The Harmonization Process of Accounting within the European Union

Abstract

Since 2005 it is mandatory for companies in the European Union, with shares traded at a regulated market, to present consolidated account statements in accordance with IFRS. The application of IFRS was supposed to lead to a more harmonized accounting practice within the Union, and thereby more transparent and comparable information available to the markets. This process of implementation was, however, not problem free. Previous research indicate that national differences in the appliance of IFRS and respective country’s level of prudence still occur. Based on the previous findings, this thesis aims to study whether there has been any convergence in the level of prudence within the European Union since the implementation of IFRS. It is also going to be looked at whether possible differences can be linked to respective country’s accounting tradition. The contribution of this thesis to the field of study is that it is done at a time where consolidated account statements have been drawn up in accordance with IFRS for ten years within the Union. Accordingly, this thesis has a longer string of data and therefore a longer time series available from which prudence can be derived. The purpose of this thesis is to examine whether the motive of the implementation of IFRS, the harmonization of accounting, with regard to the level of prudence, has been fulfilled. This study is based on a quantitative research methodology, and to measure the degree of prudence, Basu’s (1997) model of asymmetric timeliness of earnings will be used. The degree of prudence is going to be examined and compared for four EU member states: France, Germany, the United Kingdom and Sweden, as they are believed to be representative for the different accounting traditions found in Europe. The study made has 702 companies participating, and the time series applied stretches for 20 years, from 1994 to 2014. The results of the study conducted shows indications that France is the most prudent country, followed by the United Kingdom, Sweden and at last Germany. This is true for both before and after the implementation of IFRS. This was not in accordance with the predictions made based on respective country’s accounting tradition, suggesting that the country factor cannot explain the differences observed between the member states. Furthermore, the gap between the least prudent country and the most prudent country increased during the subsequent years of the IFRS enforcement, meaning that a harmonization with regard to the level of prudence could not be identified between the countries studied. Basu’s (1997) model only captures a part of the total prudence in a firm. Although no evidence for a harmonized approach to prudence within the European Union could be found in the study conducted, it would be interesting to further study the subject by complementing Basu’s model with other models measuring prudence to see if the results differ from only using the model of asymmetric timeliness of earnings. Alternatively, solely other models could be used to identify if any signs of a convergence in the level of prudence can be found.