IFRS adoption in Europe : the case of Germany

Documents de treball Departament d'Economia de l'Empresa IFRS ADOPTION IN EUROPE: THE CASE OF GERMANY Soledad Moya, Jordi Perramon, Anselm Constans Document de treball núm. 05/1 © Soledad Moya, Jordi Perramon, Anselm Constans Coordinador / Coordinator Documents de treball: Carles Gispert http://selene.uab.es/dep-economia-empresa/recerca/Documents.htm e-mail: [email protected] Telèfon / Phone: +34 93 5814296 Fax: +34 93 5812555 Edita / Publisher: Departament d'economia de l'empresa http://selene.uab.es/dep-economia-empresa/ Universitat Autònoma de Barcelona Facultat de Ciències Econòmiques i Empresarials Edifici B 08193 Bellaterra (Cerdanyola del Vallès), Spain Tel. 93 5811209 Fax 93 5812555 Febrer / February , 2005 La sèrie Documents de treball d'economia de l'empresa presenta els avanços i resultats d'investigacions en curs que han estat presentades i discutides en aquest departament; això no obstant, les opinions són responsabilitat dels autors. 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IFRS ADOPTION IN EUROPE: THE CASE OF GERMANY Soledad Moya, Jordi Perramon, Anselm Constans Document de treball núm. 05/1 1 IFRS ADOPTION IN EUROPE: THE CASE OF GERMANY1 Soledad Moya Departament d’Economia de l’Empresa Facultat de Ciències Econòmiques Universitat Autònoma de Barcelona Campus Bellaterra. Edifici B 08193 Bellaterra (Cerdanyola del Vallès) E-mail: [email protected] Jordi Perramon Departament d’Economia i Empresa Universitat Pompeu Fabra and Anselm Constans Departament d’Economia i Empresa Universitat Pompeu Fabra 1 The authors thank Chris Nobes for his assistance throughout the study. 2 Abstract From 2005 onwards, consolidated financial statements of listed European companies will have to comply with IFRS (IAS). Many German companies began adopting those standards in the 1990s, on a voluntary basis, because of their need to access international capital funding. Spanish companies, by contrast, are not permitted to adopt IFRS before 2005. This paper has two purposes: first, it analyses the financial impact of initial IFRS adoption on the statement of changes in equity and the income statement of individual German companies. Second, and taking into account the German experience, it focuses on the expected impacts on a sample of listed Spanish companies in two industrial sectors: chemical-pharmaceutical and fashion. Our analysis of German companies comprised all non-financial DAX groups applying IFRS plus additional listed companies in the two selected industrial sectors identified above. The impact of initial adoption of IFRS on German companies was, both individually and overall, very significant. The analysis suggests that the expected impact on Spanish companies is likely to be significant but to a lesser degree than in respect of the German companies in the study. Key words: IFRS adoption, Germany, Spain, IFRS adjustments, chemicalpharmaceutical sector, fashion sector. 3 IFRS ADOPTION IN EUROPE: EXPECTED IMPACT IN SPAIN BASED UPON GERMAN EXPERIENCE 1.INTRODUCTION With the globalisation of international financial markets, the idea of adopting a common language for financial reporting which allows international comparability has become widely accepted by European corporations. Among the different choices that could be met at the time of implementing a single financial reporting language2, the adoption of International Financial Reporting Standards (from now on IFRS, including old IAS) has been the one selected by Europe3. Even before this, a great number of European corporations, especially in Germany and Switzerland where many corporations are listed in different stock exchanges, had already decided to comply with IFRS. These standards are expected to help them to compete for international funds more effectively and make international capital markets more efficient. Although IFRS adoption is not compulsory in the EU until financial years starting on or after January 2005 and only for consolidated accounts of publicly traded companies, as stated by 1606/2002 European Commission regulation, many German corporations have been using IFRS in their reporting, some of them since 1994 and many since 1998 and 19994. As an example, for 2003, 19 of the 30 companies listed in the German DAX (which means 63%) were already using IFRS; 9 of them (30%) were using US GAAP and, therefore, only 7% were still using local GAAP. German legislation promoted this early adoption of IFRS At first, the “Capital Raising Promotion Act” (Kapitalaufnahmeerleichterungsgesetz-KapAEG) was enacted relating to the beginning of 1998 onwards. As a result, Section 292 of the German Commercial Code (from now on HGB) permits listed parent companies to prepare their consolidated accounts according to internationally accepted accounting standards, presumed to mean IFRS or US-GAAP. 2 At the time of implementing a common financial language in Europe, different choices could be met such as designing a new language for European countries, choosing one of the financial languages belonging to a European Country and adopt it for the rest of the countries or just choosing an already existing financial language which could be adopted by all countries. This last option is the one chosen by the European Union. 3 See European Union (2000). 4 See Street et al. (1999) for an interesting study of accounting policies and disclosures of a sample of companies claiming to comply with IFRS by the end of 1996. 4 Objectives Taking German experience as an example of early adoption of IFRS and considering that in Spain listed corporations are obliged to introduce IFRS in their consolidated accounts from 2005, the objectives of our paper are to assess the main financial impacts from first application of IFRS on German companies (the IFRS effects), and then to study the expected impact on Spanish corporations of adoption of IFRS5. For this purpose, we considered which was the best basis from which to extrapolate, whether the whole quoted German companies applying IFRS, the individual companies or the industry. We thought that the comparison by company is too dependent on individual features, while the overall comparison is too generic. So we decided that the comparison by industry was the most suitable. Methodology The methodology has been the following: we have done a preliminary comparison between IFRS and HGB (see Section 2). Then we have analysed IFRS effects on German companies in the DAX Index6 (see Section 3). The selection criterion is selfexplanatory: companies in the DAX index are the most relevant, with the highest accounting complexity and the most transparency (an indication of transparency is the availability of the English version of the annual accounts). Sections 4 and 5 analyse IFRS effects on German companies belonging to two industries: chemical-pharmaceutical and fashion. A number of companies within those industries belong to the DAX Index and had already been analysed in Section 3. Those industries were selected after considering the existence of sufficient quoted companies applying IFRS and also of enough quoted Spanish companies in the same industry. Section 6 analyses the main differences between HGB and Spanish GAAP, and between Spanish GAAP and IFRS and also contains a summary of the extrapolation from the analysis of the IFRS effects in Germany, in general and by industry. Expected IFRS effects on Spanish industries are put forward in Sections 7 and 8. Section 9 summarises the main conclusions7. 5 There are already other studies of the expected impact on Spanish companies of IFRS adoption such as, for example, Fundación de Estudios Financieros (2003) or Mazars (2003) but they have not been based on German experience and in the first one different sectors have been chosen while in the second one there is no consideration by sector. There are also interesting studies related to some other countries in Europe in relation to the adoption of IFRS, see for example Dumontier (1998) 6 We have excluded financial companies because of their special features. 7 Appendix A lists all the companies analysed, both German and Spanish, together with some key financial data. 5 2. GERMAN GAAP (HGB) TO IFRS: MAIN DIFFERENCES As noted earlier, German accounting policies have been traditionally based on the requirements of HGB until companies started to move towards international standards. However, and in relation to consolidated financial statements, companies also consider statements issued by the German Accounting Standards Board. As one of the main objectives of our paper is to describe and quantify IFRS effects on German companies, we would like to provide a framework in relation to the main differences8 between IFRS9 and German GAAP (including HGB). A first rather philosophical difference is that the German accounting model has been traditionally based on tax and conservatism, while the IFRS accounting model has a clear Anglo-Saxon inspiration where the principle of relevance10 prevails over others (Lamb et al., 1998). That divergence is going to explain many of the issues in following paragraphs. Accounting regulations in Germany are not quite developed and, often, specific applications of this conservatism do not come from HGB, but from a well established practice. Differences detected may be classified into different categories (Nobes, 2001). Following Nobes classification, we have added some new categories depending on the type of difference we are referring to, as follows: 2.1. Assets and liabilities: Recognition and measurement. 2.2. Consolidation procedures. 2.1. Assets and liabilities: recognition and measurement The following issues have been found in the recognition and measurement of assets and liabilities, where criteria followed by HGB do not meet with the ones required by IFRS. 8 We have considered only differences in measurement and valuation, which may lead to differences in equity or net income of the companies. We are not going to refer in this section to differences in disclosure as those are not subject for adjustments and therefore are not a purpose of the paper. 9 We would like to mention at that point that IRFS considered in this section are those endorsed by the EU at the time this paper has been written, that is, those included in 1725/2003 law, published in the EU official Diary on the 13th of October 2003, plus IAS 32 and 39, since they are likely to be endorsed as well. 10 See IASB Conceptual Framework (1989). 12 Effects on IS In Appendix B there is also an analysis of the IFRS IS reconciliation13, except in the cases when no information was available and could not be estimated. The information was only given for the first year of IFRS application and not for the comparative year. Given the very limited amount of information disclosed, it has not been possible to deepen our analyses of the IS reconcilation. Below we make some quantitative remarks at company level, whereas the analysis by adjustment type is presented in the next subsection: a) By inspection of the Appendix B, we can see that there is no relationship between the IS and the RE adjustments referred to above. Moreover, in about half of the 9 companies disclosing the IS reconciliations, the sign (positive or negative) of the reconciliation is the same as for the RE reconciliation, and in the other half the sign is different. b) The significance of the reconciling items as measured against the HGB net earnings varies sharply from one company to another (from a –16% to a +25%), but they are not as large as for RE. c) The distinction between gross/net effects we made in the previous section on RE is valid for IS: all companies disclose a combination of positive and negative IS adjustments. d) Two companies disclosed a relatively big positive effect: BMW and RWE for reasons summarised in Appendix B. 13 From our point of view, nature and extent of the reconciling items must come from two related causes: original distance between HGB and IFRS and balance sheet IFRS adjustments. For example: companies might have provided for future maintenance expense for HGB purposes. If so, the provision had to be written back following IFRS. The net IFRS effect on IS would then be an increase in the year expense for not having provided for them before, and a decrease for not providing for the next period. Also the IS adjustments are likely to reflect the net effect of a combination of different IFRS impacts. Again an example: the adjustment in the depreciation expense for the year may reflect concurrently or on a net basis the effects of having fair valued the subsidiaries’ PPE following an acquisition, and the change of the useful lifes (versus tax allowed estimates) and/or of the depreciation method. 13 e) The combined net positive IFRS effect for the nine companies totals € 411 million, representing a combined increase of 10 % on HGB combined net profits. 3.3 ANALYSIS BY TYPE OF ADJUSTMENT We suggest that, for extrapolation purposes, the analysis by type of adjustment is the most useful. As indicated, the adjustments are supposed to be net of the tax effects. Again we note that there might be cases where the same reconciling item affects both assets and liabilities, although the effects are not separately disclosed in the RE reconciliations: Below we summarise the numerical content in Appendix B (RE portion): a) Increase in intangible assets from capitalisation of some development costs by € 6,3 billion, basically traceable to VW and BMW as mentioned in the previous subsection. b) Decrease in PPE accumulated depreciation by € 6,4 billion: a number of companies had applied accelerated tax depreciation methods or rates for HGB purposes. The main adjustments correpond, once again, to VW and BWM, two heavy industrial groups, but also to TUI, a service company. RWE, on the other hand, shows a negative amount, for undisclosed reasons. c) Decrease in other provisions by € 4,8 billion. The fact that almost all of the companies share this type of adjustment reflects the traditional philosophy of German companies, fuelled by a generous tax system, toward creating hidden reverves by, among other things, inflating provisions. It is not possible to quantify the incremental factor caused by IAS 38 going into force for 2000 beyond the observation that most (although not all) of the companies that started applying IFRS after 1999 disclose higher effects. d) Deferred tax also caused a big net effect of € 4,6 billion. This originated from different causes: computing all temporary differences regardless of their recurrence or date of reversion, as well as taking into account tax loss-carryforwards (this is the most frequently quoted reason) and other tax recoverable differences. All the companies have foreign subsidiaries with different tax systems: the specific mix of subsidiaries is one of the key factors in determining the adjustment. On the other hand, assuming that the other IFRS adjustments are shown net of taxes, the item should not incorporate the tax consequences of the conversion to IFRS. e) Inventories increased by € 2,3 billion, usually for the application of full cost. We included under that heading the effect, much less, of applying the percentage of completion method. 14 f) Pension liabilities increased by € 10,7 billion, the single most important reconciling item, affecting all companies, except BMW. In relative terms this single item absorbed 18 % of the combined HGB retained earnings. It is not possible to identify the incremental (or decremental) effect of the revision of old IAS 19 that went into effect in 1999. In any case, the reconciliation affects practically all the companies regardless of the year of first application of IFRS. Almost all companies, whether the first application took place before, on or after 1999, adopted the projected unit credit method, changing a number of actuarial assumptions, such as the rate of interest or estimated future increases in salaries and pensions. Companies do not specify whether or not actuarial losses were deferred; however, considering the predominant practice in Germany, we can assume that there was a full recognition of them. g) Financial instruments: the companies showing effects from applying IAS 39 were, of course, the ones that started applying IFRS in 2001 onwards (D. Post, that started in 1998, is an exception). Appendix B also details the effect from the subsequent application of IAS 39 by the other companies. The IAS 39 effect varies from company to company for three possible reasons: the circumstantial risk exposure (both in absolute and in hedging terms), fair values prevailing at the end of 2001 and transitional provisions of IAS 39. As per IS effects, the adjustment types are of the same nature as the ones found in the RE reconciliations. We can summarise our comments in subsections 3.2 and 3.3 as follows: a) Company-specific factors are predominant when explaining IFRS effects for the 14 DAX companies. b) However there are a number of relatively common characteristics, as shown in Appendix B: • In ten companies the conversion to IFRS meant an increase in RE, and in the remaining four the net negative adjustment is mostly due to an increase in the pension liability. The basic explanation is simple: HGB accounts reflected the prudent philosophy in German accounting. The combined effect is huge. • That mentality had created hidden reserves in PPE (excess of depreciation), provisions (overstatements), deferred tax assets (exclusion of tax effects of tax-loss carryforwards), inventories (use of direct cost methods), intangible assets (expensing all development cost most notably in the automotive industry). But also it has been found that pension provisions were understated by a big amount. 15 • The financial situation, including working capital, improves under IFRS, and is represented on a more solid basis in IFRS accounts, as compared with the HGB accounts. 4. IFRS EFFECTS ON CHEMICAL AND PHARMACEUTICAL INDUSTRY IN GERMANY As explained in the introductory section, the main criteria for selecting a particular industry for our research was the availability of quoted German companies within the industry that apply IFRS, together with the availability of quoted Spanish companies in the same industry. The chemical and pharmaceutical (Ch&Ph) was one of them. This denomination encompasses a broad set of industrial and trade activities: all types of chemical products for manufacturing and agricultural industries, pharmaceutical, cosmetic and other consumer products. Most of the companies in the sample produce and market a wide range of products in separate business lines. The most visible example is Bayer, with its multi-industry strategy. This breath of products and activities blurs any strong industry feature and makes it less likely that there are major accounting singularities. The sample The sample comprises all seven Ch&Ph quoted companies that used IFRS, of which five belong to the DAX index and, so, have been already analysed in Section 3. Only two non-DAX companies –Stada and Wellathat used IFRS were clearly in the Ch&Ph industry, and are new in the sample. Appendix A lists the companies and supplies some numerical information on them. Appendix C discloses the RE and IS reconciliations using the same format as Appendix B, that was the basis for our analysis in the preceding DAX section. Many observations are similar to the ones arrived at in the preceding section. However, since the companies with the highest reconciling items in the preceding section belong to other industries –automobiles and otherthe combined IFRS effects in the Ch&Ph industry are lower than the combined effects in the DAX sample. The net combined effect represents only the 2 % on HGB RE. This effect by company ranges from -6% to 26 %. A characteristic of the sample is the different years of first application (see Exhibit 2). Two companies –Bayer and Scheringpioneered the IFRS application, since 1994. Both disclose the 16 IFRS effects through IS14. The reconciling items for both companies are shown as RE adjustments in Appendices B and C for consistency with the other companies in the sample. Comments by adjustment type and company The main effects by adjustment type and company are as follows: 1. Goodwill Goodwill appears as a RE adjustment in three companies15. Two of them –Linde and Altanaexplicitly state that, under HGB, goodwill had been written off against reserves on acquisition, and that, under IFRS, they wrote-back it in the balance sheet on a partial retroactive basis for acquisitions made before 1995 (as permitted by the old version of IAS 22). Consequently with the write back of the goodwill as an asset, in a number of companies there is a charge to IS caused by amortisation of goodwill that appears as a reconciling item in the first year of application. 2. Development costs Only three companies in the sample –Linde, Wella and Stadastarted applying IFRS when IAS 38 was already in force. Linde and Stada wrote back as intangible assets some previously expensed development costs (maybe because it referred to a business combination). The remaining companies kept expensing those costs, as permitted then. Altana justifies it with reference to uncertainties in clinical approval procedures. 3. PPE depreciation Four companies out of the seven disclose that, for IFRS purposes, they changed retroactively the depreciation methods from tax-inspired ones to the straight-line method, although one of them –Lindedoes not show any RE reconciling item (probably for reasons of immateriality). The companies disclose different effects on IS, depending –we understandon the asset mix and their situation regarding their remaining useful life. 4. Pensions 14 Schering claimed to comply with both HGB and IFRS for all topics except pensions, for which it departed from HGB 15 Bases for GW amortizations differ from company to company: Henkel (15-20 years), Stada (10 years), Altana (5-10 years), Linde (10-20 years except for a recent acquisition with an estimated useful life of 40 years), Schering (10-15 years). 17 Only Wella did not mention pensions in the RE reconciliation. All the others revised their pension provision following the application of the projected unit credit method. Linde discloses additionally the preceding method: the age of entry normal method. With one exception, the companies did not disclose the deferral method –if any- of actuarial differences. 5. Deferred taxes The main reason quoted by the five companies in the sample for creating a deferred asset adjustment is the recognition of the tax effects of tax loss-carryforwards. 6. Provisions For reasons already explained in the Section 3, most companies in the sample reduce the balance of provisions. Wella increased it for the recognition of some tax risks, not recognised before. 7. Hedge accounting Henkel, Bayer, Wella and Altana explain in the notes that they hedge risks (usually associated with foreign currency or/and with interest rates) and that they apply some kind of hedging accounting, without supplying further details. Of the two companies –Stada and Lindethat started applying IFRS when IAS 39 was already in force, the second discloses a positive reconciling item in the financial instruments line. Final remarks As explained, most companies in the sample show a wide variety of reconciling items. On a combined basis, most have a positive sign: either increase the value of assets (goodwill and other intangible assets, PPE, inventories, financial instruments, deferred taxes) or reduce the balances of provisions. The main exception is, once more, the pension liability amounting to € 0,9 billion, and balancing most of the positive net combined adjustments that total € 1,3 billion. Although the combined net effect on RE and on IS is minor, individual effects on various items in the balance sheet and the IS are significant: both statements must represent the financial situation and the results in a more meaningful way under IFRS. The differences in the year of the application (from 1994 to 2001) might have had impacts on the IFRS adjustments, considering that four companies out of the seven started applying IFRS before 1999, when SIC 8 took effect, and considering the fact already mentioned in 18 section 3 that often the application of a new or of a revised standard for a company already using IFRS is softened by transitional provisions. All companies except Wella and Schering disclose net positive RE adjustment As for development costs few companies believe that they meet the conditions for capitalising them for industryspecific reasons. 5. IFRS EFFECTS ON FASHION INDUSTRY IN GERMANY The fashion industry was selected because there are three German quoted companies applying IFRS and three Spanish quoted companies in the same industry. All companies produce and trade fashion apparel and other goods. Appendix A lists the companies in the sample, and supplies some quantitative information. Appendix D, that has the same structure as Appendices B and C, summarises the RE and IS reconciliations and discloses totals and percentages by company and by adjustment types. Out of the three German companies, only Adidas belongs to the DAX Index and was, therefore, already analysed in Section 3. As for the reconciliations disclosed in Appendix D, the following points are worth emphasis: 1. The three companies share few common accounting characteristics. The main common one is that most reconciling items are working capital adjustments, consistent with the industry characteristics. This is the main differentiation from Ch&Ph. 2. H. Boss and Escada disclose moving from a direct cost to a full cost system for inventory valuation, and adopting the projected unit credit method for pension computation. 3. Adidas, the biggest company of the sample, has few reconciling items (see final remarks). 4. Escada, the smallest company, shows a variety of negative adjustments both in IS and in RE reconciliations, as if its conversion to IFRS coincided with a general cleaning exercise. 5. The negative adjustment in H. Boss affecting intangible assets is the net effect of capitalising some past development costs, minus expensing some expansion costs previously classified as intangible assets. The other two companies in the sample do not mention either development cost or expansion expenses. 6. Only Escada discloses a reconciling item regarding goodwill. 19 7. Companies disclose the following depreciation bases for goodwill: a. Adidas: 4 to 20 years b. H. Boss: up to 20 years c. Escada: 5 years 8. Adidas and H. Boss apply hedge accounting on currency exposure (both companies) and H. Boss does on interest rates exposure. 9. Only H. Boss refers to trademarks amortization (15 years). Final remarks As indicated at the beginning of the section, company-specific features exceed common industry characteristics. Adidas, the biggest in the sample, in theory should generate the biggest IFRS adjustments. However, this is not case. It made the conversion back in 1994 when a number of current IAS were not yet in force. Appendix D indicates that subsequent adjustments were not relevant, probably, again, because of the softening factor represented by transitional provisions of new or revised standards. In any case, disregarding the reclassification of minority interest, Adidas and, to a larger extent, H. Boss show positive adjustments to RE for IFRS purposes, in line with our observations on the DAX sample and on the Ch&Ph industry. 6. FROM HGB TO SPANISH GAAP: MAIN DIFFERENCES AND EXTRAPOLATION FACTORS 6.1 HGB TO SPANISH GAAP: MAIN DIFFERENCES After determining the impact in Germany on DAX companies and particularly on chemical /pharmaceutical and fashion industries, we propose to predict the expected impact in Spain for those two industries. And, following the structure of the paper, we will first provide a framework of differences in accounting policies between Germany and Spain, and afterwards the same for Spanish local GAAP and IRFS16. 6.1. German GAAP and Spanish GAAP: main differences Differences between German GAAP and Spanish GAAP can be classified into the following categories (we include only the categories which we have found differences for): 16 Again we are going to refer only to differences having an IFRS impact on RE or IS. 20 6.1.1. Assets and liabilities: recognition and measurement. 6.1.2. Consolidation procedures 6.1.1. Assets and liabilities: recognition and measurement. In general, there are not many differences due to inconsistencies between German and Spanish GAAP. That is because German and Spanish accounting belong to what we can consider as a Continental accounting model, fairly different to those predominant in Anglo-Saxon countries such as UK or USA where IFRS could be included. Although it is not the objective of the paper to go into different accounting models or the history of accounting regulation17, as we have already mentioned before, IFRS are based on a conceptual framework with a clear Anglo-Saxon inspiration where the concept of utility predominates. That is not the case for German or current Spanish regulations which have been traditionally based on prudence and where tax regulations have had a determining influence over accounting regulation. However, we can refer to some differences found (often differences in practice, rather than differences in definition), which are the following: • Sometimes German groups in the past used very large tax-induced depreciation, whereas in Spain is not possible for financial reporting. • Deferral conditions for start-up and other expenses are more restrictive under HGB than under Spanish GAAP. Development costs are never capitalised under HGB, while Spanish GAAP permits it if conditions are met. • Spanish GAAP do not allow using direct costing in inventory valuation while under HGB it is permitted. • In relation to leases that would be classified as financial leases in Spain, under HGB most of them are operating leases. • Pension accounting is different in HGB and Spain being an area highly influenced by tax regulations. 17 In Zeff (2000) we can find an interesting study related to the development of conceptual frameworks in Europe and USA, at the moment when accounting regulations needed a theoretical environment which could support the general accounting standards. 21 • In Spain there have been several regularisation laws (the last one in 1996) allowing companies to adjust the fixed assets to current market values, whereas in Germany that has never been possible. • HGB permits providing for future maintenance expenses. Spanish GAAP is more restrictive regarding provisions • Intangible assets: in Germany development costs are never capitalised, while under Spanish GAAP they can be capitalised if certain conditions are met. On the other hand, in Germany only external costs were capitalised as intangible assets, while in Spain all relevant costs, whether internally generated or external, are considered. 6.1.2. Consolidation procedures. • Consolidation goodwill can be deducted immediately against equity under HGB while under Spanish GAAP it must be recognised as an asset and amortized on a straight-line basis over a maximum of 20 years. • In Spain, following the VII UE Directive, subsidiaries with activities divergent from the Group’s activities can sometimes be excluded from consolidation, whereas in Germany this exclusion is not permitted. 6.2. SPANISH GAAP TO IFRS: MAIN DIFFERENCES Differences between Spanish GAAP and IFRS are expected to be much more important than those found between Spanish and German GAAP. As mentioned above, accounting models and conceptual frameworks underlying the two regulations are quite different. Although the most recent accounting reform in Spain18 took into consideration standards issued by the IASC, there is still divergence. 18 Last accounting regulation reform took place in Spain in the 90s. At that time a new Plan General de Contabilidad was issued in order to adapt Spanish accounting regulation to the European Directives, specially to the fourth one. The new writing of the Plan took into consideration IFRS enforced at the moment but many differences between them still prevail. 28 These companies have different percentages of their shares trading in the Spanish capital market. Profitability is very different from one company to another: Faes disclosed a net profit for 2003 of € 19,5 million (representing 16,5 % of turnover), whereas Ercros suffered in 2003 a loss of € 17,8 million (mostly from ordinary activities). In Exhibit 5 we combine the potential IFRS effects, by industry, from exhibit 4 (except for the areas where the potential impact was considered low), with actual balances (mostly corresponding to 2003) and conclude on expected impacts. The main conclusions are: • For most areas overall projected IFRS effects are considered low, because related balances or amounts are relatively low. • Ercros has important loss-carryforwards, whose tax effect has not been recognised given the loss situation of the Company. In the future there is a potential for a significant IFRS adjustment. • Zeltia had at December 31, 2003 a significant balance of short-term investments valued at the lower of cost or fair value. We understand that they are available for sale investments. If the same situation repeats in 2005 there is potential for an IFRS adjustment. • The companies disclose little or no information on pensions, derivatives and share commitments: it is understood that all the items are immaterial. If the balances were important the effect could be very important. 29 Exhibit 5: Expected impactof IFRS in chemical and pharmaceutical sector TABLE 5 Potential impact ----------------------- Significance of Balances --------------------- Overall Area Chemical & Pharm Ercros Faes La Seda (3) Natraceutical Zeltia Projected impact Deferred taxation Medium Low (1) Low Low Low Low Low Goodwill* Medium-low Low Low Low Low Low Low Pension liability High Low Low (2) Low Low Low Low Development expenses Medium Low Low Low Low Low Low Formation/deferred expens Medium-low Low Low Low Low Low Low Share-based payments Medium-low N/A N/A Low Low Low Low Financial instruments Medium-low Low Low Low Medium (4) Medium/High (5) Medium Forex transactions Medium-low Low Low Low Low Low Low (1) Ercros has unrecognised deferred assets from high tax loss-carryforwards.However, snce in 2003 it was in a loss situation the company might not comply in 2005 for an asset recognition (2) Fully funded in 2003. There might be actuarial differences in 2005 on (3) Some restructuring provisions, but with little potential for a IFRS adjustment (4) The company had at december 2003 € 4,8 million in unrecognised derivatives (5) Zeltia had € 131 million in available for sale investments at lower of cost or NRV * The new IFRS 3 might have additional impact on 2005 . 30 8. EXPECTED IMPACT IN THE FASHION INDUSTRY IN SPAIN The sample comprises three Spanish companies, with turnover ranging from € 126 million to € 3.974 million. The main company of the group is Inditex, which is made up of almost a hundred companies dealing with activities related to textile design, production and distribution. Inditex, with brands such as Zara, Massimo Duti or Pull & Bear has 2.029 stores all around the world. Although Adolfo Dominguez and Cortefiel have not as much international presence as Inditex, both have a strong network of national stores. Inditex also leads the sample profits, with a net profit of € 438 million in 2003. These companies have different percentages of their shares trading in the Spanish capital market. As in the analysis of impact in the chemical and pharmaceutical industry, in Exhibit 6 we combine the potential IFRS effects, by industry, from Exhibit 4 and conclude on expected impacts. The main conclusions are: • In most areas overall projected IFRS effects are considered low, because related balances or amounts are relatively low. • Inditex had recognised at December 31, 2003 a significant amount for restructuring provisions, so we expect some impacts in retained earnings when applying IFRS19. • Cortefiel had accounted as an intangible asset significant compensation costs related to the acquisition of its stores network. We expect a negative impact in the retained earnings of the company in the 2005 accounts due to this. • Cortefiel and Inditex account for start-up expenses in the balance sheet that will have to be expensed under IFRS. • At December 31, 2003 the fashion companies had short-term investments valued at the lower of cost or fair value. These investments were especially significant in Inditex. If this remains in 2005 we expect a positive adjustment due to the transition to IFRS. • Although Adolfo Dominguez and Inditex used derivatives in 2003, the amount is not disclosed or immaterial and no important impact from the transition to IFRS is 19 If the additional conditions as required bu IFRS would not be met. 31 expected. The same applies for the three companies of the sample in relation with pension plans. Exhibit 6: Expected impact of IFRS in fashion sector Potential Impact Overall Area Fashion Adolfo Domínguez Cortefiel Inditex Projected Impact Deferred taxation Medium Low Low Low Low Pension Liability High Medium-Low (1) Medium-Low (2) Medium-Low (1) Medium-Low Formation/Deferred expenses Medium-Low Low High (3) Medium-Low (4) Medium Share-Based payments Medium-Low N/A N/A Medium (5) Medium Financial instruments Medium-Low Medium (6) Low High (7) High Forex transactions Medium-Low Low Low Medium (8) Medium-Low Restructuring Provisions Low Medium-Low (9) Low Medium (10) Medium-Low (1) Retirement premium offered. (2) Pension complement offered. (3) € 25,7 million compensation expenses plus € 4,3 million of start-up expenses accounted as an intangible asset. (4) € 0,6 million of start-up expenses accounted as an intangible asset. (5) Stock Options plan offered. (6) € 1,3 million of unrecognised derivatives plus € 9,8 million in available for sale investments at lower of cost or NRV. (7) € 242,3 million in available for sale investments at lower of cost or NRV. (8) Inditex had at December 31, 2003 € 2,4 million of unrecognised exchange profits. (9) € 0,8 million overprudent restructuring provisions might be adjusted according to IFRS. (10) € 18 million overprudent provisions might be adjusted according to IFRS. ----------Significance of Balances---------- 32 9. CONCLUSIONS Taking German experience as an example of early adoption of IFRS and considering that in Spain listed corporations are obliged to introduce IFRS in their consolidated accounts from 2005, the objective of our paper was to assess the IFRS effects in Germany - at a DAX level and for two main industries: Chemical-Pharmaceutical and Fashion-, in order to forecast the expected IFRS effects on Spanish corporations in the same industries. The IFRS effects on German Corporations were important and often they meant a significant increase in retained earnings in the first year of adoption of IFRS. The main reason for those effects was the highly conservative philosophy of HGB leading to understatements of some assets (namely PPE, inventories, deferred taxes) and to an overstatement of some provisions. However, most of the German corporations had also understated pension liabilities by a large amount. The specific analysis of the IFRS effects by industry lead to similar conclusions, with some nuances: in the chemical and pharmaceutical industry effects on non-currrent assets and liabilities were relatively more important, whereas in the fashion industry the effects were mostly on working capital. After carrying out a selective extrapolation process for a number of Spanish corporations belonging to the same two industries, our conclusion is that there is likely to be some significant IFRS effects in Spain, but to a lesser degree than in Germany. In any case, our forecast is limited to a number of specific Spanish corporations listed in Appendix A; we did not issue any forecast or conclusion on Spanish corporations in general beyond the statement that impacts in Spain are likely to be less than in Germany. The principal expected financial impacts are likely to come from fair-valuing available for sale investments (resulting in an increase in value in the two industries, with a higher impact in the fashion industry), expensing start-up and other deferred expenses and recognising sharebased payments in the two industries (again, with a higher impact in the fashion industry). Also there might be some relatively minor impacts related to pension liabilities (increasing the balance), restructuring provisions (being reduced) and adjusting monetary assets and liabilities using the current rate of exchange. 33 Our findings and conclusions on the IFRS effects on German corporations and industries are based on actual figures reflecting historical facts. However, our conclusions on expected IFRS impacts in Spain can only be estimates, based on a number of assumptions. It is expected that quoted Spanish groups will have to disclose, in their 2004 accounts, the estimated IFRS effects on their future 2005 accounts (including comparatives). That information will be of great help to update our conclusions on a more and more reliable basis. . 34 REFERENCES - Amat et.al (2004) Normas Internacionales de Contabilidad NIC-NIIF. Gestión 2000. - Dumontier, P; Raffournier, B. (1998): “Why firms comply voluntarily with IAS: an empirical analysis with Swiss Data”. 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Includo en Tua Pereda (2000), Págs.. 51 a 92. 35 36 APPENDIX A KEY DATA FOR THE GERMAN AND SPANISH COMPANIES ANALYSED (€ million) Source: 2003 Annual Accounts (1) Company DAX Ch-Ph (2) Fashion Equity Sales Assets Net Profit Adidas x x 1.356 6.267 4.188 260 Altana x x 1.445 2.735 2.532 345 Bayer x x 12.213 28.567 37.445 -1.361 BMW x 5.254 36.881 19.482 392 Lufthansa x 2.653 15.957 16.732 -984 Deutsche Post x 6.106 41.220 155 1.309 Henkel x x 3.311 9.436 9.362 530 Linde x x 3.851 8.992 11.915 108 Man x 2.784 15.021 9.955 110 Metro x 4.161 53.595 26.580 496 RWE x 7.013 43.875 99.142 953 Schering x x 2.902 4.828 5.389 443 TUI x 2.767 19.215 12.989 275 Volkswagen x 24.430 87.153 119.136 1.095 Stada x 613 745 955 44 Wella x 655 3.312 2.519 122 Hugo Boss x 399 1.054 755 82 Escada x 73 621 438 -78 Ercros x 127 214 354 -18 Faes Farma x 118 173 198 20 La Seda x 136 232 404 5 Natraceutical x 14 18 34 2 Zeltia x 316 74 431 3 Adolfo Domínguez x 53 126 91 11 Cortefiel x 312 921 635 30 Inditex x 1.761 3.974 3.014 438 (2) Chemical and Pharmaceutical sector. (1) 2003 annual accounts have been selected for the whole sample in order to compare financial data at the same date. Subsequent appendices related to German quoted companies show financial data for the year where IFRS have been implemented. 37 44 APPENDIX D-1 IFRS EFFECTS IN GERMAN QUOTED COMPANIES IN FASHION INDUSTRY (million €) -RETAINED EARNINGS %% % effect on effect on effect on ADIDAS ESCADA H. BOSS TOTAL HGB RE total Adjst total Adjst Year 1st aplication 1.994 1999/00 2.001 (negative) (positive) RE per HGB 422 165 305 892 Goodwill -2 -2 -0,2 11 R & D, and other self devel/format exp -6 -6 -0,6 31 Deprec methods 1 1 0,1 2 Finance leasing (lesse) 3 -4 -1 -0,1 6 Inventories -7 25 18 2,1 39 AR, AP, Cash -5 7 2 0,3 -14 Financial instruments other 0 0,0 0 Pensions -2 -2 -0,2 -4 Other provisions/deferred income -5 17 12 1,3 -65 Deferred taxes 10 10 1,1 21 Other 17 2 19 2,2 42 Reclassifications of minority interest -19 -4 -23 -2,6 131 RE per IFRS 423 147 352 922 100 100 TOTAL EFFECT BY COMPANY 1 -18 46 29 % EFFECT ON HGB RE 0 -11 15 3 Total negative adjustments -18 Total positive adjustments 47 Net adjustments 29 Subsequent impacts Application of IAS 36 to 38 Immaterial N/A N/A 0 Application of IAS 39 -1 Immaterial (undisclosed) N/A -1 % EFFECT ON HGB RE (1st apl. year) 0 N/A N/A 0 45 46 APPENDIX D-2 IFRS EFFECTS IN GERMAN QUOTED COMPANIES IN FASHION INDUSTRY (million €) - IS %%% effect on effect on effect on ADIDAS ESCADA H. BOSS TOTAL local IS total Adjst total Adjst 1.996 1.999 2.001 (negative) (positive) Net HGB earnings 128 2 107 237 Goodwill -2 -2 -1 5 Inventories /Cost of sales -5 8 3 1 19 Deprec methods PPE 3 3 1 19 Pensions/personnel -1 -1 0 2 Other provisions -7 -7 -3 22 Net financial expenses -2 -2 -1 7 Deferred taxes -1 -1 0 3 Income taxes 10 10 4 63 Forex adjustments -5 -5 -2 16 Minority profit share -3 -3 -1 10 Other -3 -1 -7 -11 -5 35 Net earnings per lFRS 117 -14 118 222 100 100 Net effect on P&L -11 -16 11 -15 % of adjustments on net HGB earning s -9 -775 10 -6 Total negative effects -31 Total positive effects 16 Net effects -15 Edicions / Issues: 95/1 Productividad del trabajo, eficiencia e hipótesis de convergencia en la industria textilconfección europea Jordi López Sintas 95/2 El tamaño de la empresa y la remuneración de los máximos directivos Pedro Ortín Ángel 95/3 Multiple-Sourcing and Specific Investments Miguel A. García-Cestona 96/1 La estructura interna de puestos y salarios en la jerarquía empresarial Pedro Ortín Ángel 96/2 Efficient Privatization Under Incomplete Contracts Miguel A. García-Cestona Vicente Salas-Fumás 96/3 Institutional Imprinting, Global Cultural Models, and Patterns of Organizational Learning: Evidence from Firms in the Middle-Range Countries Mauro F. Guillén (The Wharton School, University of Pennsylvania) 96/4 The relationship between firm size and innovation activity: a double decision approach Ester Martínez-Ros (Universitat Autònoma de Barcelona) José M. Labeaga (UNED & Universitat Pompeu Fabra) 96/5 An Approach to Asset-Liability Risk Control Through Asset-Liability Securities Joan Montllor i Serrats María-Antonia Tarrazón Rodón 97/1 Protección de los administradores ante el mercado de capitales: evidencia empírica en España Rafael Crespí i Cladera 97/2 Determinants of Ownership Structure: A Panel Data Approach to the Spanish Case Rafael Crespí i Cladera 97/3 The Spanish Law of Suspension of Payments: An Economic Analysis From Empirical Evidence Esteban van Hemmen Almazor 98/1 Board Turnover and Firm Performance in Spanish Companies Carles Gispert i Pellicer 98/2 Libre competencia frente a regulación en la distribución de medicamentos: teoría y evidencia empírica para el caso español Eva Jansson 98/3 Firm’s Current Performance and Innovative Behavior Are the Main Determinants of Salaries in Small-Medium Enterprises Jordi López Sintas y Ester Martínez Ros 98/4 On The Determinants of Export Internalization: An Empirical Comparison Between Catalan and Spanish (Non-Catalan) Exporting Firms Alex Rialp i Criado 98/5 Modelo de previsión y análisis del equilibrio financiero en la empresa Antonio Amorós Mestres 99/1 Avaluació dinàmica de la productivitat dels hospitals i la seva descomposició en canvi tecnològic i canvi en eficiència tècnica Magda Solà 99/2 Block Transfers: Implications for the Governance of Spanish Corporations Rafael Crespí, and Carles Gispert 99/3 The Asymmetry of IBEX-35 Returns With TAR Models M.ª Dolores Márquez, César Villazón 99/4 Sources and Implications of Asymmetric Competition: An Empirical Study Pilar López Belbeze 99/5 El aprendizaje en los acuerdos de colaboración interempresarial Josep Rialp i Criado 00/1 The Cost of Ownership in the Governance of Interfirm Collaborations Josep Rialp i Criado, i Vicente Salas Fumás 00/2 Reasignación de recursos y resolución de contratos en el sistema concursal español Stefan van Hemmen Alamazor 00/3 A Dynamic Analysis of Intrafirm Diffusion: The ATMs Lucio Fuentelsaz, Jaime Gómez, Yolanda Polo 00/4 La Elección de los Socios: Razones para Cooperar con Centros de Investigación y con Proveedores y Clientes Cristina Bayona, Teresa García, Emilio Huerta 00/5 Inefficient Banks or Inefficient Assets? Emili Tortosa-Ausina 01/1 Collaboration Strategies and Technological Innovation: A Contractual Perspective of the Relationship Between Firms and Technological Centers Alex Rialp, Josep Rialp, Lluís Santamaria 01/2 Modelo para la Identificación de Grupos Estratégicos Basado en el Análisis Envolvente de Datos: Aplicación al Sector Bancario Español Diego Prior, Jordi Surroca 01/3 Seniority-Based Pay: Is It Used As a Motivation Device? Alberto Bayo-Moriones 01/4 Calidad de Servicio en la Enseñanza Universitaria: Desarrollo y Validación de una Escala de Medida. Joan-Lluís Capelleras, José M.ª Veciana. 01/5 Enfoque estructural vs. recursos y capacidades: un estudio empírico de los factores clave de éxito de las agencias de viajes en España. Fabiola López-Marín, José M.ª Veciana. 01/6 Opción de Responsabilidad Limitada y Opción de Abandonar: Una Integración para el Análisis del Coste de Capital. Neus Orgaz. 01/7 Un Modelo de Predicción de la Insolvencia Empresarial Aplicado al Sector Textil y Confección de Barcelona (1994-1997). Antonio Somoza López 01/8 La Gestión del Conocimiento en Pequeñas Empresas de Tecnología de la Información: Una Investigación Exploratoria. Laura E. Zapata Cantú. 01/9 Marco Institucional Formal de Creación de Empresas en Catalunya: Oferta y Demanda de Servicios de Apoyo David Urbano y José María Veciana. 02/1 Access as a Motivational Device: Implications for Human Resource Management. Pablo Arocena, Mikel Villanueva. 02/2 Efficiency and Quality in Local Government. The Case of Spanish Local Authorities M.T. Balaguer, D. Prior, J.M. Vela 02/3 Single Period Markowitz Portfolio Selection, Performance Gauging and Duality: A variation on Luenberger’s Shortage Function Walter Briec, Kristiaan Kerstens, Jean Baptiste Lesourd. 02/4 Innovación tecnológica y resultado exportador: un análisis empírico aplicado al sector textil-confección español Rossano Eusebio, Àlex Rialp Criado 02/5 Caracterización de las empresas que colaboran con centros tecnológicos Lluís Santamaria, Miguel Ángel García Cestona, Josep Rialp 02/6 Restricción de crédito bancario en economías emergentes: el caso de la PYME en México Esteban van Hemmen Almazor 02/7 La revelación de información obligatoria y voluntaria (activos intangibles) en las entidades de crédito. Factores determinantes. Gonzalo Rodríguez Pérez 02/8 Measuring Sustained Superior Performance at the Firm Level Emili Grifell - Tatjé, Pilar Marquès - Gou 02/9 Governance Mechanisms in Spanish Financial Intermediaries Rafel Crespi, Miguel A. García-Cestona, Vicente Salas 02/10 Endeudamiento y ciclos políticos presupuestarios: el caso de los ayuntamientos catalanes Pedro Escudero Fernández, Diego Prior Jiménez 02/11 The phenomenon of international new ventures, global start-ups, and born-globals:what do we know after a decade (1993-2002) of exhaustive scientific inquiry? Àlex Rialp-Criado, Josep Rialp-Criado, Gary A. Knight 03/1 A methodology to measure shareholder value orientation and shareholder value creation aimed at providing a research basis to investigate the link between both magnitudes Stephan Hecking 03/2 Assessing the structural change of strategic mobility. Determinants under hypercompetitive environments José Ángel Zúñiga Vicente, José David Vicente Lorente 03/3 Internal promotion versus external recruitment: evidence in industrial plants Alberto Bayo-Moriones, Pedro Ortín-Ángel 03/4 El empresario digital como determinante del éxito de las empresas puramente digitales: un estudio empírico Christian Serarols, José M.ª Veciana 03/5 La solvencia financiera del asegurador de vida y su relación con el coste de capital Jordi Celma Sanz 03/6 Proceso del desarrollo exportador de las empresas industriales españolas que participan en un consorcio de exportación: un estudio de caso Piedad Cristina Martínez Carazo 03/7 Utilidad de una Medida de la Eficiencia en la Generación de Ventas para la Predicción del Resultado María Cristina Abad Navarro 03/8 Evaluación de fondos de inversión garantizados por medio de portfolio insurance Sílvia Bou Ysàs 03/9 Aplicación del DEA en el Análisis de Beneficios en un Sistema Integrado Verticalmente Hacia Adelante Héctor Ruiz Soria 04/1 Regulación de la Distribución Eléctrica en España: Análisis Económico de una Década, 1987-1997 Leticia Blázquez Gómez; Emili Grifell-Tatjé 04/2 The Barcelonnettes: an Example of Network-Entrepreneurs in XIX Century Mexico. An Explanation Based on a Theory of Bounded Rational Choice with Social Embeddedness. Gonzalo Castañeda 05/1 IFRS Adoption in Europe: The Case of Germany. Soledad Moya, Jordi Perramon, Anselm Constans