National institutional factors and IFRS Implementation in Europe. The case of investment property companies

• Pages: 271-288
• Date: 03 August 2015
• DOI: https://doi.org/10.1108/IJAIM-05-2014-0038
• Published date: 03 August 2015
• Author: Nicholas Fearnley,Sid Gray
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

National institutional factors and

IFRS Implementation in Europe

The case of investment property companies

Nicholas Fearnley

School of Economics, Faculty of Arts and Social Sciences,

University of Sydney, Sydney, Australia, and

Sid Gray

International Business Department, University of Sydney,

Sydney, Australia

Abstract

Purpose – The purpose of this paper is to investigate, following the adoption and implementation of

International Financial Reporting Standards (IFRS) in the European Union (EU), whether accounting

choices continue to be signicantly inuenced by national institutional factors with particular reference

to cultural values, legal systems and equity market development.

Design/methodology/approach – The focus of the paper is on the measurement options available

under IFRS with respect to investment property, and a study of factors inuencing the accounting

choices by 66 European investment property companies as disclosed in their annual reports over the

period 2005-2010 is conducted.

Findings – National institutional factors and, most importantly, cultural values remain persistently

important in explaining accounting measurement choices relating to investment property following the

implementation of IFRS in the EU.

Research limitations/implications – The study is limited to investment property companies in the

EU. Future studies could be carried out to compare the explanatory power and causal factors involved

in different industry contexts and across more countries. Alternative measures of culture may also

provide alternative insights.

Originality/value – The paper demonstrates that a nation’s culture and accounting tradition likely

has a continuing and signicant impact on rms’ measurement decisions. Thus, institutional factors are

clearly important in explaining accounting measurement choices and indicate the persistence of

international accounting differences even in the context of a globally standardized accounting regime.

Keywords Culture, European Union, IFRS, Institutional factors, Investment property,

Measurement choices

Paper type Research paper

Introduction

Following the adoption of global accounting standards, i.e. International Financial

Reporting Standards (IFRS), for the consolidated nancial statements of listed

companies throughout the European Union (EU) in 2005, it might be expected that

accounting policies and practices would have become largely standardized. However, as

demonstrated by Nobes (2006,2008,2009,2013), Kvaal and Nobes (2010,2012) and

Trabelsi (2011), there are opportunities for the persistence of international differences

under IFRS, especially through the use of options that are available within the

The current issue and full text archive of this journal is available on Emerald Insight at:

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IFRS

Implementation

in Europe

271

Received 26 May 2014

Revised 19 June 2014

Accepted 23 June 2014

InternationalJournal of

Accountingand Information

Management

Vol.23 No. 3, 2015

pp.271-288

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-05-2014-0038

standards. The purpose of this paper is to examine the extent to which traditional

patterns of accounting choice between countries persist even after the adoption of IFRS

and the factors that likely explain these choices. Our focus is on the inuence of national

institutional factors, both informal and formal, which would seem to be fundamental to

an understanding of economic change (North, 2005).

The specic aim of our investigation is to examine the case of European investment

property companies where IFRS provides the option under International Accounting

Standard (IAS) 40 Investment Property to use either fair value or cost to measure investment

properties that tends to encourage the use of fair values as a more relevant approach to

measurement. We examine the measurement practices of European investment property

companies both in 2005, the year of IFRS adoption, and in 2009-2010. This allows us to

investigate the short- to medium-term effects the implementation of IFRS has on

standardizing nancial reporting across nations. The aim of our paper is thus to address the

question of whether and to what extent national institutional factors continue to inuence

accounting measurement practices in respect of investment property post-IFRS adoption in

the EU?

The nature and development of different accounting systems throughout the world

have been examined extensively in the literature over many years (Mueller, 1967;

Doupnik and Perera, 2005;Radebaugh et al., 2006;Nobes and Parker, 2010). Many

theories have been proposed seeking to explain accounting differences with attempts to

identify key factors that inuence the development of accounting systems. From these

theories and associated empirical research, it has become evident that different

accounting systems, and therefore accounting choices within these systems, are the

result of differences in both formal and informal institutional settings between

countries. Prime examples of these institutional inuences include cultural values, legal

systems and the signicance of equity market development (Gray, 1988;La Porta et al.,

1998;Nobes, 1998). The key question following the adoption and implementation of

IFRS concerns the extent to which accounting choices continue to be made with regard

to such national institutional factors.

IAS 40 and post-IFRS research in Europe

The requirement for all European companies to produce consolidated annual reports

using IFRS has had a signicant impact on the European property industry. Prior to the

adoption of IFRS in the EU in 2005, national standards required property companies to

report their real estate assets under either a cost model (such as in Finland and Italy) or

a revaluation (fair value) model (such as in Denmark and the UK), with rms only being

able to choose between these two methods in a limited number of countries (namely, The

Netherlands and Sweden). In addition to this, some countries (such as Austria and

France) did not have a specic standard that dealt with investment property, and hence,

it was treated as a part of property, plant and equipment (PPE).

IFRS treats investment properties as separate from PPE, dening it as:

[…] property(land or building – or part of a building – or both) held (by the owner or by the

lessee under a nance lease) to earn rentals or for capital appreciation or both, rather than for:

use in the production or supply of goods or services or for administrative purposes; or sale in

the ordinary course of business (IAS 40.5).

Contrary to what might be expected of a regime of global standardization, IAS 40 gives

investment property companies the option of reporting their real estate holdings using

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