new, high valued andinternationalaccounting framework.Beforestarting to forecastpossibleeffectsof thisshift in a medium multinational firm as Brovedani, it is important to outline theaccountingflows:

- everysocietyhasonefinancialcontrollerwhosupervisesmanagementflows;- everysocietyhasitsownadministrativeoffice,managingtheinvoices’ flowand

preparingthefinancialstatementsaccordingtoitsnationalaccountingcriteria;- the Chief Financial Officer works in Italy, being responsible to coordinate the

societiesandtheinformationflowsbetweentheGroupandthestakeholders;- theconsolidatedfinancialstatementispreparedbytheCFOfollowingtheItalian

GAAP; the data is gathered using an enterprise software (ESP), adopted in themid-2000sinordertomanagebusinessoperationsandcustomerrelations.Thesystem provides data in Euro while intracompany sales and purchases aredeleted.Theconsolidationadjustmentsare,therefore,madebothbytheESPandboth,manually,bytheCFO.

In order to esteem the impact of IFRS adoption, itwas decided to reclassify the item“intangibles” and to compare them with national and international benchmarks.Intangibleswerechosenbecause,especiallyforItalianaccountingenvironment,areverysensibletoprinciplesandstandardschanges.Theanalysis,obviously,takesintoaccountthat Brovedani Slovakia and Brovedani Reme Mexico are not fully owned. The

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companiesincludedintheconsolidationand,inadditiontotheparentcompany,fortheperiodended31December2015arethefollowing:

- "Brovedani-S.p.A.-"100%owned;- "BrovedaniSlovakias.r.o."75%owned;- "BrovedaniRemeMexicoS.A.deC.V."66.26%owned.

Theapplicationof internationalaccountingstandardsfor intangibleassetsmaytriggersignificant changes. Intangible assets may be incurred if, and only if, they areattributable to future economic benefits. The consequence of this new valuationprincipleisthemovementofsuchitemsasthe"installationcosts"fromthecategoryoflong-term costs to the operating costs because they lack clear "future economicbenefits".Itispreferred,therefore,themarketcorrelation.

BROVEDANIGROUP-S.p.A.BILANCIOCONSOLIDATO(inunitàdiEuro)

ATTIVO 31.12.2015 31.12.2014

A) CREDITIVERSOSOCIPERVERSAMENTIANCORADOVUTI - -

B) IMMOBILIZZAZIONI

I Immateriali

1) Costidiimpiantoeampliamento 3.243,36 5.540,71

2) Costidiricerca,disviluppoedipubblicità 1.888.419,98 1.377.141,24

3) Dirittidibrev.ind.ediutilizzazionedelleoperedell'ingegno 6.720,08 1.937,57

4) Concessioni,licenze,marchiedirittisimili 75.390,76 88.572,46

5) Avviamentoedifferenzadiconsolidamento 234.702,04 312.936,05

6) Immobilizzazioniincorsoeacconti 626.661,94 289.874,41

7) Altreimmobilizzazioni 386.916,56 1.538.549,02

TotaleImmobilizzazioniImmateriali 3.222.054,72 3.614.551,46

II Materiali

1) Terreniefabbricati 16.105.027,49 16.749.729,06

2) Impiantiemacchinario 44.231.820,13 41.381.865,89

3) Attrezzatureindustrialiecommerciali 1.154.480,21 1.289.359,80

4) Altribeni 454.074,45 589.743,53

5) Immobilizzazioniincorsoeacconti 5.782.961,41 6.595.238,77

TotaleImmobilizzazioniMateriali 67.728.363,69 66.605.937,05

III Finanziarie

1) Partecipazioni:

a) -inimpresecontrollatenonconsolidate - -

b) -inimpresecollegate 411.166,67 411.166,67

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-inimpresecontrollanti - -

d) -inaltreimprese 12.621,25 10.621,25

2) Crediti

-versoimpresecontrollatenonconsolidate - -

-versoimpresecollegate - -

-versoimpresecontrollanti - -

d) -versoaltri - -

TotaleImmobilizzazioniFinanziarie 423.787,92 421.787,92

TotaleIMMOBILIZZAZIONI 71.374.206,33 70.642.276,43

C) ATTIVOCIRCOLANTE

I Rimanenze

1) Materieprime,sussidiarieediconsumo 6.082.545,21 6.394.632,55

2) Prodottiincorsodilavorazione 3.408.460,52 2.489.656,39

3) Lavoriincorsosuordinazione 348.852,56 138.401,16

4) Prodottifiniti 2.839.143,56 2.657.974,74

5) Merceinviaggio 108.891,00 498.014,90

TotaleRimanenze 12.787.892,85 12.178.679,74

II Crediti

1) Versoclienti(esigibilientrol'eserciziosuccessivo) 7.759.127,08 5.105.798,83

2) Versocontrollatenonconsolidate(esigibilientrol'eserciziosuccessivo) 1,00

3) Versocollegate(esigibilientrol'eserciziosuccessivo) - -

4) Versocontrollanti(esigibilientrol'eserciziosuccessivo) - -

4)-bis Tributari 1.713.269,07 1.791.209,36

4)-ter Perimposteanticipate 2.426.015,72 1.847.820,85

5) Versoaltri

-esigibilientrol'eserciziosuccessivo 667.893,49 581.519,91

-esigibilioltrel'eserciziosuccessivo 247.659,44 178.934,43

TotaleCrediti 12.813.964,80 9.505.284,38

III Attivitàfinanziariechenoncostituisconoimmobilizzazioni

6) Altrititoli - -

- -

IV Disponibilitàliquide

1) Depositibancari 24.188.833,45 17.657.799,48

2) Cassa 8.496,31 16.698,14

TotaleDisponibilitàliquide 24.197.329,76 17.674.497,62

TotaleATTIVOCIRCOLANTE 49.799.187,41 39.358.461,74

D) RATEIERISCONTI

I Rateiattivi 202,37 873,52

II Riscontiattivi 513.949,78 369.629,57

TotaleRATEIERISCONTI 514.152,15 370.503,09

TOTALEATTIVO 121.687.545,89

110.371.241,26

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PASSIVO 31.12.2015 31.12.2014

A) PATRIMONIONETTO

I Capitalesociale 8.736.000,00 8.736.000,00

II Riservadasopraprezzodelleazioni 9.334.000,00 9.334.000,00

III Riservedirivalutazione - -

IV Riservalegale 801.895,95 655.995,01

V Riservestatutarie - -

VI Riservaperazioniproprieinportafoglio - -

VII Altreriserve -2.996.800,57 -1.825.505,70

Riservaoscillazionecambi - -

Riservastraordinaria - -

Riservautilisucambi - -

Fondocontributistatalieregionali - -

Altreriserve - -

TotaleAltreriserve - -

VIII Utili(perdite)anuovo 6.845.040,07 5.946.131,25

IX Utile(perdita)dell'esercizio 1.251.580,18 746.864,16

TotalePATRIMONIONETTODELGRUPPO 23.971.715,63 23.593.484,72

X Capitaleeriservediterzi 5.875.000,00 4.849.700,00

XI Utile(perdita)dell'esercizioditerzi - -

TotalePATRIMONIONETTODITERZI 5.875.000,00 4.849.700,00

TotalePATRIMONIONETTO 29.846.715,63 28.443.184,72

B) FONDIPERRISCHIEDONERI

1) Fondotrattam.tofinemandatoAmministratori 456.592,16 437.992,16

2) Fondoperimposte,anchedifferite 1.478.461,89 1.329.988,09

2) Fondorischisucambi - -

3) Altrifondiperrischi 621.399,00 324.700,00

TotaleFONDIPERRISCHIEDONERI 2.556.453,05 2.092.680,25

C) TRATTAMENTODIFINERAPPORTOLAVOROSUBORDINATO 2.437.767,96 2.619.012,35

D) DEBITI

1) Obbligazioni

-conscadenzaentrol'eserciziosuccessivo - -

-conscadenzaoltrel'eserciziosuccessivo - -

TotaleObbligazioni - -

3) Debitiversobanche

-conscadenzaentrol'eserciziosuccessivo 20.433.408,17 19.080.521,19

-conscadenzaoltrel'eserciziosuccessivo 35.026.110,88 22.190.451,16

TotaleDebitiversobanche 55.459.519,05 41.270.972,35

4) Debitiversoaltrifinanziatori


-conscadenzaoltrel'eserciziosuccessivo 3.524.833,23 5.852.521,17

TotaleDebitiversoaltrifinanziatori 5.546.361,11 7.728.821,47

5) Acconti

-conscadenzaentrol'eserciziosuccessivo

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6) Debitiversofornitori:


8) Debitiversoimpresecontrollatenonconsolidate:


9) Debitiversiimpresecollegate:


10) Debitiversiimpresecontrollanti:


11) Debititributari

-conscadenzaentrol'eserciziosuccessivo 856.524,43 1.233.683,10


TotaleDebititributari 856.524,43 1.233.683,10

12) Debitiversoistitutidiprevidenzaesicurezzasociale



TotaleDebitiversoistitutidiprevidenzaesicurezzasociale 1.040.848,38 1.065.306,54

13) Altridebiti


-conscadenzaoltrel'eserciziosuccessivo -

TotaleAltridebiti 3.188.325,51 3.784.278,40

TotaleDEBITI 86.769.088,81 77.111.596,29

E) RATEIERISCONTI

Rateipassivi 72.677,48 104.721,37

Riscontipassivi 4.842,96 46,28

TotaleRATEIERISCONTI 77.520,44 104.767,65

TOTALEPASSIVO 121.687.545,89 110.371.241,26

Table8:BROVEDANI’SCONSOLIDATEDBALANCESHEETSource:Brovedaniinternalmaterials

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Theworkwas focused on reclassifying intangibles following IFRS and OICC (nationalItalianGAAP)inordertoappreciatethechange.B) ASSETS OICC Reconciliation IFRSI Intangibles 1) Expansioncosts 3.243,36 (3.243,36) - 2) Research,DevelopmentandAdvertisingcosts 1.888.419,98 (276.502,23) 1.611.917,75 3) Intellectualproperty 6.720,08 - 6.720,08 4) Grants,licenses,trademarksandsimilarrights 75.390,76 - 75.390,76 5) Goodwillandconsolidationdifferences 234.702,04 - 234.702,04 6) Assetsinconstruction 626.661,94 (12.147,24) 614.514,70 7) Otherassets 386.916,56 (227.833,80) 159.082,76 TotalIntangibleAssets 3.222.054,72 (519.726,63) 2.702.328,09

Table9:INTANGIBLEASSETSFOLLOWINGITALIANGAAPANDIFRSSource:BrovedaniinternalmaterialsInordertoreclassifytheitems,SAPtransactionsas“ZCESPITI”and“S_ARL_87012284” wereusedinordertodigintotheassetbook(librocespiti)andtoshowtheconsolidatedbalancesheet.IAS 38 regulates intangible assets: to be defined as intangible and non-monetary, anasset without physical substance has to be identifiable, controlled and capable ofgenerating futureeconomicbenefits. Identifiably is theabilityofan intangibleasset tobeclearlydistinguishedfromgoodwill,namelytobe:

- separable, be unbundled from the entity and, therefore, sold, licensed, rented,etc.;

- arisingfromcontractualorotherlegalrights.

Thesecondabilityiscalledcontrolbecausetheentityhastoprovethatwiththetargetassetitcouldobtainfutureeconomicbenefits.Itisgenerallyevidencedbythepresenceof a legal protection activity. The third abilitymay include revenues from the sale ofproducts/services and/or cost savings. IAS 38 does not provide a classification ofintangibleassetsnorarigidschemeofclassification.TheonlyindicationisprovidedbyIAS1:theminimumcontentofthecompany’sfinancialpositionistoreportseparatelytangible and intangible assets. Expansion costs do not meet the requirements to beconsideredasintangibleassetsandtheyhave,therefore,tobeexpensedintheincome

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statement. Thus, they are deleted from theBrovedani’s balance sheet. Following IFRSdiscipline, advertising and research costsmust be expensed in the income statementwhentheyareincurred.Fortheformercosts,itisveryeasybecauseBrovedanidoesnotbear any advertising costs while the latter costs have been deleted from the balancesheet: theamount reconciledrefers to the researchofahypodermicnebulizer, adrugdelivery device used to administermedication in the form of amist inhaled into thelungs. The remaining costs are all linked to development in which it is possible todemonstrate the technical feasibility, their intention and their economic and financialcapacity to complete the intangible asset so that it is available for use or sale, theirability to use or sell the intangible asset and how the intangible asset will generateprobable future economic benefits. Moreover, they are distinguishable from theresearchphase:onthecontrary,allcostsmustbeexpensedintheincomestatement.

Definizionedelcespite ValorecontabileresiduoSVILUPPOBOSCHMANTELLO2.5 17.438,90SVILUPPOBOSCHPISTONEPOMPACP4 3.740,66SVILUPPOSPESSORISCANIA 11.891,49SVILUPPOALBERODILANCIOC7X 26.891,92SVILUPPOFITTINGRAILBOSCH 4.503,73SVILUPPONUCLEOINTERNOBOSCH 39.721,76SVILUPPOSUMOTOREENDOTERMICO 395.328,59SVILUPPOSULETTOFLUIDO 179.220,38SVILUPPODENSONOZZLE 259.023,62SVILUPPOBOSCHCRCAPPELLOTTO 181.629,17SVILUPPOMAGNAROTOREPOMPAOLIO 6.986,01SVILUPPONEBULIZZATOREIPODERMICO 276.502,23SVILUPPODELPHIIBINJECTORBODY 140.250,75SVILUPPOHIDRIAMEMBRANA 10.092,69SVILUPPOTAPPOPIATTOPCRs5 86.050,19SVILUPPOPISTONEPOMPAMARELLI 188.921,03SVILUPPOO-RINGADAPTERCONTINENTAL 31.020,84SVILUPPOSISTEMIDIPULIZIAELAVAGGIO 29.206,02

1.888.419,98

Table10:RESEARCHANDDEVELOPMENTCOSTSSource:BrovedaniinternalmaterialsOntheleftside,itispossibletoseetheassets’definition,while,ontherightside,theirresidualbookvalue.Inred,nebulizercostsaredisplayed.Brovedanibearsdevelopment

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costsbecausetheprojectsareallagreedwiththecustomersandare improvementsofotherproducts.No problems have arisen from the reclassification of intellectual property, grants,licencesand trademarks.Theycouldbeaccountableas intangibleassets if they followthe general requirements: identifiability, control, future economic benefits anddeterminabilityofthecost.Moreover,trademarkscouldbeaccountableonlyiftheyarepurchased.Goodwill, if it is generated internally, has to be deleted from the balance sheet andexpensed in the income statement. In the Brovedani’s balance sheet, goodwill isgeneratedbythepurchaseofBrovedaniRemeMexicoanditscompetencies:since it isgenerated by a business combination, it may be included in the balance sheet as atangible asset (IFRS 3). Assets in construction are mainly development and researchcosts:researchcostshavebeeneliminated.

Definizionedelcespite ValorecontabileresiduoSviluppoProgettoHidria 9.577,74SviluppoProgettoDelphiArmatureBR01 2.194,61SviluppoProgettoCBIPistoneAPB-Mi 3.669,05SviluppoProgettoDelphiOutletFitting 2.277,62SviluppoProgettoHidriaBR02 104.474,64SviluppoProg.PolePieceKovomoBR01 85,70SviluppoProgettoPintelDelphiBR02 3.520,26SviluppoProgettoValveBodyThick 1.669,21SviluppoProgettoMandoPistoniant.BR04 400AdeguamentoSalaRiunioneBR05 136.141,53Risanamentoareacromaturamq85 323.336,13Implementaz.funzionalitàSAPSEPA 39.315,47

626.661,94

Developmentcosts 614.514,72

Researchcosts 12.147,24Table11:ASSETSINCONSTRUCTIONSource:BrovedaniinternalmaterialsOntheleftside,itispossibletoseetheassets’definition,while,ontherightside,theirresidualbookvalue.Inred,researchcostsaredisplayed.Toconclude,theresidualitem“otherassets”hasbeenanalysed:

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BrovedaniSPA 7)Altre ONERIPLURIENNALI 22.221,96SPESERINNOVOSUBENIDITERZI 175.675,16RICERCAFONTIDIFINANZIAMENTOEAPPROV. 11.581,38

BrovedaniGroup(holding) 7)Altre SPESERINNOVOSUBENIDITERZI 13.424,90RICERCAFONTIDIFINANZIAMENTOEAPPROV. 27.152,36

BrovedaniSlovakia 7)Altre SOFTWAREAPPLICATIVI 7.716,60

BrovedaniRemeMexico 7)Altre ONERIPLURIENNALI 129.144,20

Reconciliation 227.833,80Otherassets(afterreconciliation) 159.082,76

Table12:BROVEDANI’SOTHERINTANGIBLEASSETSSource:BrovedaniinternalmaterialsOneripluriennaliaredeferredchargeslinkedtodevelopmentcosts:

BrovedaniSPADefinizionedelcespite Val.cont.res.

SERVIZIOEDIFATTURAZIONEAICLIENTI 2.144,26ESTENSIONECONTR.BOSCHDEMANTELLO1012015-2017 20.077,70

22.221,96

BrovedaniRemeMexicoDefinizionedelcespite Val.cont.res.

RESEARCHANDDEVELOPMENTMAGNETCUPBOSCH 11.171,97RESEARCHANDDEVELOPMENTTHROTTLESHAFTMARELLI 1.358,19RESEARCHANDDEVELOPMENTTHROTTLESHAFTMARELLI 4.264,57IMPLEMENTACIONFACTURADORAUTOMATICOTRALIX 214,22RESEARCHANDDEVELOPMENTOUTERARMEATON 8.214,78RESEARCHANDDEVELOPMENTOUTERARMEATON 9.365,48RESEARCHANDDEVELOPMENTOUTERARMEATON 20.347,09

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RESEARCHANDDEVELOPMENTFITTINGRAILBOSCH 20.120,24RESEARCHANDDEVELOPMENTFITTINGRAILBOSCH 8.629,17RESEARCHANDDEVELOPMENTTHROTTLESHAFTCOOPER 8.281,36PROJ.DEVELOPMENTCONNECTIONPLATECONTINENTAL 6.232,24PROJ.DEVELOPMENTCAMIDLERNEXTEER 835,63PROJ.DEVELOPMENTFITTINGPUMPBOSCH 20.033,73SPRINGDISKBOSCHPROJ.DEVELOPMENT 10.075,54

129.144,20

Deferredchargeslinkedtodevelopmentcosts 151.366,16Table13:DEFERREDCHARGESLINKEDTODEVELOPMENTCOSTSSource:BrovedaniinternalmaterialsSincealldeferredchargesfollowtheIFRSrequirements,theycanbecapitalized.Spesedirinnovosubeniditerziaremaintenancecostslinkedtoleaseholds:IFRSpermitstheircapitalization as tangible assets. They have been, therefore, deleted from otherintangibleassets.Toconclude,ricercafontidifinanziamentoeapprovigionamentohavebeendeleted, too: theyare linked toexpansioncosts, forbidden in the IFRSdiscipline.Softwareapplicativiarecosts linkedtoapplicationsoftware’s licences: they followthegeneral capitalization rules (identifiability, control, future economic benefits,determinability of the cost). The next table compares the percentage change ofBrovedani’s intangibles due to IFRS adoption: the numerator is composed by all thereconciliations carried while the denominator by the pre-adoption intangible assets’value. Goodwill has been deleted from the denominator in order to increasecomparability: European and Italian studies treat goodwill separately from theintangiblesmainlybecauseitsdisciplinedoesnotfall intoIAS38andbecauseit isnotamortizedbuttestedforimpairment.

Actual Mean Max MinBrovedanicase -17,40% Europeandatabase(Capkunetal.,2008)

+1,28% +11,44% -5,00%

Italiandatabase(Marchiet.al,2012)

-11,78% +59,60% -75,39%

Table14:INTANGIBLES’VARIATIONSDUETOIFRSADOPTIONSource:CAPKUN,CAZAVAN-JENY,JEANJEAN,WEISS,2008,p.19,MARCHILUCIANOLUCIOPOTITO,2012,pp.98-136

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The European analysis of Capkun et al. took place during the compulsory shift ofpubliclytradedEuropeanfirmsbetween2004and2005.Thedatabase iscomposedof1.722European firms’balance sheets: Italian firms represent13%of the sample.ThesecondstudywasdevelopedtakingintoaccounttenpubliclytradedItalianfirmsduringthesameperiod. It ispossible todiscernthatBrovedani’s intangiblesvariation isverysimilartothemeanofthestudyfocusedonItalianfirms,ratherthantheonefocusedonEuropeanfirms.TheresultsamongintangiblesallowustohaveaglimpseonhowfartheItalian accounting framework is from the other European systems and how delicateshouldbeavoluntaryadoptioninthisenvironment.Brovedani’spercentagechangefallsintherangeofthesecondexample:thiscanbelinkedtoaspecificstrategyinordertoslowlyapproach IFRS (Brovedani is conscious that theenvironmentwhere IFRSwerebornisveryfarfromtheItalianaccountinglogic,meaningthatanadoptioncouldmeanmore costs that benefits). It can be said that also the OICC, the Italian accountingstandards, in a way are becoming more similar to IFRS. For example, from 2016researchcostscannotbecapitalizedanymore.Thestudyisstillnotfreefromlimitations,makingusawareofhowtheresearchinthisfieldisstillinitsinfancy.Thebiggestlimitationofthesecondstudyisthefactthatalltheanalysed firms are service companies while Brovedani is a manufacturing one.Furthermore, the database is very little, including almost ten companies. Thecomparison between these two studies and the percentage change measured inBrovedani highlights a certain lack ofmicroeconomic research. Italy confirms to haveone of the most divergent national accounting framework in respect to IAS/IFRS,meaning the existence of inconsistencies among Italian accounting rules regardingcertain accounting issues. Italy and Italian firms could benefit from IFRS only withadequateandsystematiceffortsofpublicinstitutions.The reconciliations areoriginatedbecause international standards,normally, focusoncurrent values in the accounting estimates, while the Italian Civil Code provides,generally, historical values. Furthermore, many of the valuations adopted by theIAS/IFRSarerelatedtoexpectedcashflows’forecastbasedonpredictionsmadeduringthe evaluations. In the accounting science, the concept of “income”, in particular"realizedincome",haslostgraduallyimportance,inspiteofthefinancialaspectofactualor worse probable generated cash flows. The adoption of international accountingstandardsmayconduct toamodelsubstantiallydifferent fromtheoneusedbyItalian

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companies, both in terms of information purposes and with regard to the draftingpatterns and criteria of evaluation of individual items. There is no doubt that theconceptual frameworkof theIFRSbalancesheet isvery far fromtheonedevelopedinItaly following the adoption of the Fourth Directive: the latter, therefore, defines theprinciplesofclarityandtrue&fairviewasageneralpurposeofthefinancialstatements,derivingtheprinciplesfordrawingupthevariousaccountsandtheevaluationcriteriaof its accounting items. Thus, the provisions of the Civil Code and the nationalaccountingstandardspresentahistoricalcostmodelwhosevaluesdonotrepresentthefutureutilityofthebalancesheetitem,ratherthesacrificeincurredbythecompanyatthetimeofitsacquisition.TheIASBmodel,onthecontrary,ischaracterized:

- byalowerlevelofprudence,thefair-valuerecognitioneliminatesvaluereserves;- by the ability to distribute unrealized but recognized profits, accounted

dependingonthecurrentvalueofareadilyrealizableasset;- by a greater variability of financial results and the equity amount, as closely

associated with fluctuations in the market value of the assets expressed incurrentvalues;

- by a greater subjectivity, and, consequently, by a lower verifiability of theassessmentsmadebydirectors.

Consequently, itcanbesaidthatthetransitiontoIAS/IFRShasnotonlyformaleffectsbut ithasastronginfluenceontheeconomyofthefirms,too.Theshiftmayaffectthesizeoftheequity,theincomeconfigurationresultingfromthefinancialstatements,thedifferent possibilities of the operating performance’s appreciation and, ultimately, thewealthdistributionamongstakeholders.Alltheseaspectsinturnaffectthefirm’screditabilities(MARCHILUCIANOLUCIOPOTITO,2012,pp.28-47).ExcludingthepaperofCapkunetal.(2008),itisnoteasytofinddataobtainedbylargedatabases about accounting itemsandhow (much) they change relative to adifferentaccountingframework:if it ishardamongEuropeanstudies,it isharderamongItalianones.SomeacademicsareveryproactivetowardsanIFRSimplementationbut,evenifadvantagesexist,theyseemortobetoomodesttoproceedinthisdirectionortoleadtoresultsthatneedfurther(empirical)analysis.Thisisespeciallytruebecausearealcost-benefitanalysishasnotbeenyetdeveloped.Nobodyhassettledaframeworkinwhich

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quantify the cost for a change of these proportions, trying to make tangible theintangiblecosts, too. It isclearthat ifa firmwantstosearchnewinvestors, increasingcrossbordertransactionsandaccesstointernationalfundsandinvestments,facilitatinginternational acquisitions and mergers (for example in Asia), a way could be surelyadopting a single, high-quality, transparent, understandable, globally enforceable andacceptedfinancialreportinglanguage.3.4 Semi-structuredinterviewTodeveloptheBrovedanicase,semi-structuredinterviewshavebeenchoseninordertoinvestigate the impact of IFRS adoption and its possible effect in an Italian mediumcompany,beyondthesimpleaccountingeffect.Thequalitativeresearchisaverybroadfamilyofresearchtechniques,aimingtoanalyseeverythingthat isnon-numeric: texts,dialogues, interviews, audio clips, movies, images. It is suitable to be applied to real,observable,micro-relationalsituations,imposingaface-to-facescheme.Theresearcherhas to dive, becoming an active spectator but remaining well aware that his/hersubjectivitywillinfluencethedatacollection.Interviewingisthemostwidespreadtoolforcollectinginformationinthesocialsciences.ThewordcomesfromtheFrenchverb“entrevue”, past participle of the verb “entrevoir”, to foresee. Likemany other terms,such as classification, measurement, observation, science, it means either a task, aprocess, or the product of that activity,meaning that not necessarily to an interview-processcorrespondsaninterview-product.Furthermore,itcouldbedefinedasaformofconversationinwhichtwoormorepeopleareengagedbothinaverbalandnonverbalinteraction in order to reach a goal previously defined. The interview aims to detectpersonal situations, behaviours, opinions and attitudes, which they cannot, fordefinition, be considered right or wrong. In the interview, therefore, you have nointention to change opinions, attitudes, or conducts of the subject(s) studied. In fact,thoughawell-conductedone,theindividual'sawarenessofsomeaspectsofhim/herselfandhis/herrelationshipwith theenvironmentcould increase.The interviewdoesnotusually originate from a request of the subject. To sumup, the tool has the followingcharacteristics:

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- itisaimedatthedetectionofsituations,behaviours,attitudes,opinions,- itplanstoacquire,notalter,thestatusoftherespondents;- ittakesplaceinaresearch’sframework.

Thevoluntarinesswithwhichtheintervieweeispromptedtoshareinformationhastobeconsideredanessentialrequirement.Theinterviewershouldnot,inanyway,compelthe respondent to accept the interview, nor propose fees for its service. Whether toaccepttheinterviewdependsonlyonthewillingnessoftheinterviewee.Generally,theinterviewsaredividedbasedontwocriteria:

- thepresenceorabsenceofadirectvisualcontactbetween the interviewerandtheinterviewee,

- thedegreeoffreedomapprovedbytheactorsinvolved.According to the firstcriterion itmaybedistinguishedthepersonal interview(face toface)fromthephonecallswhile,accordingtothesecond,therearethreemainformsofinterview: non-structured, semi-structured, structured. They are characterized from aminimumtoamaximumstructuringofboththequestionsandresponses. Inthiscase,the semi-structured method has been chosen: a method, originating from theethnographicanthropologytradition,inwhichtheinterviewerhasalistoftopicssetinadvanceonwhichhe/shecollectsalltherequiredinformationwiththeabilitytoadaptto individual respondents both questions and the order in which they are put. Theresearchers, using qualitative analysis, collect impressions, individual or collectiverepresentationsofspecifichumanfactsandexperiences.Theiranalysisisabreakdowninordertoshedlightontheimmediatelyvisiblefactsortodiscoverhiddenpaths,undertheimmediateworldofeverydayperceptions.Usuallylargenumbersandmathematicaltoolsarenotused,focusingonalittlenumberofcases,intheenucleationofthegreatestnumberofaspectsand informationderived fromasinglecontext.Qualitativeresearchcannotbeopposedtoquantitativeone:basedbothonempiricalevidence,thedifferencelies in the fact that the data collected is not numerical, requiring, therefore,interpretativeratherthanstatisticalanalysis.Inaddition,inaquantitativeresearch,theaim is to find a consistent and sufficiently representative random sample while, in aqualitative one, the purpose is to find a small specific sample in order to produce an

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acceptable and consistent explanation of the phenomenon studied. Therefore, theselectionofthesampleofthelattertakesplaceaccordingtothecriteriaofrelevanceandqualityconsistencyinrelationtotheobjectofstudy.Theuseofthein-depthinterviewhas been designed to reveal in detail the subject of the study. The scheme could besummarizedasatraceofopen-endedquestionsinordertofocusthetopic.Thegoalistofindoutwhatisthestructureofthemeaningsattributedbytheintervieweeinaspecificsubject while the researcher's task is to avoid, as much as possible, to impose itsstructureanditsopinions.Theresearchermustremainasneutralaspossibleinfrontofoppositepositionstohis/herbeliefsandvalues.Itisevidentthatabiasisproduceddueto the inevitablepresenceof theresearcher. Insummary,giventhetrackof interview,theexaminerisfreetodefinetheorderofquestions,toinvestigateortakeafewthemes,tocontainanyirrelevantdigressionsbytheinterviewee,tobringhim/herbackontheinterviewtopicsand to facilitateany feedback.The lackof standardization isboth thestrengthandweaknessesofqualitativeinterviews.Itcouldbeaweaknessbecauseitismoredifficulttocompare,count,inferfromsampletopopulation.Itcouldbeastrengthbecause it allowsyou togodeep,discover thehiddenandunforeseen, accessavisionfromwithin(FIDELIMARRADI,1996,pp.71-82).Semi-structured in-depth interviews are themost commonly used questioning set-upforqualitative researchandmaybedoneeitherwithoneormore interviewees.Theyusuallylastfromthirtyminutestoseveralhourstobeaccomplished.Theindividualin-depth interview permits the interviewer to explore deeply into social and privatematters,while thegroup interviewconsents examiners todevelopabroader rangeofunderstanding but, due to the public nature of the procedure, avoids digging asprofoundly as the individual one. The semi-structured interview could be divided inthreephases:theinitialapprehensionphase,theexplorationphaseandtheco-operativephase.Thefirstphase isdepictedby insecurityoriginatingfromtheabnormalityofanenvironment inwhichthe interviewerand intervieweearenew.Duringthisphasetheaimistogettheintervieweetalking.Thesecondphaseiswhentheintervieweestarttobeinvolvedinaprofoundconversation.Thisdevelopmentisdonebylearning,listening,testingandbondingtogether.Thefinalphase,theco-operativeone,canbedescribedasthecosinessreachedbythemembers.Asamatteroffact,theyarenotscaredtoupsetthemselves,theyevenfindgratificationbothinquestioningandbeingquestioned.Thisshouldbetheperfectoccasiontoaskquestionsthatweretoodelicatetodemandatthe

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beginning. To conclude the method description, the data analysis happenssimultaneously with data collection so that investigators can generate an emergingunderstandingaboutresearchquestions,whichinturnupdatesboththesamplingandthequestionsbeingrequested.Thisiterativeprocedureofdatagatheringandevaluationultimately leads to a point in the data collectionwhere no new groupings ormatterstranspire. This could be called saturation, indicating that data collection is finished(CRABTREEDICICCO-BLOOM,2006,pp.314-318).Theobjectiveof the semi-structured researchhasbeen to examine thepredispositiontowards the IFRSadoption in theBrovedaniGroup.All the intervieweesholdpositionamong middle and top management, having a good knowledge of national accountseither because they come from economic studies or they work daily with companyaccounts. The chosen respondents were the global operations manager, the chiefoperation manager, the administration officer, the corporate controller and thecontrolling and financeofficer. Every interview lasted, on average, thirtyminutes andwas done one to one in a neutral room where the interviewee could feel safe and,therefore, more encouraged to talk. Every interview was recorded after asking thepermission:itwasalsoexplainedthepurposeoftheresearchandtheanonymityoftheresults. The questionswere divided in threemacro-areas. The first one linked to theexplorationphase,wheretheintervieweeswereaskedpersonalinformationsuchtheiracademic and work background. The second area is connected to identify problems,suggestionsandpersonaljudgementaboutBrovedani,itsfuturechoicesandstrategies.The third part is related more closely to international standards and their possibleadoptioninthecompany,theireffects,limitations,advantagesandchallenges.Firstpart-personalinformation

1) Whichisyoureducationalbackground?2) Whichisyourworkbackground?3) Isityourfirstexperience,hereinBrovedani,as(CFO,GOM,controller,etc.)?4) Areyourmarried?Haveyougotkids?

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Secondpart-Brovedani’sfuturechallenges

5) Suppliers intheautomotivesectorarebecomingbigger,willBrovedanigrowinordertoresist,inordertostayontop?

6) WhicharethemainfuturechallengesforBrovedani?7) Will the companies acquiremore independence in order to pursue a local for

localstrategy?8) Isitplannedinthenearfutureastockmarketlisting?

Thirdpart–IFRSadoption

9) DoyouknowIFRSandtheirrisingimportanceamongsupranationalentities?10) WherehaveyoulearnedaboutIFRS(School,work,seminar,etc.)?11) AreyouinfavourofadoptingtheminBrovedani?12) Do you think that inside the firm(s) there are already the competencies and

know-howstoadoptthem?13) Has an IFRS adoption ever taken into account by the property and the

management?Isitapriorityofthefirms’strategy?Theresultsoftheinterviewhighlightacompanystillverymuchtiedtoitscore:theworkshop is still, too much, important. This is especially true in the automotivesectorwherebiginvestmentsarealwaysneeded,inwhichtoremaincompetitiveitisdemandedtobecomealwaysbiggerand internationalized, inordertostayclosetothe clientsandsuppliers.Themain findingsare related to theaccountingquality’simprovements. IFRS per se does not improve accounting quality. To achieveconsistentresults,voluntarinessandastrongenforcementprocessisneeded.SincetheylackinBrovedani,itisverydifficulttoassessthatanIFRSadoptioncouldbringmore benefits that costs linked to compliance. Every candidate has however adiscreteIFRSknowledge.Allofthemdidnotstudythiskindofstandardsatschoolorduringtheuniversity.Mostofthemhaveacquiredinformationduringseminarsandcorporate training courses. Most of the subjects have worked in different rolesbefore coming to Brovedani while the majority are married with kids. The mainchallengeforBrovedaniistoconductabusinessinanuncertainenvironment:thisis

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linkedbothtotheautomotivesectoritself(DieselGatehasforcedmanysupplierstoreinvent themselves, shifting the business from diesel to gasoline injections), andboth to the economy as a whole (more markets’ and sales’ volatility). Moreover,clients will demand stricter quality levels, more innovation and differentiation inordertodecreasethebusinessrisk.Tosumup,Brovedanichallengescouldbelinkedto:

Figure33:BROVEDANI’SFUTURECHALLENGESThe medium-term strategy is to increase independence among companies: this is aprocess started almost five years ago aiming to remove functions gradually from theholding to the other companies. In Italy design andproduct developmentwill remainwhileprojectsdevelopmentwillshiftfromtheheadquarterstoeveryfactoryaroundtheworld.Moreover,Brovedani,evenifitisacapital-intensivecompany,managestoraisefundsquiteeasily:inthisscenario,itisveryhardtothinkaboutastockmarketlisting.Brovedanihas,anyway,embarkedonapathleadingtothecapitalmarketcalledELITEbyBorsaItanaSPA:agymandaschooltoteachtothebestinternationalcompaniestodialogue with third-party investors, understanding financial markets. Italian stockexchange has created this innovative platform of services dedicated to ambitiouscompanies so they can compete with the best models and with international bestpractices.Moreover,theycanmeetwithacommunityofexcellencetotakeadvantageofall business matching opportunities available. Few candidates have answeredcompletelytothethirdpartmainlybecausetheydonotpossessdeepknowledgeofIFRS

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discipline.Thisisnotlinkedonlytothefragmentationofknowledgewithinacompany,butalsotoakindofpaternalisticapproach:eachroleisdividedsharplyespeciallyintheadministrative, finance and controlling office. The consolidated balance sheet is doneonlybytheCFO,whodoesnotshareanyinformationwithhisstaff:thelatterdoesnotknow that it was published.Moreover, the style of leadership allows themanager tomakeallthedecisions,fullydepoweringhisstaff.Inthisway,thecontroliswidespreadbut it does not allow any room formanoeuvre to his subordinates,making them feelprotected but also little self-sufficient. Moreover, the industry and the company isrecoveringfrombigcrisis(2008,Europeandebtcrisis,DieselGate). Inthelast5yearsBrovedani has managed a slightly increasing turnover. In 2011, the sales budgetturnoverwas fixed to110MillionEurowhile the actualwas almost85MillionEuros.ThisincredibledecreaseheldbackinvestmentsandchancestogrowespeciallyinAsia:BrovedanihasbeeninterestedinpurchasinganIndiancompetitor.Afterthishugedrop,themanagementpreferredtobeverycautious.Brovedani isawarethatnowadaysthemainproblemisnottoattractfunds,rathertoattractskills,competencies,know-hows.Mostof the intervieweesarenot in favourof an IFRSadoption formany reasons: thegeneralthoughtsconcernthemorediscretionlinkedtoIFRSandthefairvaluemethodcompared to accounts more closely linked to the historical cost and, therefore, theprudence principle. In addition, there is a feeling that the national criteria areapproachingslowlytowardinternationalones:thecapitalizationofresearchcostsis,forexample, forbiddenfrom2016amongItalianGAAPs.Aslowchange isseenfavourablybecauseitdoesnotimposetoomanycostsjustoveroneyear:itcouldbeashockforasmall-medium company like Brovedani, which does not have the expertise and theresourcesofamultinational.Allof this is sharpenedby theenvironment inwhich theIFRS were born: a very different one compared to the Italian. The IFRS discussionremained always in the administrative offices between accounting managers andauditors:asafirmfocusedmainlyonitscoreactivities,Brovedanidoesnotvalueverymuchadministration,consideringitasimplestafffunction,auselesssuperstructurethatcouldbeeliminatedwiththeadventofindustry4.0.Theimpactoftheadministrationinthe turnover is verymodest compared to other companies in the same industry. Thefunction in Brovedani costs approximately 1.5% of the sales turnover while in othercompaniesthecostrangesbetween3%and5%.Obviously,thisstatementisnotsharedby the subjects coming from theaccountingareasof the company: the administration

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hasabadreputationinsidethefirmmaybebecausemostpeoplehavenocompetencesinthefieldandseetheadministrativedemandsassomethingabsurd.SurelytheItalianlawsandrequirementsdonothelptodecreasethisfeeling.Brovedanihaslongunderstoodtheimportanceofinternationalization,beingabletorisetothechallenge.Today,despitethecollapseofdomesticdemand,itisabletostandoutwithgoodeconomicperformance.IfanenterpriseisstronginItaly,hasabetterchancetoconquerforeignmarkets.Internationalizedcompaniesshowbetterresultsthanthosewhoarelimitedtothedomesticmarketandthusseemsstronger,morecompetitivebut,inmostcases,theywerealreadysolidbeforestartingtheirexpansionabroad.Bestrongleads more easily to internationalization and not vice versa, because resources,investmentandfixedcostsneededtobeknownabroad.Companieshavetobemanagedaccording to a medium-long term maximization profits perspective. This means thatmuchoftherelevantdecisions,includingtheonetoexploreforeignmarkets,aretakenaccordingtoalong-termhorizon,withtheabilitytowithstandnoimmediatereturns.Inaddition,very important is thisprocess is theability todealwith thosewho isahead,though geographically distant, or with those who have been able to offer creativesolutions to emerging problems, with those who have developed products, services,facilities and innovative mechanisms. While large companies have more easily thanmanagerialandfinancialresourcestorespondto internationalcompetition, theItalianSMEs approach is more deconstructed. Not all Italian SMEs understand thatinternationalizationisarewardinggrowthstrategy,whichmustbeconductedwithcare,commitment and specific methodologies, depending on the context in which theyoperate.Toconclude,BrovedaniGroupcouldbefacilitatedtodrawuptheconsolidatedaccounting, becoming more transparent while letting more independence to itssocieties.Despitesomeclearadvantages,asthedecreaseofearningsmanagementandtheincreaseoftimelylossrecognitionsandvaluerelevanceofearnings,itseemsthatthereason behind the IFRS adoption movement are political, too: not generated by agenuineeconomicalreasoning.Brovedaniseemstobe,inthismoment,notinterestedtoinvestinIFRS.Itisveryfocusedonthecoreareas(administration,controlandfinanceisa staff function), it has not the intention to become more transparent and thestakeholders(especiallythemanagementandtheshareholders)seemnottovalueIFRSasthebestfit.ThesignificantcostsassociatedwithadoptingIFRSseemtooutweighthebenefits,evenifallthisreasoninghavetobeprovedwithfactandfigures.Refusingthis

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framework is linked also to the verydifferent environment inwhich IFRSwereborn:Brovedanihas,anyway,totakethemintoaccount,somewhereinthefuture.

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4 ConclusionsandfinalremarksDuetoglobalization,internationalaccountinghasbecomeincreasinglyimportant:evenacompany,operatingwithinthebordersofitsowncountry,isnolongerisolatedfromthe internationalaccountingcontext. Inthe last threedecades,ademandforaunique,well-recognized and high-quality international accounting framework has risenattentionoftheaccountingworld.Afterhavingunderstoodthattheenvironmentisoneof themain causes of different national GAAPs, it could be said that IFRS is themostfamous and used set of international standards, rules and practices. A process ofharmonization is, hence, needed to diminish superfluous or contradictory standards.Obviously, the adoption of IFRShas both beneficial anddetrimental effects: academiadoesnotprovideaclearanswer.FortheEU,itrepresentsarealCopernicanrevolution.IFRS,infact,provokedareversalofhierarchies.Thisshift,foracivillawcountrysuchasItaly,hastobetakenintoaccountveryseriously.Theaimistoemphasizethepositiveeffects,notleavingouthoweverthelimitationsthatmayarise.Tobetterunderstandtheprocess,arealcasehasbeenanalysed:thepossibleimpactofIFRSadoptioninapocketmultinational firm.Ithashighlightedmanylimitationsfoundintheliterature.Thereisno need to increase comparability and transparency and no intention to adoptvoluntarily IFRS. This could heavily diminish advantages such as lower timely lossrecognition,morevaluerelevanceandlessearningsmanagement.Thesemi-structuredinterview pointed out a company culture verymuch associated to the core activities,considering administration an annoying superstructure, something that in the futurewillbedeleted, surpassed. Inaddition, themainbelief is that ItalianGAAPsareeasierandmoresuitabletodescribethegroup’ssituation:itseemsthattheyareapproachingslowly to international standards.Afterhaving reclassified intangibleassetsaccordingto IFRS, a comparison with similar studies was developed: the percentage change ismore similar to Italiandatabases that Europeanones, confirming the remoteness andthedivergenceoftheItalianaccountsfromthoseoftheothermemberstates.International FinancialReporting Standardsmay allowbetter information statements,and, therefore,more useful,more effectively andmore globally comparable accounts.Somedisenchantedreflectionsareneeded inordertoclarifytwokeyobjectives:moreusefulinformationandmorecomparability.Asfarasutilityisconcerned,IFRSpostulatethat information should serve primary to investors. This led, at the time of their

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introduction, to affirmwitha reallyunmotivatedemphasis andwithout apreliminaryand indispensable critical reflection that the new rules allow to better appreciatecompany's performances. The conceptual pillar on which stands a good part of thelogical construction of the principles is the fair value. The expression was born inEnglish-speakingcountries,lateradoptedinthelegalfieldasacriteriontosafeguardtheinterests ofminority shareholders. It is linked to concepts as "fairness" and "equity",which in those fieldsmayalsobeappropriate. In the IFRS it is linked toacriterionofobjectivityandtocurrentmarketconditions:however,itshouldbeimplicittheideathatthemarketexistsanditisabalancedandunbiasedgaugeofcorporatevalues.Theglobaleconomic crisis linked to corporate collapses of 2008 originated in the Americanenvironment, one of the most advanced, sophisticated and efficient financial market.After that event,manypeople started todoubt that anaccounting frameworkderivedfromthatbackgroundcouldbeeligibletobetheinternationalbenchmark.Thismethodismotivated not only by technical considerations, relating to issues of inadequacy ofvaluation,butalsotopoliticalandeconomicconvenience. It isevident theseriousnessand the dangerousness of this technique. The historically consolidated accountingprinciples couldbedistortedby introducing from theoutside logics very far from thetraditional ones. Additionally, it is risky when you choose to follow an accountingbehaviourbasedontheeconomicdesirabilityofindividualeffects.Itislikelytoproducea deliberately misleading information concerning the technical overview of thephenomenon.Regarding the comparability, theprojectbehind the IFRSexpansionhaspromoted an enthusiastic convergence between different cultures and nationalaccountingpractices.Thefinalgoalistoarrivetoacommonunderstandablelanguage.Itcouldbenotedthatitisnotaneasyprocess,givingrisetomisleadingbeliefs.Despitetheefforts undertaken, cultural, social, economic differences between countries remainstrongandtheywillimpactontheapplicationoftheprinciples.Themostimportantissueisrepresentedbydifferencesonthemarketsduetodissimilarprices, values’ measures and degree of economic development. Even if the samemethodology is applied, uniformity and comparability between accounting values arenotguaranteed.Theroad towardsa substantial convergenceandaneffective,andnotmerelyapparent,comparability,isstilllong.Theeuphoriaandenthusiasm,spreadintheearlydaysoftheapplication,havebeenmitigated.

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5 Acknowledgements

My heartfelt thanks to Professor Chiara Saccon for her precious and concrete helpduringthisperiod.Mygratitudealsogoestomyparentsforbeingalwaysareferencepointinmylifeandtomyfriendsfor encouragingmetodomybest.Finally,aspecialthankgoestothepeopleImet inBrovedani forbeingmorethanjustsimplecolleagues.

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The impact of IFRS adoption in a pocket multinational company

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