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90 R.K. Larson, D.L. Street / Jnl. of Internatonal Accounting, Auditing and Taxation 13 (2004) 89119

1. Introduction

In recent years, the International Accounting Standards Board (IASB) has acquired

greater legitimacy and stature (Choi, Frost, & Meek, 2002;Herz, 2003;Meek & Thomas,2004; Roberts, Weetman, & Gordon, 2002). Indeed, the 2002 convergence survey conducted

by the six largest accounting firms reveals that 95% of the countries surveyed are committed

to either the complete or partial convergence of their national accounting standards with

International Financial Reporting Standards (IFRS)2 (BDO et al., 2003). A major event for

the IASB was the European Unions (EU) decision in 2002 to require all EU listed companies

to prepare consolidated accounts using IFRS beginning in 2005. To date, considerable

research has focused on convergence in the first 15 members of the EU (see, for example,

Haller, 2002;Street & Larson, 2004).3

Although it has received limited attention by academic researchers, the EUs decision

regarding IFRS has substantial ramifications for the rest of Europe. All new EU member

countries are obligated to follow accounting decisions made by the EU. This most directly

affects the ten new EU members that joined May 2004 and the three EU candidate countries.

In addition, Norway, Iceland, and Liechtenstein are members of the European Economic

Area (EEA). EEA countries, by treaty, are obligated to comply with EU Accounting Di-

rectives and Regulations, including the adoption of IFRS in 2005. Finally, although not an

EU member, Switzerland is geographically in the midst of the EU and has close economic

relationships with many EU countries.

The current study examines the state of convergence in these 17 countries by providing

an overview of how IFRS are being adopted and investigating the perceived impedimentsto convergence. The study addresses a key question recently posed by Meek and Thomas,

What about non-listed companies and companies nonconsolidated (i.e. individual com-

pany) accounts, particularly those from European code law countries? Will they con-

tinue to reflect national accounting systems, or will they shift away from them? (Meek

& Thomas, 2004, p. 31)

This research utilizes the extensive data set collected by the six largest international ac-

counting firms in their GAAP Convergence 2002 survey. Additionally, subsequent events

and studies are reviewed.

All 17 countries examined in this study will either require or effectively allow listedcompanies to prepare consolidated financial statements in accordance with IFRS by 2005.

However, several barriers to convergence were identified by the large firms survey. The most

frequently noted impediments were limited national capital markets, insufficient guidance

on first-time application of IFRS, the lack of existence of transactions of a specific nature

(such as pensions and other post-retirement benefits), the tax-driven nature of national

accounting regimes (i.e., the alignment between financial accounting and tax reporting),

and the complicated nature of particular standards. In regards to the latter, several of the

2

The term IFRS in the paper includes current and future standards issued by the IASB as well as InternationalAccounting Standards (IASs) issued by the former International Accounting Standards Committee.3 Before May 2004, the EU member countries were Austria, Belgium, Denmark, Finland, France, Germany,

Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, and the United Kingdom.


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R.K. Larson, D.L. Street / Jnl. of Internatonal Accounting, Auditing and Taxation 13 (2004) 89119 91

countries were particularly concerned about financial instruments. Other standards most

commonly viewed as complicated were impairment of assets, income taxes, and employee

benefits (pensions).

Our analysis reveals that concerns about tax linkages and complicated standards appearto be creating a situation in certain European countries where IFRS are most often used

for listed companies consolidated accounts, and another basis of accounting is used for

non-listed companies and/or for individual accounts.4 The research finds that few of the

countries studied intend to require IFRS for non-listed companies, and only about half will

require IFRS when listed companies prepare individual accounts. This finding suggests

the emergence of a two-standard system of financial reporting in a majority of these 17

European countries and is consistent withStreet and Larsons (2004) findings for the first

15 EU countries.

The rest of the paper is organized as follows. The study continues with a summary of

the major findings reported by the firms in GAAP Convergence 2002.This is followed by

an overview of official EU convergence efforts and a literature review. A detailed country-

by-country analysis of the data is then presented and followed by a discussion of the results

and the conclusion.

2. GAAP Convergence 2002

GAAP Convergence2002 is the third major survey sponsored by the sixlargest accounting

firms aimed at encouraging convergence of national accounting standards with IFRS [GAAP2000, GAAP 2001, and GAAP Convergence 2002 are available atwww.pwcglobal.com].

GAAP 2001found that, at year-end 2001, many national accounting systems included nu-

merous and significant differences from IFRS and that greater effort must be directed at iden-

tifying differences in these countries and planning for their timely elimination ( Andersen

et al., 2001).The 2002 survey explores the extent to which nations have developed country

plans aimed at converging their national standards with the international benchmark and

identifies impediments these countries have encountered, or anticipate facing, in their efforts

to converge with IFRS.

To provide context for the survey analysis by individual country, an understanding of the

overall findings ofGAAP Convergence 2002is important. The 2002 survey indicates globalaccounting convergence towards IFRS is underway. In some manner, 56 of the 59 partici-

pating countries had either adopted IFRS or intended to converge their national GAAP with

IFRS. While the survey findings support the legitimacy of the IASBs global accounting

role, it also identifies obstacles that continue to impede convergence in many countries. A

slim majority of the 59 countries express concerns regarding the complicated nature of cer-

tain international standards, especially those associated with fair value accounting. Almost

half note that the tax-driven nature of their national accounting regime hinders convergence.

Three impediments to convergence are identified by about one-third of the 59 countries:

4 The term non-listed includes all EU domiciled companies that are not listed on an EU stock exchange. The

terms individual accounts or individual financial statements are used in this paper. In some countries, these financial

statements may be known as annual, single-entity, or parent-only.
http://www.pwcglobal.com/http://www.pwcglobal.com/


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(1) disagreements with certain significant IFRS; (2) insufficient guidance on first-time ap-

plication of IFRS; and (3) limited domestic capital markets. Translation difficulties and

satisfaction with national standards among investors and financial statement users repre-

sent barriers to convergence in about 20% of the countries. In addition to dealing with theobstacles noted above, the large firms conclude that capital market participants need to join

forces to ensure that (1) the coverage of IFRS in the education and training of accountants

is increased, and (2) national language translations of IFRS, including interpretations, are

produced on a timely basis.

GAAP Convergence 2002 includes a copy of the survey questionnaire completed by

partners representing the participating accounting firms in the 59 countries (see pages 19

through 23). For each country, the findings reported in GAAP Convergence 2002 reflect

the consensus view of the participating partners in that country and not necessarily those

of the national governments or accounting standard setters. Respondents focused on listed

companies. In countries where requirements for listed and non-listed companies differ,

the responding partners were asked to provide additional information regarding the sit-

uation for non-listed companies (i.e. would they be allowed or required to prepare con-

solidated accounts based on IFRS, etc.).5 The primary data source for this paper is the

explanatory comments provided by the partners. In addition, subsequent events and studies

are reviewed.

3. EU convergence efforts

Effective January 1, 2005, European Commission (EC) Regulation No. 1606/2002 re-

quires all EU listed companies to prepare their consolidated accounts in accordance with

IFRS.6 However, listed companies will only be required to use those IFRS approved

for use by the EU. In September 2003, the EU endorsed all then existing IFRS except

those relating to financial instruments (including IAS 32, IAS 39, and Standing Interpre-

tations Committee (SIC) interpretations 5, 16, and 17). As of September 2004, the EU

still had not endorsed either the IASBs financial instrument standards or the 16 Inter-

national Accounting Standards (IASs) just revised as part of the Improvements Project

(EC, 2004).7

The EU regulation allows the 25 member countries to determine whether IFRS endorsedby the EC will be required beyond the preparation of consolidated financial statements by

listed companies. Each EU country is given the choice of whether IFRS will be required

or allowed in preparation of: (1) listed companies individual accounts, and (2) non-listed

companies consolidated and/or individual accounts.

5 The survey also did not seek to address any different or additional requirements that may apply to financial

services or other specialized industries.6 Companies can delay use of IFRS if: (1) they only have publicly traded debt securities; or (2) they already

use another set of internationally accepted standards and are publicly traded both in the EU and on a regulated

third country market.7 The ECs Accounting Regulatory Committee met in September, 2004 to discuss whether to recommend that

the EC in October endorse IAS 32 and IAS 39. It recommends endorsing IAS 39, except for two sections: the

prohibition on hedge accounting for core deposits and the fair value option.


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EU regulations also affect member states of the EEA. Effective since 1994, the EEA

agreement allows Iceland, Liechtenstein, and Norway to participate in the EU Single Mar-

ket without full EU membership. However, EEA countries are expected to comply with

the accounting directives and regulations (DTT, 2003b),including adoption of IFRS forpreparation of consolidated financial statements by listed companies (Andersen et al., 2001).

4. Literature review

Research addressing the convergence or harmonization of international accounting

standards is both growing and becoming more empirical in nature (for more extensive

discussions of this literature, seeAbd-Elsalam & Weetman, 2003;Garrido, Leon, & Zorio,

2002;Meek & Thomas, 2004;Rahman, Perera, & Ganesh, 2002;Street & Larson 2004;

Tarca, 2004). Many studies assess the International Accounting Standard Committees

(IASC) (predecessor of the IASB) and the IASBs success in facilitating or achieving

harmonization. These studies focus on either: (1) accounting practices of corporations,

de facto; or (2) national accounting standards, de jure(Tay & Parker 1990). This study is

concerned with the latter, de jure, and how or whether national accounting standards are

actually moving toward convergence.

Early studies investigating the harmonization of official national accounting standards

with IASs produced varying results (Larson & Kenny, 1999). While more recent studies

point out that convergence is still not complete (Bloomer, 1999;Street & Gray 1999),these

studies indicate that the increased legitimacy of the IASC, and now the IASB, is creating asituation where national accounting standards are in the process of converging with IFRS

(Abd-Elsalam & Weetman, 2003;Andersen et al., 2000, 2001).

Numerous studies have focused on accounting harmonization within the EU and other

European countries (Aisbitt & Nobes, 2001; Canibano & Mora, 2000; Haller, 2002; Hoarau,

1995;Roberts et al., 2002;Thorell & Whittington, 1994;Walton, 2003).In many of the

earlier studies, the major harmonization issues examined and debated typically center on the

proper and actual roles of the EU accounting directives and the IASC (e.g.Hoarau, 1995;

Thorell & Whittington, 1994). One stream of research investigates the problems associated

with translating accounting terminology and concepts, such as true and fair, into different

European languages (Aisbitt & Nobes, 2001; Evans, 2003). Another stream of researchused annual reports and indexes in an effort to measure European harmonization (Canibano

& Mora, 2000;Taplin, 2004).Roberts et al. (2002)andWalton (2003)document the devel-

opment of accounting harmonization in Europe through the EU directives and note the shift

towards convergence with IFRS. After providing an in-depth analysis of EU harmonization

and its movement toward the IASB,Haller (2002)raises many important issues. For exam-

ple, Haller (2002, 182) points out that the current EU solution of mandating IFRS for the

consolidated accounts of listed companies and allowing countries to require national GAAP

for individual accounts is not really an increase in efficiency and a reduction in complexity!

Recent developments in the EU and other European countries allow for an examination

of the effect of mandated regional regulations requiring convergence on national accountingstandards.Rahman et al. (2002)empirically support the idea that regulatory harmony can

improve practice harmony. However, the EU regulation mandating IFRS adoption by listed


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Table 1

Sources of information regarding accounting practices in 17 European countriesPanel A:New European Union (EU) member countries (as of May 1, 2004)

Sources Cypus Czech Republic Estonia Hungary Latvia Lithuania Malta

GAAP Convergence

2002

Xa X X X X X

GAAP 2001 X X X X X X

GAAP 2000 X X X X

EU (2004c) X X X X X X X

DTT (2000) X X X X X

Alexander and Archer

(2001)

X X X X X

European Accounting

Reviewarticles

Vafeas,

Trigeorgis, and

Georgiou (1998)

Sucher, Seal, and

Zelenka (1996),

Holeckova (1996),

Seal, Sucher, and

Zelenka (1995)

Bailey, Alver,

Mackevicius, and

Paupa (1995)

Rooz, Sztano, and Sztano

(1996);Clarkson, Fraser,

Iles, and Weetman (1996),

Boross, Clarkson, Fraser,

and Weetman (1995)

Bailey et al.

(1995)

Bailey et al.

(1995)

Other reports and

journal articles

Ernst and

Young

Cyprus (2004)

World Bank

(2003a),PwC

(2002a)

DTT (2003a) Roberts et al. (2002),de

Bruin (2000)

World Bank

(2002b)

DTT (2004

Panel B: European Union (EU) candidate countries, European Economic Area (EEA) member countries and Switzerland

BulgariaEU

candidate

RomaniaEU candidate TurkeyEU candidate IcelandEEA

member

LiechtensteinEEA

member

GAAP Convergence

2002

X X X

GAAP 2001 X X X X

GAAP 2000 X X

EU (2004b) X X

DTT (2000) X X

Alexander and Archer

(2001)

X X

European AccountingReviewarticles

King, Beattie, Cristescu,and Weetman (2001),

Dutia (1995)

Cooke and Curuk (1996),Simga-Mugan (1995)

Other reports and journal

articles

World Bank

(2002a)

PwC (2004),World Bank

(2003b),Ernst and Young

Romania (2003)

DTT (2004b),DTT

(2002),Bursal (1998)

a Cyprus returned aGAAP Convergence 2002survey, but the response did not address all areas this paper investigates. Cyp


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companies followed a variant of ideas suggested byHoarau (1995)and others by allowing

each country to decide whether national standards should still be allowed or required for

non-listed companies and the individual accounts of listed companies. The current study

contributes to the literature by exploring the dynamics that evolve when regional regula-tions mandate convergence for consolidated accounts of listed companies while allowing

individual countries to determine the degree to which national standards converge with

IFRS.

Convergence of national accounting standards with IFRS in what, until recently, could

be called non-EU Europe has received limited attention in academic accounting journals

based outside of Europe. Indeed, much of the existing English language academic literature

addressing this issue has appeared in the European Accounting Review. Most other prior

studies addressing convergence of IFRS and national standards were conducted by the large

public accounting firms or the World Bank. While not meant to be exhaustive,Table 1lists

the major English language studies and reports regarding convergence for the 17 European

countries examined in this study. Many focus on comparisons of one or more countrys

national GAAP and IFRS (e.g.Andersen et al., 2000, 2001;PwC, 2002a, 2002b, 2002c).

The most complete study isDeloitte Touche Tomatsus (DTT) (2000)detailed comparison

of IFRS with GAAP in 14 Eastern European countries. In general, this body of research

indicates that, while over time national accounting standards are gradually converging with

IFRS, a number of significant differences remain to be addressed before convergence is

achieved. While European countries are moving to converge their accounting standards with

IFRS, research is needed to provide updated assessments of convergence and impediments

to its progress (Meek & Thomas, 2004).Street and Larson (2004)investigated convergence in the first 15 EU member countries

and found that it is focused primarily on the consolidated accounts of listed companies.

A major barrier to convergence of national standards with IFRS appears to be that most

continental European countries have historically linked their financial reporting and tax

laws (Eberhartinger, 1999; Eilifsen, 1996; Haller, 2002; Hoogendoorn, 1996; Holeckova,

1996;Jaruga et al., 1996;Lamb, Nobes, & Roberts, 1998).Guenther and Hussein (1995, p.

132)concluded that one of the biggest impediments to uniform international accounting

standards is the requirement in many countries that financial reporting standards conform

to tax regulations. In the new EU environment,Meek and Thomas (2004, 31)ask, How

will taxation influence their accounting? Our review of the large firms 2002 convergencesurvey findings and recent developments provides preliminary evidence of the extent to

which the European countries examined in this study have been motivated to break or relax

this traditional link.

5. Findings

We examine convergence efforts in 17 European countries that are either new EU mem-

bers or have close economic and political ties to the EU. While the study examines 17

countries, it primarily focuses on the 13 countries that provided detailed responses to thelarge accounting firms 2002 convergence survey.GAAP Convergence 2002 did not cover

convergence efforts in Liechtenstein, Malta, and Turkey, and the survey response from


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Cyprus lacked detail (i.e. IFRS had already been adopted). This section begins by reporting

each countrys plans to converge national GAAP with IFRS (seeTable 2for a summary

of the countries included in the 2002 survey). Then, for the countries covered in GAAP

Convergence 2002, this section explores the difficulties experienced or anticipated in work-ing towards convergence (seeTable 3).This includes highlighting the particular accounting

topics and standards that the survey finds to be hindering convergence (seeTable 4).While

the analysis focuses on data from the survey, it also incorporates information from other

pertinent reports to provide a more complete and up-to-date snapshot of convergence ef-

forts in these countries. The discussion begins with the new EU members, followed by EU

candidate countries, the EEA countries, and Switzerland.

5.1. Cyprusnew EU member country

Cyprus requires all companies to use IFRS in preparation of both individual and consol-

idated financial statements (Ernst & Young Cyprus, 2004). Thus, Cyprus survey response

did not indicate any significant obstacles to convergence.

5.2. Czech Republicnew EU member country

The Czech Republic will require all listed companies to apply IFRS in consolidated and

individual financial statements for 2005 accounts (EU, 2004c).Non-listed companies will

be allowed, but not required, to use IFRS for consolidated accounts. Non-listed companies

will still be required to use Czech GAAP for individual accounts. Where applicable, earlyadoption of IFRS is permitted.

Accounting legislation effective January 1, 2002 resulted in the elimination of some dif-

ferences between Czech GAAP and IFRS and, accordingly, made Czech GAAP more con-

vergent with IFRS. Further progress is expected toward convergence. However, theWorld

Bank (2003a)notes a number of differences between IFRS and Czech GAAP, including

Changes in Accounting Policies (IAS 8), Intangible Assets (IAS 38), Business Combina-

tions (IAS 22), Special Purpose Entities, and Financial Leasing (IAS 17). TheWorld Bank

(2003a, p. 1)also reports that in practice, compliance with certain complex EU Directives

and IAS requirements, including those dealing with consolidation and deferred tax, has

been delayed.A number of impediments to convergence were identified by the 2002 convergence sur-

vey. These include insufficient guidance on first-time application of IFRS, the tax-driven

nature of the national accounting requirements (viewed as a major obstacle), a relatively

underdeveloped capital market, and a general satisfaction with national accounting stan-

dards. On a more positive note, foreign investors are seen as supporting the adoption of

IFRS. Another impediment to convergence noted on the Czech Republic survey is the lack

of transactions of a specific nature, such as pension schemes and other post-retirement ben-

efits. The survey also suggested that national standard-setting authorities believe the local

environment is specific and needs tailored accounting and reporting standards that reflect

the Czech environment.The survey indicates convergence could be further stimulated by the introduction of an

independent body that would issue Czech accounting standards. Convergence could also be


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Table 2

Expected use of IFRS in 2005 for 17 European countries by listed and non-listed, and by consolidated and individual financiaEuropean country IFRS required for consolidated statements of

listed companies

IFRS required for individual accounts

of listed companiesaIFRS Required for consolid

statements of non-listed com

New EU members

Cyprus Yes Yes Yes Czech Republic Yes Yes Allowed option

Estonia Yes Yes Required for financial insti

lowed for others

Hungary Yes, to extent does not conflict with national law No Allowed option, to extent do

flict with national law

Latvia Allowed, t o e xtent t here i s n o conflict w ith n ational

law

Allowed,to theextent there is no conflict

with national law

Allowed, to extent there is

with national law

Lithuania Yes Yes Yes for banks; not allowed

Malta Yes Yes Yes

Poland Yes Allowed option Yes for banks; not allowed

others

Slovakia Yes Yes Yes

Slovenia Yes Being considered as required Proposed as required for ba

surance firms; allowed fors

EU candidates

Bulgaria Yes Yes Yes

Romania Yesb Yesb Yesb

Turkey Allowed option Allowed option

EEA members

Iceland Yes, EEA members expected to (must) comply

with EU accounting directives and regulations

Being considered as allowed option Being considered as allowe

Liechtenstein Yes, EEA members expected to (must) comply


Allowed option Allowed option

Nor way Yes, EEA members expected to (must) comply


Will probably not be allowed Being considered as allowe

OtherSwitzerland Multinational companies must use IFRS or US

GAAP; Others may use Swiss GAAP

No No

Data sources: GAAP Convergence 2002 Survey Data, 2004 EU Surveys, DTT, E&Y, and PwC.a Several countries state that companies may use IFRS as long as it does not conflict with national accounting laws.b Except for small entities and where Romanian Accounting Law conflicts with IFRS.


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Table 3

Perceived impediments to achieving IFRS convergence identified in large firm surveya

European country Complicated nature

of particular

standards

Tax-driven nature

of national

accounting regime

Disagreement with

certain significant

IFRS

Insufficient guidance

on first-time

application of IFRS

Limited

capital

markets

Satisfaction w

national acco

standards am

investors/use

New EU members

Czech Republic X X X X

Estonia X X

Hungary X

Latvia X X X

Lithuania X X X X

Poland X X X X

Slovakia X X X Slovenia

EU candidates

Bulgaria X X X X

Romania X X X X X

EEA members

Iceland X

Norway X X X

Other

Switzerland X

Total 8 7 1 7 9 3

a As of December 31, 2002.


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Table 4

Accounting standards and areas perceived as barriers to convergence in surveya

European country Standards seen as too complicated or complex

Financial

Instruments

(IAS 39)

Impairment

of Assets

(IAS 36)

Deferred Income

Taxes (IAS 12)

Employee

Benefits (pensions)

(IAS 19)

Other

New EU members

Czech Republic

Estonia X X Reporting by Retirement Plans (IA

Hyper-Inflation (IAS 29), Joint Ven

(IAS 31)

Hungary

Latvia X X X X Construction Contracts (IAS 11), L

(IAS 17), Investment Property (IAS

Lithuania X X X Poland X X Business Combinations (IAS 22), S

and SIC 30 (Reporting Currency)

Slovakia X X

Slovenia

EU candidates

Bulgaria X X X X Leases (IAS 17), Reporting by Ret

Plans (IAS 26), Provisions (IAS 37

Romania X X Hyper-Inflation (IAS 29), SIC 19 a

30 (Reporting Currency)

EEA members

Iceland

Norway X

Other

Switzerland

Total 8 5 4 3

a As of December 31, 2002.


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facilitated by changes in tax and other business legislation. In regard to the former, the World

Bank (2003a)has expressed concern that the Ministry of Finance drives both accounting

regulations and the regulation and collection of taxes.

The survey noted that while new IFRS translations are usually prepared on an annualbasis, at year-end 2002, the most recent version of IFRS available in the Czech language

was the 2000 version. Confirming the survey, theWorld Bank (2003a)notes that 2001 and

2002 translations were not published. The World Bank further noted that the 2000 version

was expensive and, therefore, not widely available. AnIASB (2004)approved 2003 Czech

language translation is now available.

5.3. Estonianew EU member country

In 2005, Estonia will require all listed companies and all financial institutions to apply

IFRS in their consolidated and individual financial statements (EU, 2004c). Non-listed

companies may choose to prepare their consolidated and individual accounts using either

IFRS or Estonian GAAP. Larger companies are expected to choose IFRS while smaller and

medium-size companies (SMEs) are expected to choose Estonian GAAP.

The new law states that standards of the Estonian Accounting Standards Board (Estonian

GAAP) should be harmonized with IFRS and cross-referenced to applicable IFRS para-

graphs. New Estonian GAAP should be in line with IFRS recognition and measurement

requirements. Any differences in the local standards should be explained and justified

(DTT, 2003a).By mid-2003, most Estonian GAAP had been rewritten to conform with the

new law and IFRS.Although new standards of Estonian GAAP are to be based on IFRS, they will require less

disclosure and will allow simplified treatments in certain accounting areas. Several IFRS

deemed less relevant in the Estonian economic environment will not be covered by Estonian

GAAP. Standards not expected to be adopted into Estonian GAAP in the near future include

IAS 19 (Employee Benefits), IAS 26 (Accounting and Reporting by Retirement Plans),

IAS 29 (Hyperinflation), and IAS 31 (Joint Ventures). Estonian GAAP recommends that

companies follow IFRS where local GAAP is silent.

Convergence with IFRS is relatively widely supported by different authorities. The Esto-

nian Accounting Standards Board understands that, for a small country like Estonia, IFRS

is the most effective way of improving the quality of the accounting framework.Unlike many countries, the Estonian survey response states that the national accounting

environment is absolutely not tax-driven (there is no annual profit tax). Rather, as DTT

(2003a)notes, corporate tax is based on dividends, not profit.

While considerable progress has been made, the survey identified several impediments

to convergence. These include: (1) the complicated nature of certain IFRS, particularly

IAS 39 (Financial Instruments); (2) a relatively underdeveloped capital market, including

difficulties in measurement of the fair value for items such as long-term investments and

biological assets; (3) the lack of existence of transactions of a specific nature, such as pension

funds; and (4) translation difficulties.

IFRS were not translated into the national Estonian language at the time of the 2002survey. However, a translation was in process, and it was hoped that a completed text would

be published by the end of 2003 or the beginning of 2004.


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5.4. Hungarynew EU member country

In 2005, Hungary will require listed companies to prepare consolidated financial state-

ments in accordance with IFRS, to the extent there is no conflict with national law. IFRSwill also be permitted, but not required, for preparing consolidated accounts of non-listed

companies. However, IFRS will not be permitted for the individual accounts of listed and

non-listed companies unless the individual accounts also comply with the Hungarian Ac-

counting Act (EU, 2004c).

Government Resolution No. 2099/2002 (dated March 29, 2002) sets out a detailed time

schedule of steps to harmonize Hungarian accounting legislation with the EU norms. Hun-

garian national accounting standards will be based on IFRS, and the deadline for com-

pletion is 2008. The standard-setting process was initiated by several meetings set up

by the Ministry of Finance (which is responsible for the current accounting legislation)

to discuss basic decisions regarding the standards. Attendees represented the Chamber

of Auditors, the Association of Qualified Accountants, several Ministries, preparers and

users of financial statements, and Big 4 accounting firm representatives. The standard-

setting process is intended to eliminate some allowed alternatives included in IFRS. It

is also expected that some additional rules will be incorporated to reflect Hungarian

specialties.

The tax-driven nature of national accounting requirements is seen as an impediment to

convergence. Previously,de Bruin (2000)noted that Hungary still had a strong linkage to

accounting for tax purposes. Also, the survey identified some concerns that IFRS are too

comprehensive and complex for owner-managed SMEs.At the time of the survey, the most recent Hungarian version of IFRS was an unofficial

translation prepared in 1994. The 2002 edition was expected to be officially translated by the

end of 2003, and plans are to translate new IFRS as they are issued. With EU membership,

it is believed that problems with translation availability should disappear.

5.5. Latvianew EU member country

Legislation currently in force allows companies to use IFRS in the preparation of in-

dividual and consolidated financial statements, but only to the extent it does not conflict

with the national Latvian accounting laws (EU, 2004c). Additionally, Riga Stock Exchangelisting rules currently require that all Official List companies prepare and submit financial

statements prepared in accordance with IFRS. However, for statutory reporting purposes,

these companies are required to prepare another set of accounts prepared in accordance

with the accounting law.

Latvia plans to establish a board to develop Latvian standards in compliance with IFRS.

At the time of the survey, the new accounting law was still in the process of approval. The

proposed law would require the Cabinet of Ministers of Latvia to mandate the process of

convergence in accordance with EU requirements and IFRS, and it would apply to a long

list of companies and entities, including commercial companies, branches of international

companies, not-for-profit organizations, permanent representatives of foreign companies,state and municipality organizations, public organizations, and individuals carrying out

business activities. However, the Cabinet of Ministers would have the authority to determine


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the mandatory Latvian accounting standards (which should comply with IFRS) and the

scope of the entities to which the Latvian accounting standards apply.

While Latvian standards are to comply with EU regulations and IFRS, it is intended

that Latvian accounting standards will be more simple, understandable, and easier to use.Thus, few international standards will be incorporated without changes. While there should

not be any real conflicts with IFRS, Latvian standards may ignore subjects not generally

applicable to Latvia. When national accounting law does not make specific requirements,

best practices of IFRS are to be followed, but this guidance is likely to apply only to large,

local companies and foreign subsidiaries subject to the judgment of the auditor.

At the time of the survey, four national accounting standards had been issued by the

Financial Accounting Standardisation Technical Committee under the Latvian Ministry of

Economics. These include: (1) Presentation of Financial Statements; (2) Inventories; (3)

Cash Flow Statements; and (4) Net Profit or Loss for the Period, Fundamental Errors and

Changes in Accounting Policies. These standards are not legally binding, although they

represent generally accepted practice and may be voluntarily applied.

Several impediments to convergence in Latvia were identified by the survey. One im-

pediment is the lack of financial resources, including money to involve professionals in the

local standard development process. The survey also revealed concerns regarding insuffi-

cient guidance on first-time application of IFRS, although respondents noted there was no

reason to believe such guidance could not be issued if necessary.

The Latvian survey respondents believe a separate system of accounting for tax assess-

ment is a necessity. Under the existing system, application of IFRS influences calculation

of the tax base. Tax adjustments needed when taxable profit is different than accountingprofit under IFRS had not been developed at the time of the survey.

Indeed, there is reluctance of national authorities in Latvia to accept standards based

on rules prepared by an international organization, such as the IASB. Until EU admission,

Latvia could not directly incorporate IFRS in the Latvian legal system, which is based on

Continental law principles. However, the survey suggested recent admission to the EU may

facilitate inclusion of IFRS in Latvias legal system.

While the Latvian accounting profession is definitely interested in developing more

sophisticated national standards, IFRS are generally viewed as too complex, especially

with regard to extensive disclosures. Indeed, a major concern highlighted by the survey

is the complicated nature of some IFRS. Adoption of the following standards would becomplicated for SMEs (which constitutes more than 99% of enterprises in Latvia): IAS

11 (Construction Contracts), IAS 12 (Income Taxes), IAS 17 (Leases), IAS 19 (Employee

Benefits), IAS 36 (Impairment of Assets), IAS 39 (Financial Instruments), and IAS 40

(Investment Property).

Three additional barriers to convergence were identified by the survey. Certain types of

transactions, such as pensions and post-retirement benefits, do not exist or are not common

in Latvia. Thus, a lack of applicability may impact the perceived need for standards in these

areas. Another impediment is the relatively undeveloped state of the Latvian capital market,

which is seen as rather illiquid. Finally, translation difficulties were seen as a barrier.

At the time of the survey, the most recent translation of IFRS available was the versioneffective January 1, 2000 and published in 2001. Private organizations developed the 1997

and 2001 translations, which were not officially sanctioned. In the past, limited financial


15/31


resources were available for translation efforts. At the time of the survey, a translation of

the 2002 version of IFRS was underway.

5.6. Lithuanianew EU member country

In Lithuania, as of January 1, 2004, IFRS are required to be used by all companies listed

on the National Stock Exchange. By 2005, all listed companies and all banks (whether or

not listed) will be required to use IFRS to prepare both consolidated and individual financial

statements (EU, 2004c). Except for banks, all non-listed companies will be required to use

Lithuanian GAAP for both consolidated and individual financial statements.

A new national accounting standard-setting body has been established by law (World

Bank, 2002b). The Lithuanian Law of Financial Accounting specifically states that

Lithuanian Business Accounting Standards (Lithuanian GAAP) should comply withIFRS. Lithuanian GAAP is being developed and is expected to be similar to

IFRS.

According to the survey, several obstacles pose a barrier to convergence in Lithuania,

including insufficient guidance on first-time application of IFRS, the tax-driven nature of

the national accounting regime, and a relatively underdeveloped capital market. Certain

international standards are also seen as being relatively complicated, including IAS 12

(Income Taxes), IAS 36 (Impairment of Assets), and IAS 39 (Financial Instruments). The

World Bank (2003b)notes that the Bank of Lithuania prohibits banks from using IAS 39

and has rules regarding consolidation that conflict with IFRS.

The survey also indicated that in Lithuania both accountants and financial directorsin most companies and the public in general have very limited knowledge of IFRS. In

addition, up-to-date consolidation and equity methods of accounting were not required by

Lithuanian GAAP; therefore, companies do not have relevant experience. Another perceived

barrier to convergence identified by the survey is the lack of existence of certain types of

transactions in Lithuania, particularly pensions for employees and other post-retirement

benefits. Derivative instruments, including embedded derivatives, are also not widely used

in Lithuania.

An official translation of IFRS in the Lithuanian language has been published. However,

according to the survey, it is not easily available (expensive and sold only in certain places),

and the quality of the translation is poor.

5.7. Polandnew EU member country

As of July 2004, Polands Parliament had a proposal pending on how to officially con-

verge with IFRS (EU, 2004c). In light of Polands then anticipated accession to the EU,

survey respondents expected that public companies would be required to produce IFRS

consolidated financial statements as of 2005. Expectations are that listed corporations will

be allowed, but not required, to use IFRS for their individual financial statements (EU,

2004c).While non-listed banks are expected to be required to prepare their consolidatedaccounts using IFRS, few other non-listed companies will be permitted to use IFRS for their

consolidated or individual accounts.


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Recent changes to the Polish accounting law (applicable from 2002) moved Poland

significantly towards IFRS (e.g. long-term contracts, leasing, financial instruments). Poland

also adopted IAS 33 (Earnings Per Share). While not compulsory, Polands accounting law

states that for issues where Polish GAAP is silent, IFRS may be used. Beginning in 2004,all public companies are required to produce a reconciliation of net profit and net assets

between Polish GAAP and IFRS.

The 2002 accounting law additionally created the Polish Accounting Standards Com-

mittee (KSB). The Committees responsibilities include: (1) preparation of national ac-

counting standards; (2) analysis of IFRS, other national standards, and EU directives; and

(3) liaison with international bodies concerned with convergence of accounting standards.

In practice, expectations are that IFRS will be a key benchmark used by the Polish Ac-

counting Standards Committee when preparing Polish National Accounting Standards.

However, at the time of the survey, many IFRS had not yet been addressed, including

IAS 1, IAS 8, IAS 14, IAS 17, IAS 19, IAS 22, IAS 26, IAS 29, IAS 36, IAS 38,

and IAS 41. TheWorld Bank (2002c)has also expressed concerns about differences be-

tween IFRS and Polish Accounting Regulations, including reporting under hyperinflation-

ary conditions, revaluation of fixed assets, consolidation requirements, segment reporting,

research and development, leasing, accounting for employee benefits, and many disclosure

requirements.

According to the survey, a positive move towards convergence was the change in the

accounting law that removed the remaining elements of tax-driven accounting. How-

ever, according to the survey, there is some reluctance of national authorities in Poland

to accept standards based on rules prepared by an international organization, such asIASB. The reluctance stems from a mixture of factors, including a nationalist fear

of loss of sovereignty (i.e. decisions made outside of Poland) and the loss of sta-

tus or position (full adoption of IFRS would make domestic legislators/standard setters

redundant).

Other perceived impediments to convergence revealed by the survey include insufficient

guidance on first-time application of IFRS and a lack of practical knowledge on IFRS

application. There is also a general satisfaction with national accounting standards and a

lack of interest from investors and other users to change national standards. Indeed, there

is no significant demand from domestic investors for IFRS as opposed to Polish GAAP

reporting. The relatively underdeveloped capital market in Poland is perceived as limitingthe number of potential users of IFRS.

According to the survey, some IFRS are viewed as being particularly complicated. For

example, wide adoption of fair valuation causes problems with practical application, espe-

cially in regard to IAS 22 (Business Combinations), IAS 36 (Impairment of Assets) and IAS

39 (Financial Instruments). Also, the lack of existence of transactions of a specific nature

is considered an impediment. For example, there are no defined benefit plans in Poland and

financial instruments tend to be unsophisticated.

The most recent translation of IFRS into Polish appears to be based on the 2001 standards.

While expectations are that translations will be conducted on an annual basis, the Polish

experience of the translation process suggests the time lag is likely to be significant. Anexample of the difficulties that can be associated with translating accounting concepts from

one language to another is provided by Kosmala-MacLullichs (2003) analysis of how


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the notion of true and fair has been translated into Polish and the Polish accounting

framework.

5.8. Slovakianew EU member country

In 2005, Slovakia will require all companies (both listed and non-listed) to use

IFRS to prepare consolidated financial statements (EU, 2004c). Listed companies

will also be required to prepare individual accounts using IFRS. However, non-listed

companies will be required to prepare individual financial statements using national

standards.

Slovakia wanted to implement all required EU legislation before joining the EU. There-

fore, Accounting Act No. 431/2002 became effective on January 1, 2003 (PwC Slovensko,

2003). The law is based on EU directives and incorporates many provisions similar to IFRS,

including the True and Fair override principle. The survey indicates Slovakias goal is to

adopt IFRS into national GAAP on a standard-by-standard basis and, whenever possible,

to eliminate any differences between IFRS and Slovakian GAAP. The Ministry of Finance

can also prescribe accounting rules, as was done in the case of consolidation methods

(E&Y/Weinhold Legal, 2004).

Obstacles to convergence identified by the survey include the tax-driven nature of Slo-

vakian accounting requirements, the relatively underdeveloped capital markets in the coun-

try, the lack of existence of certain types of transactions, and the complicated nature of

certain IFRS. Regarding the latter, areas of particular concern include deferred tax assets

and financial instruments. Another problem identified by the survey is the cost and financingof the convergence project.

A 2000 translation of IFRS in the national language is available. The only updates

since then are translations of IAS 40 and IAS 41. However, accounting firms are provid-

ing some up-to-date information on IFRS (for examples, seewww.pwcglobal.com/skand

www.ey.com).

5.9. Slovenianew EU member country

In May 2004, Slovenia continued to contemplate how to adopt IFRS. Expecta-

tions are that IFRS will be required for use in the preparation of the consolidatedand individual financial statements of listed companies (EU, 2004c). For non-listed

companies, Slovenia will probably require banks and insurance companies to use

IFRS to prepare consolidated and individual accounts. All other non-listed companies

will be permitted to use IFRS in their consolidated and individual accounts (EU,

2004c).

According to the survey, revisions to Slovenian accounting standards continue to align

them more closely with IFRS. Presently, Slovenian Accounting Standards are nearly com-

pletely in compliance with IFRS. The Companys Act requires that Slovenian Accounting

Standards comply with EU practice. EU requirements for listed companies are also to be

adopted in Slovenia. Given the current state of Slovenian Accounting Standards, no ex-tensive plans are considered necessary because Slovenia sees itself as being in almost full

compliance with IFRS.
http://www.pwcglobal.com/skhttp://www.ey.com/http://www.ey.com/http://www.pwcglobal.com/sk


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A 2001 translation of IFRS is available in the national language. There is usually a

two to three month time lag between the issuance and availability of a new standard or

interpretation after it has been approved by the IASB.

5.10. BulgariaEU candidate country

The Bulgarian Accountancy Act states that, effective January 1, 2005, all entities should

prepare and submit both consolidated and individual accounts in accordance with IFRS.

Since January 1, 2003, transitional provisions of the Act require that banks, insurance

companies, and investment and pension assurance companies prepare both individual and

consolidated financial statements in compliance with IFRS. Since 2003, all Bulgarian com-

panies have been allowed to use IFRS. The 2001 Accounting law requires full convergence

of Bulgarian national accounting standards with IFRS (seeWorld Bank, 2002a).Until the enactment of IFRS, Bulgarian companies will apply national accounting stan-

dards adopted by the Council of Ministers. In 2002, national standards were amended and

became quite similar to IFRS. The objective is to have the requirements of local GAAP fol-

low IFRS so that the transition is smooth. Until complete implementation of IFRS in 2005,

the National Accountancy Council, as a consultative body to the Ministry of Finance, will

assist in the preparation of the normative acts for the accounting activities in the country.

According to the survey, there are no longer significant disagreements between Bulgarian

GAAP and IFRS. Remaining differences relate to IAS 12 (Income Taxes), IAS 17 (Leases),

IAS 23 (Borrowing Costs), and IAS 34 (Interim Reports). In addition, not all of the SICs

have been taken into account by national standards. There are additionally specific national

standards which do not have an equivalent IFRS. These include national standards covering

financial statements of insurance companies, specialized investment companies, not-for-

profit organizations, and accounting for environmental expenses. The Bulgarian accounting

profession will await guidance on international practice for the above-mentioned issues.

In Bulgaria, several items are perceived as impediments to convergence. These include

insufficient guidance on first-time application of IFRS, the tax-driven nature of the national

accounting requirements, the underdeveloped nature of capital market, translation difficul-

ties, and the complicated nature of particular IFRS. The survey respondents listed several

standards as being complicated. These include IAS 12 (Income Taxes), IAS 17 (Leases),IAS 19 (Employee Benefits), IAS 26 (Accounting and Reporting by Retirement Plans),

IAS 36 (Impairment of Assets), IAS 37 (Provisions, Contingent Liabilities and Contingent

Assets), and IAS 39 (Financial Instruments). According to the survey, the nature of pensions

and other post-retirement benefits locally are different from international practice. Due to

the underdeveloped business environment and market, there are also difficulties with the

application of IAS 36 and especially IAS 39.

The timely translation of IFRS into Bulgarian is a concern. At the time of the survey,

a 2001 translation was available, but unofficial, and a 2002 translation was in process.

TheWorld Bank (2002a)reports that translation efforts rely on the goodwill of committee

members from academe and international accounting firms that have been working with theMinistry of Finance. The survey indicated there is often a 612 month time lag between the

issuance of new IFRS and the availability of a Bulgarian translation.


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5.11. RomaniaEU candidate country

After 2006, all companies, except small entities, will be required to use IFRS in Roma-

nia. In 2001, the Ministry of Public Finance issued Order 94, which approved accountingregulations regarding harmonization with the Fourth EU Directive and IFRS. Order 94 re-

quires a stepped implementation of IFRS between 2001 and 2006. Each year smaller and

smaller Romanian companies are required to use IFRS. For example, in 2003 (vs. 2004) [vs.

2006], firms must use IFRS if they meet at least two of the following criteria: (1) revenues

of at least 7 (6) [5] million euros, (2) asset book value of at least 3.5 (3) [2.5] million euros,

and (3) at least 150 (100) [50] employees (Ernst & Young Romania, 2003,World Bank,

2003b).

The official IAS Romanian translation was incorporated into local legislation regard-

ing financial reporting. However, the survey notes that some subsequent regulations and

guidance are contrary to harmonization, such as one encouraging non-application of IAS

29 (Hyperinflation). TheWorld Bank (2003b, pp. 12) is quite concerned that the Ac-

counting Law and secondary legislation include specific accounting requirements that may

conflict with IAS and undermine government efforts to implement reliable accounting

standards.

The survey reports several obstacles to convergence in Romania, including insufficient

guidance on first-time application of IFRS and the tax-driven nature of national accounting

requirements. An interesting point related to the latter is the fact that the Ministry of Finance

is currently responsible both for setting accounting standards and for planning and collecting

taxes (World Bank, 2003b).Another perceived barrier to convergence in Romania is the complicated nature of certain

IFRS. The survey notes that IAS 29 (Hyperinflation), IAS 36 (Impairment of Assets), IAS 39

(Financial Instruments), SIC 19 and SIC 30 (Reporting Currency), and standards referring

to consolidation are particularly problematic. This may be a significant issue because, in

practice, the imposition of complex IAS dealing with financial instruments, consolidation,

and hyperinflation has been delayed (World Bank, 2003b, p. 1).

According to the survey, there are also major disagreements with certain significant

IFRS, including, but not limited to: (1) mandatory non-application of IAS 29 for financial

statements filed with the Ministry of Finance; (2) the basis for fixed assets valuation; (3)

prescribed format for notes; and (4) non-application of SIC 19 (IAS 21) and SIC 30. Ac-cording toPwC (2004), several differences remain between IFRS and Romanian GAAP,

including financial instruments.

The survey notes a reluctance of national authorities to accept standards based on rules

prepared by an international organization, such as IASB. Romanian authorities have a

tendency to try to amend the application of certain IFRS via detailed Ministry of Public

Finance Instructions. These instructions can, while officially requiring application of all

IFRS, prescribe certain fixed format disclosures that might introduce contradictions to

IFRS.

According to the survey, there is also a perception in Romania that financial statements

are for the fiscal authorities. The capital market is still evolving, resulting in less pressurefrom investors to achieve full IFRS compliance. So, another perceived impediment is due

to the relatively underdeveloped capital markets in Romania.


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The 2001 IFRS were translated into Romanian, and at the time of the survey, the 2002

edition was being translated. TheWorld Bank (2003b)notes that while the Department for

International Development in the United Kingdom is funding the translation, copies of the

translation are considered expensive by local standards.

5.12. TurkeyEU candidate country

While not included in the 2002 convergence survey, Turkey is making many changes to

converge national rules with IFRS. Currently, Turkey permits domestic listed companies

to use IFRS (DTT, 2004b). Two regulatory bodies define accounting standards in Turkey:

the Banking Regulation and Supervision Agency (BRSA) for the banking sector, and the

Capital Market Board (CMB) for publicly traded companies (DTT, 2002). Effective July

2002, BRSA requires a completely new set of standards to converge their standards with

IFRS. These new standards closely conform to IAS 7, 8, 10, 16, 17, 20, 21, 22, 24, 27, 28,

29, 31, 32, 36, 37, 38, and 39.

Historically, CMB accounting standards were quite different from IFRS. In 2002, the

CMB translated IFRS into Turkish and proposed changes to CMB rules to make most

quite similar to IFRS. The effective date for these proposals was December 31, 2003 (DTT,

2002).

5.13. IcelandEEA member

In Iceland, at the end of 2002, there were no formal plans to converge Icelandic GAAP andIFRS in full or in part. However, a committee was reviewing the Annual Accounts Act (No.

144/1994) on behalf of the Ministry of Finance. The review of the act focused on whether

Iceland is in compliance with the EUs Fourth Council Directive and the Seventh Council

Directive, based on comments from the European Free Trade Association Surveillance

Authority (ESA). AnEU (2004b)survey found Iceland was still in the Work Group Stage.

The EU survey suggests IFRS will only be required for the consolidated accounts of

listed companies in Iceland. Listed companies will also probably be permitted, but not

required, to prepare individual accounts using IFRS. In addition, while not required, non-

listed Icelandic companies will probably be permitted to prepare individual and consolidated

financial statements using IFRS.The Annual Accounts Act and Regulation No. 696/1996 Presentation and contents of

financial statements are the primary sources of financial reporting requirements in Iceland.

These acts and regulations do not refer to IFRS. However, because IFRS presentation and

accounting principles are more clear and accurate and give a better view of a companys

financial standing than national Icelandic GAAP, the survey states that companies using

IFRS fulfill all the requirements of Icelandic GAAP. Further, by the end of 2002, the

Icelandic Financial Accounting Standard Board (a body set up by law) had issued five

rules for preparing accounts based on IAS 1 (Presentation of Financial Statements), IAS

2 (Inventories), IAS 7 (Cash Flow), IAS 8 (Net Profit or Loss for the Period), and IAS 12

(Income Taxes).The survey indicates that major groups seen as influencing convergence in Iceland include

its accounting profession and Icelandic corporate executive directors. A major impediment


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to convergence according to the survey is the lack of interest of national standard-setting

authorities (the Icelandic Parliament). Beyond a general lack of interest, another imped-

iment may be the relatively small and underdeveloped capital market in Iceland. Finally,

while not considered an impediment, IFRS has not yet been translated into the nationallanguage.

5.14. LiechtensteinEEA member

Liechtenstein was not included in the firms 2002 convergence survey. Although the

country does not have an active stock exchange, Liechtenstein has passed laws regarding

IFRS (EU, 2004b). All EEA countries are bound by treaty to require that listed corporations

consolidated accounts be prepared in accordance with IFRS. In addition, IFRS will be

permitted, but not required, in preparing individual accounts of listed companies and forboth the consolidated and individual accounts of non-listed companies.

5.15. NorwayEEA member

Norway, as a member of the EEA, is required to implement the EU accounting directives

(Alexander & Schwencke, 2003;DTT, 2003b).The 2002 convergence survey found that a

process hadbeen started to evaluate whether the accounting act in Norway should be changed

so listed companiesand perhaps other large companieswould be required to prepare

consolidated accounts in accordance with IFRS. The EU (2004b) survey indicates thisprocess is continuing. Expectations are that IFRS will be allowed for preparing consolidated

accounts of both listed and non-listed companies. For individual accounts of all companies,

IFRS will not be required, and will probably not be allowed.

The Norwegian Accounting Standards Board has stated that one of its goals is to

converge with IFRS. Because EU regulations do not have the force of law in Norway,

the Norwegian Accounting Act must be revised before implementation of IFRS would

be allowed. The government intends to follow the EU regulation and is considering

convergence.

Norwegian standard setters are very aware of the fact that Norwegian companies operate

in an international market. This fact, combined with the globalization of capital markets,has necessitated Norwegian GAAP adapting to IFRS. The survey indicates that apart from

some circumstances where a requirement under IFRS would be prohibited under Norwegian

law, Norwegian GAAP is in line with IFRS.

Alexander and Schwencke (2003, p. 563)confirm that new Norwegian accounting stan-

dards heavily rely on IFRS but further state that some standards include minor violations

of some explicit rules of the IASB. These authors are more concerned about the Norwegian

standards direction because Norway is probably the only country which has implemented

the EC directives without explicitly formulating a general prudence principle within the law

(p. 562). While noting this situation may violate the directive, Alexander and Schwencke

raise the larger issue that compared to IFRS, Norwegian accounting is giving more empha-sis to matching, as opposed to prudence, and the profit and loss statement, rather than the

balance sheet.


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Because Norway has a well-established GAAP, the survey finds that one impediment to

convergence is a general satisfaction with national accounting standards. Therefore, many

companies have a lack of interest to change national standards. Conversely, taxes are not a

problem because tax and accounting rules are mainly separated in Norway.Another impediment to convergence is the belief that insufficient guidance exists on first-

time application of IFRS. Also, until clarification is provided as to exactly which companies

will be affected, companies are less willing to start the process to prepare for convergence

to IFRS. In addition, some IFRS are seen as particularly complicated, especially IAS 39

(financial instruments).

The survey suggested that IFRS had not been translated into Norwegian; however, expec-

tations were that IFRS would be translated into Norwegian in the future. Records indicate

that a Norwegian translation of IAS was available in 1995 (IASC, 1995).

5.16. Switzerland

Beginning in 2005, Swiss listed companies that are considered to be multinational will

be required to use either IFRS or US GAAP for consolidated accounts (DTT, 2004a). All

other listed companies will alternatively be allowed to use Swiss GAAP. Swiss GAAP will

also continue to be used by non-listed companies and for the individual accounts of listed

companies.

For statutory (individual) accounts, Swiss companies do not adopt IFRS for tax reasons.

Therefore, the tax-driven nature of the national accounting requirements is seen as an

impediment to convergence. Income taxes are determined on an unconsolidated level andare based on the statutory accounts.

The Swiss standard setter has introduced many IFRS requirements to Swiss GAAP, and

convergence is anticipated to continue but only for consolidated accounts. All attempts to

introduce a true and fair view to Swiss GAAP for the preparation of individual accounts

have failed.

According to the survey, Swiss investors and users are interested primarily in consoli-

dated accounts. Also, as Swiss law allows different accounting standards for consolidated

accounts, survey respondents see no real need to convert national GAAP to IFRS.

In October 2003, official translations were available in three official Swiss languages

(German, French, Italian) through the EU. However, the survey noted that a one-year timelag often exists between the issuance of new IFRS and their translations being available in

the Swiss national languages.

6. Discussion and conclusion

6.1. Translation issues

An important issue affecting convergence with IFRS highlighted by the survey is whether

or not quality accounting materials are available in a countrys national language(s). Thesurvey emphasizes that, in recent years, IFRS either were not available or were not available

in a timely manner in the national language of several of the countries studied. While editions


23/31


Table 5

Translations of IFRS into national languages

European country Translation of IFRS

available in countrysnational language

Translation official

(approved) or unofficial

Most recent IFRS

translation

New EU membersa

Cyprus Yes (Greek) Done by EU; not IASB October 2003 EU

translation of all EU

endorsed IFRS

Czech Republic Yes Approved 2003 standards

Estonia Translation was in

progress; expected in

2003 or 2004

Hungary Yes Available, but not approved 2003 standards

Latvia Yes Available, but not approved 2001 standardsLithuania Yes Considered official by

Lithuania; Not IASB

Recent, but unclear which

year

Poland Yes Approved 2001 standards

Slovakia Yes Approved 2000 standards; plus IAS

40 and 41

Slovenia Yes Approved 2001 standards

EU candidates

Bulgaria Yes Considered official by

Bulgarian Ministry of

Finance; not IASB

2001 standards;

translation of 2002

standards expected by

April 2003

Romania Yes Approved 2002 standards

Turkey Yes Done by Turkish authorities;

not IASB

2002 standards

EEA members

Iceland No

Liechtenstein Yes (German) Approved October 2003 EU


endorsed IFRS

Norway Old translation; new

translation expected

in future

OtherSwitzerland Yes (German, French

and Italian)

Approved October 2003 EU


endorsed IFRS

Sources: Survey (December 2002),IASB (2004b),EU website (2004), and World Bank Reports (ROSC reports).

Sometimes it is unclear whether the date referred to the date of the translation or the date of the IFRS edition that

was translated.a The EU expects to have all EU legislation and important documents translated into the nine new EU languages

by the end of 2004 (EU, 2004a).

of IFRS have been translated into all national languages of these countries except Estonian

and Icelandic, many of these translations do not include all recent standards (seeTable 5).For example, until recently, Hungary was using a 1994 translation. Thus, most new EU and

EU candidate countries do not possess complete IFRS translations and, accordingly, have


24/31


had little opportunity to develop any significant experience using and implementing IFRS.

Additionally, while the EU plans to translate all key materials into the nine new official

EU languages by the end of 2004 (EU, 2004a),as of May 1, 2004, EU approved IFRS had

not been officially translated and published in the EUs Official Journal. Unfortunately, thisleaves little time for developing a high level of familiarity with IFRS.

In general, the survey further reveals that significant time lags have often existed between

issuance of a new standard or interpretation and its availability in the national languages

of these countries. This time lag varies greatly. Some countries report relatively short time

lags, such as Slovenia (2 or 3 months), Bulgaria (612 months), and Switzerland (1 year).

AsTable 5shows, other countries have translations that are at least two years old. Once all

existing IFRS are translated, an important remaining issue will be how quickly proposed

and new IASB standards and interpretations are actually translated into the languages of

new EU members and EU candidate countries.

Despite the issues noted above, the large firms convergence survey indicates that, at the

time of the survey, most of the countries examined in our study did not view translation

of IFRS as a problem. Of course, some of these countries have up-to-date translations

that include all or most IFRS. For example, Switzerland has up-to-date translations in its

three national languages, German, French, and Italian. The finding additionally suggests

that, at the time of the survey, expectations were that EU translations would be issued in a

timely manner in order to allow for sufficient preparation for 2005 implementation.8 These

expectations should perhaps be tempered by the findings ofAbd-Elsalam and Weetman

(2003, p. 67).These authors studied implementation of IAS in an emerging capital market

and suggest two stages are important in this process: (1) relative familiarity with thecontents of the IAS, and (2) the accessibility of IAS in the language of the country. Abd-

Elsalam and Weetman found that lower disclosure levels were associated with relative

unfamiliarity with regulations and the non-availability of an authoritative translation (p.

80). Thus, while up-to-date translations of existing IFRS may be available by 2005 for most

countries included in this study, the impact of unfamiliarity associated with a history of

translation problems may hinder the effective adoption of IFRS. The impact of lags in the

translation of new IFRS, especially those addressing complex reporting issues, is also an

area of concern, particularly in the case of developing countries with emerging transitional

economies.

6.2. The development of a two-standard system

All countries included in our study will either require or effectively allow listed com-

panies to prepare consolidated financial statements in accordance with IFRS by 2005. A

majority of new EU members (Cyprus, Czech Republic, Estonia, Lithuania, Malta, and

Slovakia) and EU candidate countries (Bulgaria and Romania) will also require IFRS for

the individual accounts of listed companies. This scenario differs from the plans of the

first 15 EU members (Street & Larson, 2004)and may relate to the fact that most new EU

member and EU candidate countries have recently changed from a communist system to a

8 Seehttp://europa.eu.int/eur-lex/en/archive/2003/l 26120031013en.htmlregarding language availability. EU

endorsed IFRS in the 11 official languages of the first 15 EU member states were posted in October 2003.
http://europa.eu.int/eur-lex/en/archive/2003/l_26120031013en.htmlhttp://europa.eu.int/eur-lex/en/archive/2003/l_26120031013en.html


25/31


capitalistic system and are more amenable to new ideas. Additionally, our analysis reveals

that, in comparison to most of the first 15 EU states, the link between financial accounting

and tax accounting, while existent, may not be as pronounced in some of the countries

included in this current study. Our analysis further finds that, similar to the first 15 EUmembers (Street & Larson, 2004),most European countries studied here currently do not

plan to require non-listed companies to use IFRS.

InGAAP Convergence 2002,the firms caution that, while only requiring IFRS for listed

companies may represent a logical transition towards convergence, a two-standard system,

where some companies continue to use national GAAP, may be difficult to maintain in

the long-run. The firms recommend that governments and national standard setters develop

formal convergence plans to eliminate these dual standards.

6.3. Perceived impediments to convergence

Development of a two-standard system in several countries included in our study

may relate to the barriers to convergence identified by the large firms survey. The most

common impediments were limited national capital markets, insufficient guidance on first-

time application of IFRS, the tax-driven nature of national accounting regimes (i.e., the

alignment between financial accounting and tax reporting), and the complicated nature of

particular standards. Several countries also noted concerns regarding applicability of IFRS

for SMEs.

Most perceived impediments to convergence were seen as more of a problem in the new

EU member and EU candidate countries. For example, seven of these countries identified 12major IFRS they believed were too complicated (seeTable 4).These countries were partic-

ularly concerned about IAS 39 (Financial Instruments), followed by IAS 36 (Impairment of

Assets), IAS 12 (Income Taxes), and IAS 19 (Employee Benefits/Pensions). In contrast, the

only concern about a complicated IFRS by EEA countries or Switzerland was from Norway

in regards to IAS 39 (Financial Instruments). In total, 8 of the 13 countries surveyed by

the firms specifically mentioned financial instruments as a barrier to convergence. As of

September 2004, the EU still had not endorsed the IASBs standards regarding financial

instruments. Even IASB Chair Sir David Tweedie admitted he might have to concede defeat

on financial instruments since he was not confident the EU would adopt the IASBs standard

(Anonymous, 2004).Several other impediments to convergence were mentioned by new EU member and EU

candidate countries. Six of the 10 surveyed by the firms noted that the lack of transactions

of a specific nature, such as pensions and other post-retirement benefits, represent a per-

ceived barrier to convergence (seeTable 4). As companies evolve and begin to engage in

more sophisticated transactions, careful planning should be made to ensure that financial

reporting staff are adequately trained in the proper accounting for these transactions and that

accounting systems are sufficiently updated. Additionally, six of the surveyed countries also

noted that insufficient guidance on first-time application of IFRS was a concern. Hopefully,

issuance of IFRS 1 (first-time adoption of IFRS) will provide some relief in this regard.

A review of explanatory material provided in the surveys for two barriers, lack of trans-actions of a specific nature and insufficient guidance on first-time application of IFRS,

confirm that affirmative responses to these questions were at times associated with a lack


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of familiarity with certain accounting transactions and/or a lack of technical accounting

expertise. Therefore, these findings further highlight the need for timely up-to-date trans-

lations of IFRS, and additionally draw attention to the need for high quality education and

training materials in the national languages of these countries. As stated in GAAP Conver-gence 2002, the accounting profession and international organizations should devote more

resources to developing and providing quality IFRS education and training materials and

programs, and universities worldwide should include IFRS in the core accounting curricu-

lum. Additionally, as the Trustees of the IASC Foundation currently consider the role, if

any, the Foundation will play in IFRS education, ample consideration should be given to

these findings.

While only Latvia and Slovakia specifically mentioned the cost of convergence given

limited financial resources, several other countries implied that cost was an issue, especially

in regards to having current and up-to-date IFRS translations available. Current national

language translations are a necessity for the effective implementation of IFRS. Translations

of new IFRS must be done quickly, but even the EU admitted that its endorsement of most

IFRS in 2003 was delayed by six months because of translation problems (EC, 2003).

Eight of the 10 new EU member and EU candidate countries also indicated that their

countrys relatively underdeveloped capital markets hindered convergence. Without active

capital markets, many listed companies have not been forced to produce financial statements

using internationally recognized accounting standards. Woolfe (2004) agrees that a key

problem for these countries is the lack of liquid markets. For example, it is hard to value

company shares for various financial reporting purposes when they have not been traded

for long periods of time.The study finds that the linkage between tax accounting and financial reporting in-

fluences the reluctance of most studied European countries to converge national GAAP

with IFRS, particularly for individual accounts of non-listed companies. Among the new

EU members and EU candidate countries surveyed by the firms, only Estonia, Latvia,

Poland, and Slovenia did not cite the tax-driven nature of their national accounting regime

as an obstacle to convergence. These findings are consistent with prior research that

notes the importance of the relationship between tax and financial reporting in many

continental European countries and the resulting negative influence of this link on ac-

counting harmonization (Guenther & Hussein, 1995;Lamb et al., 1998;Street & Larson,

2004).Survey comments indicated resistance from national accounting standard setters in at

least five countries. Some standard setters believe that accounting needs to be tailored to a

particular countrys environment, something which the IASB and EU oppose. While one

EEA standard setter simply expressed little interest in convergence, a couple of standard

setters appeared somewhat hostile to the idea that they may lose some or all of their decision-

making authority. European accounting convergence is largely based on the legal authority of

the EU. Therefore, the EUs power to mandate and enforce regional accounting convergence

is at stake. The EU appears ready to force the issue. In July 2004, the EU dealt with non-

compliance by formally asking seven EU countries to put in their national laws the 2001

accounting fair value Directive (2001/65/EC) (Lymer, 2004).If a satisfactory response isnot received within two months, the EU may decide to take these countries to the European

Court of Justice.


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Several countries reviewed in this study also noted that for SMEs, IFRS are too com-

plicated and require excessive disclosures. Consistent with a recommendation of the large

firms set forth inGAAP Convergence 2002, the IASB accelerated its project on SMEs. In

June 2004, theIASB (2004a)issued a discussion paper,Preliminary Views on AccountingStandards for Small and Medium-sized Entities. The proposed IASB SME standards are

being designed for companies with no public accountability and may require less disclo-

sure than IFRS. National regulators will establish their own size criteria to determine which

entities may or must use these standards. Comment letters regarding this discussion paper

were due to the IASB by September 24, 2004.

6.4. Conclusion

This research provides evidence both on the status of convergence with IFRS and onissues perceived as affecting the drive toward accounting convergence in 17 European

countries. Issues including complicated standards and linkages between tax and financial

reporting appear to be creating a situation whereby IFRS will be required for listed compa-

nies consolidated accounts while another basis of accounting will frequently be used for

non-listed companies and/or individual accounts. This finding provides further evidence

of the emergence of a two-standard system of financial reporting in many European

countries.

The finding regarding complicated standards also emphasizes the significance of the

EUs reluctance to adopt IAS 32 and 39. Summarizing a recent report issued by the Federa-

tion des Experts Comptables Europeens (FEE), the organizations President, David Devlin,stated,

As a general principle, FEE calls for global standards. As a consequence, we emphasise

the need for endorsed IFRS to be the same as IFRS. The endorsement process should

not be used as a means to create European standards. Only global standards will meet

the wider objectives of financial stability, efficiency and transparency and provide the

benefits of increasing confidence in financial markets, reducing the cost of capital and

facilitating global investments.

There would be serious drawbacks if elements of IFRS were not to be endorsed as

EU standards would be seen as very much a second best. There would also be seriousimplications for audit reporting if endorsed IFRS were different from IFRS: IFRS

could no longer be referred to as the reporting framework (FEE, 2004).

FEEs position is consistent with the large firms view that the ultimate goal of each

countrys convergence plan should be to adopt IFRS, supplemented only in rare instances

for national issues (BDO et al., 2003, p. 8). If convergence and proper implementation

of IFRS are to become a reality, all parties should work toward a reasonable solution. The

current situation creates major uncertainties for preparers and compounds existing barriers

to convergence.

The studys results highlight the need for more research in the area of convergence. Inparticular, the roles of national GAAP requirements, stock exchange listing requirements,

and the links between financial reporting and tax accounting merit further investigation.


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These issues need to be better understood in order to determine if accounting convergence

via IFRS will become a reality or will remain an elusive goal within a two-standard

system.

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