Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
The Financial Information through IFRS and National RulesChallenges, Valences and Limits
Ana Morariu*, Mihaela Daucianu** and Daniela Nicoleta Medintu***
For Romania, 2012 was a challenge of applying International Financial
Reporting Standards to companies listed on the stock exchange. This
transition to IFRS application generated a number of problems to Romanian
professional accountants both in the restatement of financial statements
and tax implications. Due to these impediments, the financial statements
are expected to generate differences that may essentially influence the
decision making process reflected by the profitability of a stock and implicit
its price. The objectives of this article are to analyze financial diagnosis and
interpretation of any differences, offered on a part by the financial
statements prepared in accordance with national rules and, on the other
hand, the IFRSs. In order to fulfill the objectives it will be used a mixed
research methodology that will combine both qualitative and quantitative
methods with the purpose of comparison of financial indicators in order to
be analyzed both in terms of national rules and the IFRSs.
Transition to IFRS indicates that there are significant differences between
average values of the considered indicators obtained by applying the two
accounting references. These differences alter the amount of profitability
and stocks price, so they could influence investors’ decisions. To reduce
these differences and to give investors confidence in the financial
statements, large entities in various fields of activity should be encouraged
to optionally apply the IFRS in order to be identified in practice all
accounting and tax aspects and find solutions in a timely manner.
The article wishes to emphasize the valences of IFRS and the limits of
financial information of accounting, tax but also legal divergences of
national rules. The Application of International Accounting Standards at
international level will be the future in accounting plan in Romania as well, if
the implementation of another theory in political and economic plan could
not divert this trend.
JEL Codes: M41
1. Introduction
Due to the many economical, political, social and cultural changes, accounting is in
constant evolution. For example the legislative changes required to apply IFRS to the
companies traded on a Market regulated and supervised by BVB. Standards issued by the
IASB have been approved by the European Commission and in order to apply them, the
national regulatory body has produced a number of its own regulations (Order no.
881/2012, OMPF 1286/2012), but much too late to be applied on the financial year 2012.
Our opinion goes in favor of their implementation, due to the advantages offered by these
standards of quality information, recognized worldwide, to the methods of taxation balance
that give temporary differences and not only current taxes for governments, to the
accounting treatments for each element in the structure of financial statements.
The motivation of the introduction of IFRS is the one of Annual Financial Statements
transparency, of uniform presentation of information, both for its shareholders and
potential investors.
* Prof. Ana Morariu, Bucharest University of Economic Studies, Romania. Email: ana.morariu@gmail.com
** Phd. Mihaela Daucianu (Avram), Bucharest University of Economic Studies, Romania.
Email: mihaela_direc@yahoo.com
*** Phd. Nicoleta Medintu, Bucharest University of Economic Studies, Romania. Email: danielamedintu@gmail.com
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
In the first year of application of International Financial Reporting Standards for listed
companies, accounting professionals have faced a number of problems both in the
restatement of financial statements and in tax implications. IFRS involves appealing to the
professional judgment and in Romania professional accountant is limited primarily by the
tax legislation of ANAF, still unclear. Until now the solution presented were merely
accounting solutions. In other countries, such a great change is prepared years before, by
developing measures underpinning the knowledge of the changes to be made to the
concerned companies, in order to prepare the personnel who will understand and apply
them, and not last, in order to quantify their implications in economy as a greater picture.
Following the transition to IFRS, due to these impediments, the financial statements are
expected to generate differences that essential influence the decision making process,
reflected through the profitability of a stock and hence its price. However, through this
transition to IFRS, investors can identify not only whether the financial statements are
relevant for decision making, but also if that may affect profitability.
The objectives of this article are to view the valences of financial diagnosis and
interpretation of any differences, offered on one hand by the financial statements prepared
in accordance with national rules and, on the other hand, by IFRSs; limitations of existing
studies in Romania, that have targeted the theoretical analysis of the differences between
IFRSs and national norm, but also the fact that empirical studies can influence the
decisions of investors in Romania.
2. Literature Review
The so far existing studies mainly refer to the theoretical analysis of the differences
between the national rule and IFRSs; to empirical studies on how financial-accounting
information influence the decisions of the investors in Romania by regression analysis,
through the determination coefficient or coefficient indicators, considered significant.
(Robu MA, IB Robu, 2014). Recently an analysis on this matter referred to the financial
and accounting information provided, on the one hand, by the national regulations and, on
the other hand, by the IFRSs, and estimated the influence on the profitability of the stock.
However, this analysis included financial statements for the year 2011, which were
prepared according to national standard, and the 2012 financial statements which have
been prepared in accordance with IFRS.
This analysis is irrelevant since there is no comparability between the two financial
exercises of the same year. "With regard to national and international standards, Barth et
al (2008) showed, based on an analysis of a sample of companies from 21 countries that
have adopted IFRSs between 1994 and 2003, that the use of these standards increases
the quality of financial - accounting information" (Robu MA, IB Robu, 2014). Jermakowicz
et al (2007) reached the same result by examining the existing link between the results of
the financial statements and market values, for the best 30 companies present on the
stock exchange in Germany, between 1995-2004, whose prices are part of the DAX index
- 30. The results concerning the relevance of accounting information were not favorable in
Spain, Portugal, Norway, researchers as Callao et al (2007) argue that improvements
were not noted in the relevance of financial reporting, concluding that there are major
differences between book values and market values with the adoption of IFRSs..
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
3. The Methodology and Model
In order to fulfil the objectives will be used a mixed research methodology that will
combine both qualitative and quantitative methods, in order to compare the financial
indicators to be analysed, both in terms of national rules and by the International Financial
Reporting Standards. The Quantitative Methods regards the calculation of financial
diagnosis for a sample of 15 companies from the first category of BVB, both in terms of
national rules and by the ones of IFRSs. The Qualitative procedures are the comparison
of the results and the explanation of any differences between the national standard and
IFRS financial statements for 2011.
For 2012, under the first category of BVB have been listed 28 companies, 10 of which
were conducting financial activities. They have been eliminated from the analysis due to
the particularities of their type of activity. We have also eliminated three other companies
that haven’t present their financial information for 2011, compared to the IFRS and
national standard. The analysis was carried out for 15 companies listed on the BVB in the
first category. IFRS comparative financial analysis and diagnosis and the national rule
(OMPF 3055/2009) required the calculation of some financial indicators belonging to
solvency, liquidity and profitability ratios. Any differences were analysed both for each
financial indicator calculated and on the "rates", by doing an average of indicators
influences. (Table no. 1)
Table: 1 Analyzed Numerical Variables
Numerical Variables
Formulas
Solvency Indicators
Results Interpretation
General solvency ratio
(RSG)
Total Assets /
Total Debts
Total assets should be two times
higher than total debt.
Overall leverage ratio
(RIG)
Total Debts /
Total Assets
Overall debt ratio should be <= 1.
Financiar Leverage
(LF)
Total Debt /
Equity
A ratio greater than 1 implies a high
risk for lenders.
Financial autonomy rate
(RAF)
General Liquidity Rate
(RLG)
Rate of return on equity
(ROE)
Rate of return on assets
(ROA)
Net Margin
(MN)
As their own equity is higher, the
company uses less loans to finance
investments.
Liquidity Indicators
The value of this indicator is
Current Assets /
considered normal, according to the
Current Liabilities
usage of 0.8 to 1
Rentability Indicators
It is used as a benchmark interest
Net income /
rate on bank deposits in the current
Turnover
year.
Equity /
Total Assets
Operating result /
Total assets
A good return (profitability) is
achieved if the result passes 15%.
Net Result /
Assets
Express profitability of all activities.
The higher the value, the more
profitable is the company.
Source: Own approach
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
The analysis was based on information from the balance sheet and the profit and loss
account, for the financial year 2011, prepared both by the national rules (OMPF
3055/2009) and the International Financial Reporting Standards terms. The information
was extracted from the BVB website.
To exemplify, was analysed the Electromagnetic SA company, as it presents a high index
of disclosure. (Table no. 2)
Table no. 2 The results of comparing numerical variables
Numerical Variables
IFRS
OMFP 3055/2009
Variation
Solvency Indicators
General solvency ratio
5,6
5,97
-0,06
(RSG)
Overall borrowing rate
0,18
0,17
-0,06
(RIG)
Financial Leverage
0,22
0,21
-0,05
(LF)
Financial autonomy rate
0,83
0,84
-0,01
(RAF)
Average Variation
-5 %
Liquidity Indicators
General Liquidity Rate
1,94
1,93
0,01
(RLG)
Average Variation
1%
Rentability Indicators
Rate of return on equity
0,06
0,06
(ROE)
Rate of return on assets
0,05
0,05
(ROA)
Net margin
0,03
0,03
(MN)
Average Variation
Source: Own approach
As a result of the analysis of the presented indicators (Table no. 2), by switching to IFRS,
following the restatement of financial statements, the Company recorded differences in
average debt ratio - 5%. This difference is given by a decrease in equity and increased
total debt. The decrease in equity is given by the application of IAS 29 "Financial reporting
in hyperinflationary economies", the company has corrected the historical cost of capital
and reserves with the inflation effect, until the 31st of December 2003. The differences of
re-evaluation were eliminated, which were included in capital until the end of 2003, and
the reserves of that re evaluations were transferred to the reported earning. Increase in
total debt is given by recording the debt with the deferred tax liability, arising from the
adjustment of financial statements under IFRS.
Deferred tax is calculated for temporary differences, between the tax values at the
reporting date, and the net accounting values of the assets and liabilities, for financial
reporting purposes.
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
The liquidity indicator shows an increase of 1%, as a recognition of advances granted as
receivables. Profitability ratios do not differ.
The analysis continued for all the companies analysed, having different areas of activities.
In this sample we have both companies whose financial statements are audited by the Big
4 companies (Pricewaterhouse Coopers, KPMG, Ernst & Young, Deloitte Touche &
Tohmatsu) and companies whose financial statements are not audited by Big 4 but
present a higher disclosure level, e.g. Electromagnetica SA. (A.I. Feldioreanu 2014)
The percentage of the companies audited by Big 4 is of 40% among analysed companies
in the first category of BVB. Financial statements prepared in accordance with
International Financial Reporting Standards are more credible to investors than those
prepared under national law. Investor Credibility is also given by the audit of financial
statements performed by the Big 4 companies.
Table no. 3 The results of comparing numerical variables
Solvency
The auditor is
Liquidity
indicators
part of the
variation
Company
variation
Big4?
IFRS/Order
IFRS/Order
YES / NO
3055/2009
3055/2009
Rentability
Variation
IFRS/Order
3055/2009
Alro SA
YES
0,61
1,19
-0,71
Antibiotice SA
NO
0,18
0,13
-0,31
Biofarm SA
NO
0,12
0,16
-0,30
C.N.T.E.E
Transelectrica
YES
-0,47
0,16
0,31
Concefa SA
NO
0,17
0,25
-
Electromagnetica SA
NO
-0,05
0,01
-
Impact Developer&
Contractor SA
NO
0,25
-0,25
-5,24
Oil Terminal SA
NO
0,17
0,33
-
Oltchim SA
YES
0,30
0,14
2,29
OMV Petrom SA
YES
0,30
1,58
-0,62
Prefab SA
NO
-0,03
0,10
-
Ropharma SA
NO
0,04
0,06
2,19
S.N.T.G.N. Transgaz
SA
YES
0,32
1,01
0,08
Socep SA
NO
0,77
0,84
-0,04
Turbomecanica SA
YES
0,04
-0,11
0,05
Source: Own approach
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
4. The Findings
Following the analysis, with the transition to IFRS, making a comparison with the financial
statements prepared in accordance with national rules, the restatement differences can be
explained as follows:
a) The decrease in the solvability ratio - decrease in equity as a result of applying IAS 29
"Financial Reporting in Hyperinflationary Economies", companies correct the historical
cost of capital and of reserves with the inflation effect, until 31 December 2013; increase
in total debt due to the recording of deferred tax liability arising from the adjustment of
financial statements under IFRS.
b) Increased liquidity indicator - recognition of advances granted as receivables.
c) Increase solvency indicators - increase in equity due to retained earnings adjustment,
increased assets due to the adjustment of fixed assets due to revaluations.
d) Decrease in profitability indicators - decrease in profits as a result of registering the
provisioning costs imposed by legislation. They are constituted for the present obligations
to third parties, arising from past events and the amount necessary for closing the debt, is
reliably estimated.
Also as a result of the analysis for the 15 companies in the first sample of BVB, we find
that profitability indicators show decreases for 40% of the companies analysed, solvency
indicators show 20% decrease, and the liquidity indicators decrease in proportion of
13.4%. IFRS Transition indicates that there are significant differences between the
medium values of the considered indicators, obtained by applying the two accounting
references. These differences alter the amount of profitability and the stock price,
influencing thus the investor’s decisions.
"After application of IFRSs, the shareholders give a considerable attention to operating
activities that may lead to an increased value of shares; while financial profitability is
exercising a negative influence due to the possibility of manipulation of the results by the
managers who want to achieve certain results". (Robu M. A., Robu B.I. 2014)
However, the review finds that additional information was required in the notes of the
companies analysed, to better understand the value of certain asset and liability or equity
items to account for differences. It is very important for users, that certain matters are as
detailed as possible, in order to easily understand the information presented and to make
the correct decision.
5. Summary and Conclusions
Application of International Financial Reporting Standards should be seen as a strategic
direction for entities, budgeting strategy that entails costs of staff training, joint projects
with internal and external specialists, in order to implement IFRS. For proper application of
tax laws should be identified and implemented accounting and tax treatment, whereas
IFRS operates with fair value measurements, depreciations, estimates of the value of
assets, liabilities, provisions. Therefore, large entities, from such various areas and
activities, should be encouraged to optionally apply to the IFRS exactly because it may
help to identify in a practical manner all aspects of accounting and tax practice and to find
solutions in a timely manner.
Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
In the same time this strategy would result in having minor or no differences, in case of
transition to the mandatory financial statements in accordance with International
Accounting Standards.
Application of International Financial Reporting Standards will be the future of the
accounting plan in Romania, in case that the implementation of other political and
economic theories would not divert this trend. Testify in this matter the changes in national
rules (OMPF 3055/2009 applicable from 1st January 2015), which prepare the alignment
with International Financial Reporting Standards.
End Notes
The research will continue by analysing the companies from the second category of BVB,
from various areas of activity. The aim of research is first if there are differences between
national regulations and IFRS, on average values of financial, accounting indicators,
calculated based on information provided by the annual financial statements, and on the
other hand if there are differences between the medium values of profitability of the stock,
based on performance and on the financial position of the company, expressed on the
basis of accounting data, and accounting referential applied. For analysis will be
considered a sample of 48 companies listed on market, in the second category of BVB.
Acknowledgment
„This paper was co-financed from the European Social Fund, through the Sectorial
Operational Programme Human Resources Development 2007-2013, project number
POSDRU/159/1.5/S/138907 "Excellence in scientific interdisciplinary research, doctoral
and postdoctoral, in the economic, social and medical fields - EXCELIS", coordinator The
Bucharest University of Economic Studies”.
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Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
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