Do Harmonised Accounting Standards Lead to Harmonised ......Harmonisation of accounting practices...

Ana Isabel Morais & Ana Fialho

Do Harmonised Accounting Standards Lead to HarmonisedAccounting Practices? An Empirical Study of IAS 39

Measurement Requirements in Some European Union Countries

I n 2005 International Financial Reporting Standards(IFRS) were adopted in the consolidated accountsof listed European Union (EU) companies. The

objective of this study is to investigate the level ofcompliance with a complex standard, IAS 39 FinancialInstruments: Recognition and Measurement , (IASB 2005)among companies from France, Germany, Italy, Portugaland the United Kingdom (UK). Previous studies haveshown that harmonised accounting standards do notnecessarily lead to harmonised accounting practices (forexample, Cairns 2000; Street et al. 1999; Street andBryant 2000; Bradshaw and Miller 2008). Some politicaland economic influences on financial measurementpractices remain local and capital markets are notperfectly integrated (Ball 2006). Therefore, some factors(such as legal systems, financial systems, role of theaccounting profession, tax alignment and extent ofprivate versus public ownership of companies), which inthe past led to differences between accounting systems,may still influence accounting in European countries.Furthermore, the enforcement of financial reportingstandards is considered to be an important factorin the promotion of comparable information (CESR2003). Without an effective worldwide enforcementmechanism, local political and economic factors willcontinue to exert a substantial influence on local financialreporting practice (Ball 2006).

However, economic globalisation requires increasedinternational comparability in financial reporting, andaccounting harmonisation has been seen as an importantway for achieving more reliable, credible and comparablefinancial information at an international level. There-fore, the European Parliament and the Council issuedregulation 1606/2002 in 2002, which requires publiclylisted European companies to adopt InternationalAccounting Standards Board (IASB) standards in thepreparation and presentation of consolidated accountsfor the periods beginning on or after 1 January 2005.Companies have incentives to comply with IFRS. Priorstudies indicate that companies complying voluntarilywith IFRS have a higher accounting quality (Barth et al.2008) and a lower cost of capital (Leuz and Verrechia2000).

The objective of this paper is to investigate the level ofharmonisation for IAS 39 Financial Instruments:Recognition and Measurement and to identify ifdifferent levels of harmonisation are associated withcompany-specific factors. Based on Rahman et al. (2002),we used the Jaccard (JACC) index to determine the levelof harmonisation between IAS 39 and the financialreporting practice of a broad-based sample ofEuropean-listed companies in 2005. We applied regressionanalysis to identify companies’ specific characteristics thataffect the level of convergence of the reporting practice offinancial instruments. The results of this study show ahigh level of harmonisation between accounting practicesof European companies included in our sample and IAS39.

JEL Classification: M41

CorrespondenceAna Isabel Morais, Avenida das Forcas Armadas, 1649-026 Lisboa,Portugal. Tel: +00351919058942; email: [email protected]

doi: 10.1111/j.1835-2561.2008.0027.x

224 Australian Accounting Review No. 46 Vol. 18 Issue 3 2008

A.l. Morais & A. Fialho Do Harmonised Accounting Standards Lead to Harmonised Accounting Practices?

We investigate whether there is variation in thecompliance of European companies with the reportingrequirements relating to IAS 39. Of all the standardsissued by the IASB, IAS 39 has caused the mostcontroversy because it requires the adoption of fairvalue measurement for selected financial instruments.In practice, there are potential problems with thedetermination of fair value. In some cases, if activeliquid markets are not available, companies mustestimate the fair value. This increases opportunitiesfor manipulation and may introduce some ‘noise’ dueto imperfect estimation of variables or imperfect orinadequate use of valuation models. Moreover, the fairvalue measurement approach adopted by IAS 39 differsfrom the accounting treatments used in Europe underprevious local accounting standards, and has resultedin criticism of, and opposition to, the standard invarious quarters, most notably the European financialand banking sector (European Central Bank 2004).

To investigate the level of compliance with IAS 39, weuse a sample of 203 European-listed companies drawnfrom five countries: France, Germany, Italy, Portugal andthe UK. Our findings indicate a high level of complianceof financial instrument-reporting practice with IAS 39.The results also show that the level of compliancewith IAS 39 is greater for financial institutions thanfor other companies. However, we find no persuasivesupport for other factors (auditor, size, being cross-listed,profitability and number of years of IFRS adoption)being related to the level of compliance with IAS 39.

In this study we aim to provide evidence on the extentof mandatory IAS/IFRS 39 compliance in the first periodthat companies were required to adopt the standards.This study is to provide evidence on the extent of IAS39 compliance in jurisdictions where the adoption ofIAS/IFRS is mandatory. Most previous IAS compliancestudies used samples of companies that adopted IFRSvoluntarily (Street et al. 1999; Tower et al. 1999; Streetand Bryant 2000). We also investigated compliance withIAS/IFRS 39 in the first period that companies wererequired to adopt the standards. As IFRS 1 First-timeAdoption of International Financial Reporting Standards(IASB 2004) paragraph 1 states, it is important to assurethat the first financial statements prepared and presentedunder IFRS contain high-quality information that istransparent for users is comparable over all periodspresented, and that provides a suitable starting pointfor accounting under IFRS. Our study suggests thatcompanies have achieved high levels of compliance,which is a positive signal in capital markets.

Literature Review

Our study is related to three main streams ofinvestigation into accounting harmonisation and the

level of compliance with IFRS: (1) analysis of thelevel of compliance with IFRS; (2) study of the levelof harmonisation of accounting practices followedby companies from different countries (materialharmonisation); and (3) exa-mination of the level ofdisclosure of information about financial instruments.

Table 1 presents a summary of some of the importantprior studies that concern the level of compliance withaccounting standards and the company-specific factorsthat affect the level of accounting practices harmonisa-tion. Those studies show that the level of accountingpractices harmonisation (material harmonisation) isrelated not only to accounting standards harmonisation(formal harmonisation), but also to company-specificfactors such as auditors, country of domicile and listingstatus. However, Table 1 also indicates that most priorstudies have been based on the voluntary adoption ofIFRS and, in general, they have not investigated IAS 39adoption. We investigate the compliance with IAS 39,for a sample of European companies that are required toadopt IASB standards.

Hypotheses and Research Design

Hypotheses

The IASB standards are developed for the private sector,for markets where public capital is raised and reportingrules are largely unaffected by taxation requirements.Historically, IASB standards have been influenced bycommon law countries, like the United States (US)and the UK. However, Portuguese, French, Italianand German institutional and legal environments aredifferent to those in the US and the UK, and thesedifferences affect accounting systems in the formercountries (Demirguc-Kunt and Levine 1999; Faccio andLang 2002; La Porta et al. 1998, 2006).

We expect that the level of compliance with IAS 39will be higher for companies in common law countries(UK) than for companies in code law countries (France,Germany, Italy and Portugal) for two main reasons. First,IASB standards are closer to common law accountingstandards than standards in code law countries. Second,La Porta et al. (1998, 2006) showed that the indexof private and public enforcement is higher for theUK than for other European countries. Therefore, it ishypothesised that:

H1: The level of compliance with IAS 39 will be higher forcompanies in common law countries than for companiesin code law countries.

Previous studies suggest that sector is a significantdeterminant in the choice of accounting methods(McLeay and Jaafar 2007; Meek et al. 1995; and Cooke

C© 2008 CPA Australia Australian Accounting Review 225

Do Harmonised Accounting Standards Lead to Harmonised Accounting Practices? A.l. Morais & A. Fialho

Tab

le1

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226 Australian Accounting Review C© 2008 CPA Australia


Tab

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1992) and highlight a relationship between disclosurelevel and industry sector (Cooke 1992 and Raffournier1995). Financial institutions are more regulated thancompanies from other sectors, suggesting a greaterincentive to comply with IASB standards than non-financial companies. Additionally, it is expected thatentities in a given industry may comply more closelywith a particular IFRS that is more applicable to theiractivities (Al-Shammari et al. 2008). Consequently, weexpect that financial institutions comply more with IAS39, since their activity is closely related with financialinstruments. As a result we hypothesise:

H2: The level of compliance with IAS 39 will be higher forfinancial institutions than in the other sectors.

Prior research provides some evidence that the level ofcompliance may be associated with the type of auditor.Auditing is considered to be an important enforcementmechanism. There is evidence that the earnings of UScompanies with a Big 4 auditor are of higher qualityand that the stock market values earnings surprises ofBig 4 clients more highly than earnings surprises ofcompanies with non-Big 4 auditors (Teoh and Wong1993; Krishnan 2003). Additionally, Francis and Wang(2008) find that earnings quality increases for companieswith Big 4 auditors, based on an international broad-based sample. As a result, we expect:

H3: The level of compliance with IAS 39 will be higher forcompanies audited by one of the Big 4 auditors.

Larger companies are more likely to comply with IASBstandards for three main reasons. First, larger companiesare more visible and tend to act to protect their repu-tation (Watts and Zimmerman 1978; Holthausen andLeftwhich 1983; Cooke 1989). Second, larger companiestend to have more resources which enable them tocomply with new accounting standards (Al-Shammariet al. 2008) Larger companies tend to incur lowercosts in accumulating detailed information (Singhvi andDesai 1971; Firth 1979). Finally, smaller companies maybe more likely to hide crucial information because ofcompetitive pressures within their industry. Thus it ishypothesised that:

H4: The level of compliance with IAS 39 will be higher inlarger companies.

We expect companies that are listed in more thanone market to exhibit a higher level of compliancedue to their incentive to make financial reportingmore transparent and comparable and to increase thecompany’s credibility. Street and Bryant (2000), Streetand Gray (2001), and Glaum and Street (2003) haveshown that companies that are cross-listed have higher

levels of voluntarily compliance with IAS. Accordingly itis hypothesised that:

H5: The level of compliance with IAS 39 will be higher incompanies listed in more than one market.

Prior research regarding the association between prof-itability and level of compliance reports mixed results.The research of Wallace et al. (1994) and Wallace andNaser (1995) indicate a significant association. However,Al-Shammari et al. (2008) find that profitability is not astatistically significant variable. Nevertheless, we expectmore profitable companies to comply more, to signaltheir ‘quality’. This leads to our next hypothesis:

H6: There is an association between profitability and levelof compliance with IAS 39.

Finally, we expect that the number of years a companyhas been complying with IFRS is an important variable inexplaining the level of compliance. Therefore, we expectthat experience of IFRS will assist companies to achievecompliance. This leads to our final hypothesis:

H7: The level of compliance with IAS 39 will be higher incompanies that adopted IFRS before 2005.

Sample

The sample is based on 220 European-listed companiesthat are included in the Paris Stock Index (CAC 40), theGerman Stock Index (DAX 30), the Milan Stock Index(MIB 40), the Portuguese Stock Index (PSI 20) and theLondon Stock Index (FTSE 100) in 2005, and that arerequired to adopt IAS 39.

Table 2, panel A shows descriptive statistics for thesample companies in terms of country representation.Of the total companies, we excluded 15 that presenttheir financial reports based on US Generally AcceptedAccounting Principles (GAAP) or UK GAAP. ForGermany, we excluded eight companies because they didnot adopt IFRS in 2005.1 A further two companies wereexcluded because of missing information. Consequently,the number of sample companies was reduced from 220to 203. In terms of country representation, most of thecompanies are from the UK (46.8%).

Table 2, panel B shows representation by industry.The sample comprises 50 companies from the financialsector (24.6%) and 153 companies from other sectors(75.4%). This industry classification shows that most ofthe companies are from the non-financial sector, exceptfor Italy.

Methodology

The first objective of this study is to investigate thelevel of compliance of financial instrument measurement



Table 2 Companies included in the sample

Panel A: Number of companies included in the sample

Companies France Germany Italy Portugal UK Total(CAC) (DAX) (MIB) (PSI) (FTSE)

Listed companies 40 30 30 20 100 220US GAAP – (8) (2) – (5) (15)Other – (1) (1) – – (2)Total by country 40 21 27 20 95 203% by country 19.7% 10.3% 13.3% 9.9% 46.8% 100%

Panel B: Industry analysis

Companies France Germany Italy Portugal UK Total(CAC) (DAX) (MIB) (PSI) (FTSE) (% by sector)

Financial sector 6 4 15 3 22 50(24.6)

Non-financial sector 34 17 12 17 73 153(75.4%)

Total by country 40 21 27 20 95 203(100%)

practice with IAS 39. To accomplish this goal, we useda self-constructed compliance checklist (see AppendixA), based on the amended IAS 39, as adopted by theEuropean Union (EU),2 and used by the companiesincluded in the sample. The checklist includes 54 itemsrelated to financial instruments’ measurement methods.In the second column, we assigned the value 1 to themeasurement methods required by IAS 39 adopted bythe EU and the value 0 to the measurement methodsnot allowed by IAS 39 adopted by the EU. In the thirdcolumn, we identified the measurement method adoptedby each company. We assigned the value ‘0’ when themeasurement method was not adopted by companiesand we assigned the value ‘1’ when the measurementmethod was adopted by companies.

Data were manually collected from the first annualreports under IFRS, for 2005, available on the companies’websites as well as on the website of Euroland(www.euroland.com). We started by examining the notescontaining the statement of accounting policies. In theevent that companies fail to indicate any informationabout financial instruments’ measurement requirementsin this note, we examined the note on financialinstruments and the balance sheet.

On adoption of IFRS, the same accounting policiesshould also be used at the transition date (end of 2004financial year) and the adoption date (2005 financialyear), except for the exemptions and exceptions toretrospective application of some IFRS, as describedin IFRS 1.3 The exemptions and exceptions related tofinancial instruments do not affect our data because allcompanies that disclosed the information indicated thatthey used the same policies for financial instruments attransition and adoption dates.

The information on measurement method was col-lected using a dichotomous classification. We assignedthe value 1 for the presence of each item and 0 for the

absence of the item. The various options for reportingeach item are coded as follows:

• ‘0’ to ‘Not adopted items’: this measurement methodwas not adopted by companies

• ‘1’ to ‘Adopted items’: this measurement methodwas adopted by companies

• ‘NP’ to ‘Not-presented items’: companies did notcomment on whether they have the transactions oritems to which the disclosure item applies

• ‘NA’ to ‘Non-applicable items’: companies have nosuch transactions or items to which disclosure rulesapply.

When a company did not disclose a measurementmethod but was required to do so, the ‘not presented’(NP), a ‘0’, was assigned. We may identify this type ofsituation, for example, when the company presentedheld-to-maturity investments in the balance sheet, butthe company did not disclose any information about theinitial or subsequent measurement of held-to-maturityinvestments in the notes.

Finally, when a company did not disclose anyinformation about an item, in the balance sheet or in thenotes, we considered that the company was not adoptingthe measurement method because the company was notrequired to and ‘not applicable’ (NA) was used. Suchcases were excluded from our analyses. Thus possiblemisclassification can occur if companies do not discloseinformation, not because they do not have the item,but because they do not comply with IAS 39. In thesecases, we should have classified the item as NP insteadof NA. The impact of this misclassification is likely to bean overstatement of the JACC index. We are unable tocontrol for this potential measurement error due to lackof company-specific information.

Based on these procedures applied to the range ofmeasurement requirements detailed in Appendix A, and



following Rahman et al. (2002), we calculated the JACCindex for each company and for each country in orderto determine the level of compliance with IAS 39 forour sample companies. The calculation was based onthe following 2∗2 table:

Where:

a = The number of matches when the companyadopted the specific measurement method requiredby IAS 39, (1,1).

b = The number of mismatches when the companydid not adopt the specific measurement methodrequired by IAS 39, (1,0).

c = The number of mismatches when companyadopted a specific measurement method notpermitted by IAS 39 (0,1).

d = The number of matches when the companydid not adopt the measurement method and themeasurement method is not required by IAS 39,(0,0).

The JACC index measures the extent of similaritybetween the practices that were adopted by the companyand required by IAS 39. The expression used for theindex, for each pair, is translated by the followingformula:

J ACC = a

a + b + c(1)

The values of the indexes may vary between 0 and1, and the higher the value of the index, the higher thelevel of compliance of financial instruments reportingpractice with IAS 39. After estimating the index bycompany, we computed the average of the JACC indexby country.

The second objective of this paper is to investigatewhether the level of compliance with IAS 39 variedbecause of differences in institutional factors inEU countries. To accomplish this second objective,we applied a linear regression model to relate thedependent variable JACC index to explanatory variables(country, industry, auditor, size, profitability, listingstatus and year of IFRS adoption). Data for all

the independent variables were obtained from theWorldscope Database.

Results

The JACC index is an index of similarity betweenthe companies’ practices and the measurements re-quirements of IAS 39. The level of compliance offinancial instruments reporting practice with IAS 39 wasmeasured with the JACC index, and in Table 3, panelA we present descriptive statistics, by country. We havealso computed separately the index with and withoutfinancial companies (Table 3, panel B). The mean levelof compliance for financial companies was 0.844 and fornon-financial companies 0.802. This indicates that, aspredicted, compliance with IAS 39 is higher for financialinstitutions.

The level of compliance with IAS 39 differs betweenthe countries. From Table 3, panel A it is evidentthat UK companies present the highest index (0.887),followed by Italian companies (0.871), Portuguesecompanies (0.856), French companies (0.839) andGerman companies (0.680). These results suggest thatGerman companies comply less with the measurementpractices of IAS 39 than the other European-listedcompanies. However, the results may reflect lack ofdisclosure on transition. Some German companiesdisclosed information about subsequent measurementin the notes, but failed to give information about theinitial measurement. In these cases, we considered theitems as not presented (NP) and we assigned a ‘0’. TheNP items have a negative impact on the JACC index,as these cases are observations of mismatches, and thehigher the number of NPs, the lower the JACC index.

A comparison test between two means using theGaussian distribution was conducted to identify if therewere any significant differences between the means ofJACC indexes by country. The results presented in Table3, panel C reveal that the differences between the Germanmean and the means of all other countries are significantat the 1% level. In the case of France and the UKthe difference between means is significant at the 5%level.

Untabulated results indicate that in the UK samplethere are ten companies (11%) with a JACC index lowerthan 0.6. On the other hand, in the other countries thereare only one or two companies with an index lower than0.6. Additionally, for the cases with an index equal to 1(total compliance) we have eight UK companies (8%),eight French companies (20%), six Italian companies(21%) and four Portuguese companies (20%). In thecase of Germany, there are no companies with indexesequal to 1 and there are six companies with a JACC indexlower than 0.6 (15%). Thus the majority of firms do notcomply completely with the requirements of IAS 39.



Table 3 Jaccard index results by country and by sector

Panel A: Jaccard index: IAS 39 compliance by country

N Minimum Maximum Mean Median Std dev.

France 40 0.571 1.000 0.839 0.846 0.123Germany 21 0.538 0.917 0.680 0.684 0.105Italy 27 0.632 1.000 0.871 0.889 0.094Portugal 20 0.651 1.000 0.856 0.862 0.107United Kingdom 95 0.455 1.000 0.887 0.846 0.145

Panel B: Jaccard index: IAS 39 compliance by sector

N Minimum Maximum Mean Median Std dev.

Financial 50 0.467 1.000 0.844 0.897 0.150Non-financial 153 0.455 1.000 0.802 0.824 0.138

Panel C: Differences in means of Jaccard index between countries

France Germany Italy Portugal

Germany 5.291∗∗∗

Italy −1.205 −6.543∗∗∗

Portugal −0.551 −5.313∗∗∗ 0.500United Kingdom −1.960∗∗ −7.577∗∗∗ −0.683 −1.100

This table shows significant differences (based on t-test) between the Jaccard indexes for each pair of countries. ∗, ∗∗, ∗∗∗ Significant atthe 10%, 5% and 1% levels of significance, respectively (two-tailed).

A deeper analysis indicates that the diversity betweenfinancial instrument accounting practices and IAS 39 isdue to the practices adopted on an initial measurementof financial instruments. We found that companiesdo not adopt the measurement method required byIAS 39 for initial measurement; namely, for the held-to-maturity investments, loans and receivables, andavailable-for-sale financial assets items, since they didnot include transaction costs as required by IAS 39.In order to evaluate the relevance of this practice, weanalysed the audit reports of all the companies includedin the sample. We found that none of the companieshad qualified reports in relation to accounting forfinancial instruments. A possible explanation for thisis that the non-disclosure of financial information abouttransaction costs is a minor issue.

In contrast, we observed that, in general, companiescomply with the accounting practices required forsubsequent measurement of all the categories offinancial assets and liabilities. In particular, there istotal harmonisation in the case of derivatives as allthe companies in the sample adopted the accountingtreatment required by IAS 39.

Since the classification of an item as NA can beproblematic, we also decided to analyse whether thenumber of NAs varies across the countries and acrossthe items. We found that, on average, 22% of oursample companies had NA items and the number ofNA items varies between 17% in Italy and 27% inthe UK. Indicating some country variations in the NAclassifications, the analysis also showed that German andItalian companies had the highest values of NA for theitem ‘Hedge of a net investment in a foreign operation’,

with 76% and 74%, respectively. The UK, French andPortuguese companies had the highest values of NA forthe item ‘Financial liabilities at fair value through profitand loss’, with 62%, 78% and 85%.

Table 4 reports results of a regression modelinvestigating explanatory factors of compliance of the203 European companies in our sample. The estimatedmodel is statistically significant and the explanatorypower evaluated by the adjusted R2 is around 11%.With respect to our specific hypotheses, we found thatonly country and industry are significant explanatoryvariables. Industry is statistically significant at the 10%significance level. The results reveal that the estimatedcoefficient for Germany is negative and statisticallysignificant at the 1% significance level, suggesting thatGerman companies tend to comply less with IAS 39 thanthe UK companies. The estimated coefficients of Italy,France and Portugal are positive, but not statisticallysignificant. Except for Germany, we found no evidencethat compliance differs across the countries consideredin our sample. Additionally, we found no persuasivesupport for companies’ specific factors such as auditor,size, being cross-listed, profitability and number of yearsof IFRS adoption being related to the level of compliancewith IAS 39.4

Conclusions

In this study we provide empirical evidence of the highlevel of compliance with respect to the measurementrequirements in IAS 39 by a sample of European-listed companies, from five different countries, in the



Table 4 Regression results1

Ln(JACC) = α0 + α1FRANCEi + α2ITALYi + α3PORTUGALi++α4GERMANYi + α5INDUSTRYi + α6AUDITORi++α7Ln(MVE)i + α8INTi + α9TDTAi + α10NITAi++α11PASTADOPTi + εi

Estimated sign Coefficient t-statistic

C −0.301 −1.663∗

FRANCE − 0.030 0.800ITALY − 0.069 1.617PORTUGAL − 0.067 1.275GERMANY − −0.147 −2.526∗∗∗

INDUSTRY + 0.066 1.915∗

AUDITOR + −0.050 −0.935Ln(MVE) + 0.005 0.476INT + 0.003 0.115TDTA ? 0.001 0.808NITA ? 0.086 0.427PASTADOPT + −0.008 −0.148N 203Adjusted R2 0.106F statistic 3.125∗∗∗

∗, ∗∗, ∗∗∗ Significant at the 10%, 5% and 1% levels of significance,respectively.This table presents the results of regression models that examinethe relationship between the logarithm of JACC index andindependent variables for the full sample of 203 Europeancompanies listed in CAC40, DAX30, MIB30, PSI20 and FTSE100.FRANCE assumes the value 1 if the company i is from Franceand 0 otherwise; ITALY assumes the value 1 if the company iis from Italy and 0 otherwise; PORTUGAL assumes the value 1if the company i is from Portugal and 0 otherwise; GERMANYassumes the value 1 if the company i is from Germany and 0otherwise; INDUSTRY assumes the value 1 if company i is afinancial institution and 0 otherwise; AUDITOR assumes the value1 if company i is audited by one of the BIG 4 and 0 otherwise;ln(MVE) is the logarithm of market value of equity of company i;INT assumes the value 1 if the company i is listed in more thanone market and 0 otherwise; TDTA is the ratio total debt/totalassets for company i; NITA is the ratio net income/total assets forcompany i; and PASTADOPT assumes the value 1 if the companyadopted IASB standards before 2005 and 0 otherwise.1We also estimated the same linear regression model withoutlogging the Jaccard index and we found similar results (resultsnot tabulated).

first year of mandatory adoption. Despite the factthat we studied the first year of mandatory adoptionof a complex standard, IAS 39, the results of theJACC index showed a high level of compliance withfinancial instrument measurement requirements. Weobserved almost full compliance with IAS 39 in allfive countries for subsequent measurement practices.There was less compliance in relation to disclosure ofinitial measurement policies in Germany. However, nocompany had a qualified audit report, suggesting thenon-disclosure was not a material issue.

Multivariate analysis showed that level of compliancewas not affected by institutional factors or companyfactors as predicted. Aside from the difference noted

above in relation to Germany, we did not observe countrydifferences as explanatory factors for compliance. Thissuggests that institutional factors had less influence,at least in relation to IAS 39 in the first year, thanwas expected. Financial sector companies demonstratedgreater compliance than other companies. Othercompany variables (auditor, size, being cross-listed,profitability and number of years of IFRS adoption) werenot significant explanatory factors.

Although previous studies have found that formalharmonisation does not necessarily lead to a completematerial harmonisation (Cairns 2000; Street et al. 1999;Street and Bryant 2000; Bradshaw and Miller 2008;Rahman et al. 2002; Ball et al. 2003), our findingsshow a high level of compliance of financial instrumentmeasurement practices with IAS 39, for the first year ofmandatory adoption. The result is a positive signal for theharmonisation of financial reporting of EU companies.

Ana Isabel Morais is at the ISCTE Business School. AnaFialho is at the Universidade de Evora.

Notes

1 Since 1998, German companies that are both the parent companyof a group and listed on a stock exchange have been able toopt for producing their group accounts according to IFRS orUS GAAP. After IASB standards became mandatory in 2005,Germany made the provision that the requirement to adopt IASBstandards should only apply to the financial year starting on orafter January 2007, in relation to companies that had been usingUS GAAP.

2 The modified version of IAS 39 contains carve-outs that affect twoparts of IAS 39: the fair value option and the hedge accountingrequirements. IAS 39, issued by IASB, provided an option to fairvalue all financial assets and liabilities without any restrictionsby designating them as financial assets or liabilities at fair valuethrough profit or loss. However, the standard adopted by the EUdid not include this option. In terms of hedge accounting, IAS 39adopted by the EU was less restrictive because the Commissiondeleted some conditions. These two differences do not affect ourchecklist.

3 IFRS 1 allows limited exemptions from retrospective applicationof some IFRS in specified areas where the cost of applying IFRSretrospectively may exceed the benefits to users of financialstatements. IFRS 1 also prohibits retrospective application ofIFRS in some areas where retrospective application may requirejudgments by management about past conditions after theoutcome of a particular transaction. If companies elect to usean exemption or are required to apply an exception, then theaccounting policies adopted in the opening IFRS balance sheetwill be different from the accounting policies adopted in thecomparative period and in the reporting period.

4 We also included leverage as a possible explanatory factor withno significant result.

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Appendix A Compliance Checklist

Items IAS 39 Companies

1 Financial assets at fair value through profit or loss1.1 Initial measurement

1.1.1 Fair value plus transaction costs 0 (1 or 0)1.1.2 Fair value 1 (1 or 0)

1.2 Subsequent measurement1.2.1 Cost 0 (1 or 0)1.2.2 Amortised cost 0 (1 or 0)1.2.3 Fair value in profit or loss 1 (1 or 0)1.2.4 Fair value in equity 0 (1 or 0)1.2.5 Impairment 0 (1 or 0)

2 Held to maturity investments2.1 Initial measurement


2.2 Subsequent measurement2.2.1 Cost 0 (1 or 0)2.2.2 Amortised cost 1 (1 or 0)2.2.3 Fair value in profit and loss 0 (1 or 0)2.2.4 Fair value in equity 0 (1 or 0)2.2.5 Impairment 1 (1 or 0)

3 Loans and receivables3.1 Initial measurement



4 Available-for-sale financial assets4.1 Initial measurement



5 Financial liabilities at fair value through profit and loss5.1 Initial measurement



6 Other financial liabilities6.1 Initial measurement





Items IAS 39 Companies

7 Derivatives7.1 Fair value hedge

7.1.1 Profit and loss 1 (1 or 0)7.1.2 Equity 0 (1 or 0)7.1.3 Deferral 0 (1 or 0)

7.2 Cash flow hedge7.2.1 Profit and loss 0 (1 or 0)7.2.2 Equity 1 (1 or 0)7.2.3 Deferral 0 (1 or 0)

7.3 Hedge of a net investment in a foreign operation7.3.1 Profit and loss 0 (1 or 0)7.3.2 Equity 1 (1 or 0)7.3.3 Deferral 0 (1 or 0)

7.4. Financial assets or liabilities at fair value through profit and loss7.4.1 Profit and loss 1 (1 or 0)7.4.2 Equity 0 (1 or 0)7.4.3 Deferral 0 (1 or 0)


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