David Procházka

The Development of Financial and Management Accounting After the IFRS Adoption: A Case from the Czech Republic

Latest research indicates that business and reporting process have been gradually integrated. As a reaction to growing complexity of business, innovations, global competition, higher mobility of capital and integrating capital markets, the convergence of financial and management accounting has been emerging. The integration is supported by the development of information and communication technology. Financial and management accounting converge on the various levels, e.g. on data recording, calculation level and/or output level. Those motivations for integration are typical especially for developed countries. The transitional countries are in process of switching to standard accounting practice similar to those utilised in developed countries. Unfortunately, financial reporting is heavily influenced by the tax legislation, which impairs the usefulness of financial statements for decision-making of external users. Due to weaknesses of financial accounting and reporting regulation, entities reporting under local accounting standards are forced to remove those lacks at least on the management accounting level in order to prepare information needed for internal management and decision-making. The separate coexistence of management accounting and financial accounting is therefore inevitable under such circumstances. The implementation of the IFRS into the legislation of the European Union and its member states has brought new quality to financial reporting, esp. in the transitional countries, despite the fact that the necessity to prepare information according to the IFRS levies additional costs on the companies. In order to lower the cost burden, the IFRS are becoming the leading principles of management accounting for internal users. The paper assumes that the IFRS are the driver for convergence of financial and management accounting in the transitional countries such as the Czech Republic.

The Development of Capital Markets of New EU Countries in the IFRS Era

From 2005, the EU listed companies are obliged to prepare their consolidated financial statements in conformity with IFRS, which are viewed as high-quality financial standards (Leuz, 2003). To comply with the increased disclosure requirements, companies have to incur significant costs. However, the benefits from harmonised financial reporting are available only to those entities, which have serious incentives to report transparently (Daske et al., 2013). The benefits and costs following the changeover to IFRS are therefore neither unfolded equally across companies, nor countries. Empirical research (e.g. Lee et al., 2008; Christensen et al., 2013) reveals that the shortcomings in institutional setting may close off all potential benefits from harmonised accounting, which is pertinent mainly for the transition countries. The aim of this paper is to identify absolute and relative winners and losers among the new EU member states in terms of the progression of their capital market. The particular focus is put on the capital market size measured by a simple criterion “number of listed companies” and its changes in transitional and post-adoption period. The splitting of time-series into two subsets enables to eliminate the influence of different reporting incentives from the effects of change in reporting regime. As an unintended result, the paper’s empirical findings raise some doubts about the appropriateness of certain research designs for assessing the economic consequences of mandatory IFRS adoption.

SPECIFICS OF IFRS ADOPTION BY CENTRAL AND EASTERN EUROPEAN COUNTRIES: EVIDENCE FROM RESEARCH

Abstract The paper reviews recent literature on the specifics of adoption of International Financial Reporting Standards (IFRS) by the new EU members from the Central and Eastern Europe. Despite being members of the EU or OECD, the transition to a standard developed economy has not yet finished. The first part of the paper presents macroeconomic statistics and capital market data, which underline a unique economic structure of the region (relative unimportance of capital markets for raising capital, strong dependence on foreign direct investments) combined with the lacks in institutional environment. Under such conditions, the economic consequences of IFRS adoption can be unpredictable and adverse. The second part of the paper analyses the reflection of specifics of the IFRS adoption in the CEE region in research studies covered by the Thomson Reuters’ Web of Science database. The analysis reveals (a) cross-country disproportion in the research coverage of the area; (b) relatively low coverage of the IFRS research focusing on these transition countries in top journals.

Forced IFRS Adoption: Direction of the “EU-15 Parents—CEE Subsidiaries” Links

The paper adopts a view of business research on the positive effects of the parent–subsidiary links on the performance of subsidiaries. The paper focuses on the Central and Eastern European subsidiaries and surmises that a high-quality IFRS adoption in a chain “foreign parent—local subsidiary” may positively affect an undeveloped accounting practice in a transition country, if the number of such subsidiaries is significant. Similarly, if subsidiaries from transition countries, experiencing a lower quality of financial reporting, form a significant share of consolidated groups, the expected increase in accounting quality after the IFRS adoption is endangered. This may hold even for parents domiciled in countries with a traditionally transparent capital markets and well-working financial reporting. The paper aims at identifying the subsidiaries of EU listed companies, with a special focus on the assessment of the links between “EU-15 parents and their CEE subsidiaries”.

New Approaches to Revenue Recognition and Common Sense

The paper outlines basic features of revenue recognition practice under IFRS and US GAAP. The revenues usually represent the greatest single item reported in the financial statements. The current guidance on revenue recognition suffers from some weaknesses and inconsistencies. Finding the solution to these problems is a subject of joint IASB’s and FASB’s Revenue Recognition Project. The main aim of Revenue Recognition Project is to remove inconsistency and to create a comprehensive standard on revenue recognition that would apply to all possible revenue-generating transactions. Unfortunately, there exist some conflicts regarding the measurement of revenue. The advantages and disadvantages of fair value and allocated customer consideration amount model are analysed from the point of users’ information need usefulness. Background for this evaluation is derived from the empirical experiment.

Financial Performance of Czech Subsidiaries of the EU-Listed Companies

The paper examines the development of financial performance of Czech subsidiaries under the control of EU-listed companies during the period 2009–2014. Summary statistics of individual corporate data indicate that both the domicile of the parent and the industry affiliation of the subsidiary have an impact on the subsidiary’s performance measured either by return on assets (ROA) or by return on equity (ROE). The association of parents’ domiciles and subsidiaries’ industries with performance is also confirmed by the analysis of variance (factorial ANOVA). ROE is significantly higher than ROA; the variability in ROE is, although, double compared to the variability in ROA. Finally, the differential between ROA and ROE is not constant over the sample companies.