LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)

HANI HANIFAH S

ARTICLE 1
A Cross-Country Analysis of IFRS Reconciliation Statements
I.

Summary

Business research on this scientific journal talked about how the initial implementation of IFRS
can affect financial reporting of the companies in European Union. As we know that, before the
companies in EU implemented IFRS on their financial statement, they used GAAP as their
accounting standards.
In this research, the researcher used a sample of IFRS Reconciliation Statements are examined to
identify the most significant IFRS adjustments. Using index of conservatism, these amounts are
further to analyze assess their impact on the accounting numbers reported under previous
national GAAP. The researcher used UK, Ireland and Italy firms as their sample. The analysis
focus on the reconciliation statement included in the first annual report produced under IFRS
from a sample companies in these three countries. For each of these companies, the
reconciliations were grouped according to the relevant standard and the amount of the
adjustment was expressed as a percentage of the total equity adjustments in the balance sheet of
total profit (loss) adjustments in the income statement. These percentages were then analyzed
statistically and descriptive information produced. The IFRS disclosure of companies from three
sample countries were also examined by means of a conservatism index. This index was
developed by gray (1980), is useful for assessing whether there are material quantitative
difference in profits and equity reported under IFRS as compared to that reported in accordance
national GAAP.
The result indicates that the impact of IFRS implementation on profit in each of the sample
countries was significant; on average, profit calculated under national GAAP increased by a
sizeable percentage once figures were reported using IFRS. However, the positive impact of
these adjustments on total profit under national GAAP was offset to some extent by changes
required under IFRS2, IFRS 5, IFRS 38 and IAS 39. The result also show that the introduction of

LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)
HANI HANIFAH S

IFRS has a variable effect on the total of equity of companies from three sample countries, while
UK and Italian companies experienced an increase in equity, the Irish firms in the sample
recorded decrease.
II.

Critical Review

A. Introduction
One of the most fundamental changes to affect financial reporting in recent times has been the
introduction of International Financial Reporting Standards (IFRS). These standards were
applied to the consolidated financial statements of European Union (EU)-listed companies for
annual accounting periods beginning on or after 1 January 2005. Previous year comparatives
were also required to be shown in the first set of financial statements published under the new
rules, together with reconciliations to the equity and profit figures that were calculated according
to previous national accounting standards. Therefore, in the EU, the basis underpinning the
preparation of the annual report, as well as the components, format and presentation of financial
statements, have changed dramatically. Preliminary evidence suggested that changes to the
financial statements were substantial. For example, in 2005, Vodafone plc reported that the
application of IFRS resulted in the restatement of a 1.9 billion loss into a 4.5 billion profit in
its financial statements because goodwill was no longer written off to the income statement
(Financial Times, 2005a). Similarly, in the same year, ICI highlighted the impact of IFRS on
corporate earnings when it revealed that the application of the new rules boosted its 2004 profit
by 6 per cent, primarily because of changes in the accounting treatment of pensions, goodwill,
derivatives and share options (Financial Times, 2005b). Further, Astra Zenecas 2005 re-stated
results showed that earnings per share had decreased by $0.02 and net assets had decreased by
$48 million when it adopted International GAAP (Accountancy, 2005), while BA announced that
it would not be able to pay a 2005 dividend because of its 1.4 billion pension deficit under
International Accounting Standard (IAS) 19 (Financial Times, 2005c). Therefore, a study of the
actual impact of IFRS adoption is required so that general conclusions about the financial effects
of the new standards can be made[1].
This paper reports an analysis of the IFRS reconciliation statements of a large sample of EU
companies from the UK, Ireland and Italy. It investigates the impact of IFRS on both the net
profit and the net worth of the sample companies as well as examining the effect of individual

LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)
HANI HANIFAH S

international standards. A cross-country comparison between the three countries is also made.
Therefore, this study is not intended as a theoretical piece of work, but rather serves to inform
subsequent research. The remainder of this paper is organised as follows. Section 2 summarises
the developments towards the international harmonisation of accounting standards in the EU and
reviews prior research that has identified those IFRSs that have proved problematic due to the
significant financial impact they have had upon implementation. The financial reporting
environments of the countries examined in this study are described in Section 3. Section 4 details
the dataset used and presents some preliminary statistics while the method of analysis adopted,
and the results, are discussed in Section 5. Finally, Section 6 offers a number of concluding
observation.
B. Discussion
The remainder of the paper is structured as follows. Section 1 introduce about initial IFRS
implementation in EU. Section 2 summaries the development towards the international
harmonization of accounting standards in the EU and review prior research that has identified
those IFRSs that have proved problematic due to significant financial impact they had upon
implementation. The financial reporting environment of the countries examined in this study are
described in section 3. Section 4 details the dataset used and presents some preliminary statistics
while the method of analysis adopted, and the result, are discussed in section 5. Finally, section 6
offers a number of concluding observation.
There are four major methodological approaches to concept analysis (Wilson-derived methods,
qualitative methods, critical analysis of the literature and quantitative methods) (Morse et al.,
1996a). In this paper, the researcher use quantitative as her research method. The researcher
used an index of conservatism these amounts are further to analyze assess their impact on the
accounting numbers reported under previous national GAAP. With this method, the researcher
can avoid subjectivity element on her research.
According to the title, the researcher use an sample of IFRS Reconciliation Statements are
examined to identify the most significant IFRS adjustments. Using an index of conservatism,
these amounts are further to analyze assess their impact on the accounting numbers reported
under previous national GAAP. The researcher choosed UK, Ireland and Italy firms as their

LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)
HANI HANIFAH S

sample. In our opinion, between the title and the substance of this journal, there was something
that didnt match. Based on the title of this journal, A Cross Country Analysis of IFRS
Reconciliation Statement, we know that the researcher want to know the effects of IFRS
implementation for the first time for the companies cross country, but in fact, the researcher just
choose the companies around European Union. In our opinion, later, the result of the research,
just informed the reader about the effect of IFRS implementation in European Union. Those
things cant reflect the real condition and situation.
If we look closer to the journal, we can know that the researcher didnt determine type of
company first. The researcher only choosed 175 companies around UK, Ireland and Italy. In our
opinion, if the researcher want to examined the effect of IFRS implementation and compare the
result between one company to other companies, one country to other countries, at the end, the
result will not relevant or only relevant in Europe country that have economic culture similarity.
Different with Kim M. Shima and David C. Yang in their journalFactors Affecting the Adoption
of IFRS they have research about IFRSs effect from many perpective such as source of finance
(equity and foreign debt financing), taxation, legal system, political and economic ties
(colonialism and trade alliances), inflation, economic development, education and culture. Kim
and David also used 8 years periods of financial statement in 527 countries. That will show us
fairly perspective about cost and benefit convergence of IFRS.

LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)
HANI HANIFAH S

Kim and David show some effects from IFRS such as:
1. The variables measuring equity sourced financing (EQUITY), the importance of taxation
(TAX) and inflation (INFLAT) were shown to be negative and significant in relation to
the adoption of IFRS.
2. The political and social ties variables for colonization by the UK (UKCOL) and the
presence of the top import or export partner that has adopted IFRS (ONE) were positive
and significant in relation to theadoption of IFRS.
3. Variables measuring the relative level of foreign sourced debt financing (DEBT), the
growth rate of the economy (GROWTH), and the gross capital formation (CAPFOR)
positively influenced adoption.
4. A common law legal system (LEGAL), literacy (LIT) and uncertainty avoidance (UA)
were shown to have a positive and significant relation to IFRS adoption. Although the
variable measuring culture (UA) was negatively correlated with IFRS adoption in
univariate analysis, multicollinearity with other independent variables may explain the
positive relation in multivariate results.
Kim and David also explain:
1. The negative relation between IFRS adoption and importance of equity financing, as
measured by the relative size of equity markets (EQUITY), may have been surprising
given that IFRS were intended to benefit capital market participants. Additional analysis
finds that these results were mainly driven by countries with smaller capital markets
adopting IFRS and to a smaller extent the hesitancy of some countries with larger capital
markets to forgot their national standards in place of IFRS.
2. Kim and David research also reveal three themes influencing the decision for adoption of
IFRS
a. The worldwide trend in globalization has produced contracting incentives for
countries to consider Memberships in certain international trade organizations, like
the EU, and increased trade with IFRS countries promote adoption as a means to
foster easier cross border information and capital flows. Similarly, colonial ties to the
United Kingdom, whose own accounting practices were influential to IFRS
development, may lessen transition costs for adoption. Negotiations of foreign
sourced debt contract may be more easily facilitated using an internationally
recognized accounting standard such as IFRS.

LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)
HANI HANIFAH S

b. The need for foreign investment and financing creates signaling incentives for
countries to adopt IFRS. Countries with growing economies may willingly adopt
international standards in an effort to make financial reporting of higher quality. In an
effort to attract foreign capital, these countries may anticipate that adopting
international standards will bring greater inflows of investment and international
loans.
c. Factors that concern more domestic issues, such as the greater importance of taxation,
may increase the political costs and transitional costs of adoption. Similarly, countries
with higher levels of inflation and larger capital markets are more hesitant to adopt
IFRS, which may relate to concerns about replacing existing standards. Like Kim and
David explain that there are some environmental dimensions that hinder adoption, as
we know although the application in the United Kingdom, Ireland, and Italy havent
significant problems, but the application of IFRS in Indonesia has some difficulties
especially for IAS 16 Property, plant and equipment. In IAS 16, the international
standard allows measurement of fixed assets using the revaluation model of next year
after the assets at values based on the value of the acquisition. Indonesians
companies can apply revalution model (fair value accounting) in recording PPE
(Property, Plan, and Equipment) began in 2008 (assuming that IAS 16 will be
effective in 2008). There will be a big change as far revalution models can not be
applied in Indonesia and can only be done if government regulations permit. What is
the difference historical cost, which is already better known than revalution model?
Revaluation models allow IAS 16 are recorded at their fair values. The problem in
Indonesia is a tax system that does not support this standard. In the tax laws, the
revaluation of assets upwards final taxed at 10% and must be paid in that year (eg,
may not be repaid in 5 years) and did not generate deferred tax liabilities that could be
reversed in subsequent years if the asset value has decreased. if the company decided
to use revalution model and price of the asset increases every year, then every year
have to pay a final tax. In fact, the asset price increase does not take the cash flow
into the company. If the tax code does not support the companies will be reluctant to
apply revaluation models. Moreover, if companies use the revaluation model of the
company should spend more money to pay appraisers.

LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)
HANI HANIFAH S

III.

Conclusion

Overall, we can conclude that the researcher generally has reached her initial purpose of her
research, but in our opinion there is still something that has to be corrected for the next research.
First is the researcher should choose companies not only located in European Union, but also to
choose companies from Asean so the researcher can reach her initial purpose of her research.
The researcher can know the impact of initial implementation of IFRS of companies around the
world. Beside the researcher should determine the type of the company first for example,
manufacture, service, bank, insurance and etc. So the researcher can more understand about the
effect of IFRS implementation specifically. If the researcher dont determine one type of
companies, but choose all of type of companies, it can make the result become ambigue. As we
know that we have to compare apple to apple. We cant compare apple to orange. And the last,
the researcher should determine number of companies as her sample proporsionally.
Additionally, In our opinion is very important to know the contribution of CMs model from Kim
and David is that it identifies those motivational factors that force national accounting policy
makers to adopt IFRS, while also highlighting national concerns that should be addressed before
transitioning to IFRS. Not only look at positive aspect when IFRS adopt in Europe but how IFRS
can run effectively in around the world.

References
Kim M. Shima, David C. Yang, 2012,Factors Affecting the Adoption of IFRS, Journal Of
Business, 17(3):276-29.
https://irvandesmalcpa.wordpress.com/2011/12/07/konvergensi-ifrs-suatu-kajian-literatur/

LINTANG AYU KINANTI

ARLINI PERMATASARI PUTRI (F1314017)
HANI HANIFAH S