Accounting for Non-current Assets Held for Sale and
Discontinued Operations: A review of the largest hundred
European companies and a look into accounting classification
systems
Master thesis, MscAC,
University of Groningen, Faculty of Economics and Business 2 April 2013
SEBASTIAAN WILLEM VERVEST Studentnumber: 2181940 Nolenslaan 53-2 3515VK Utrecht tel.: +31 06 15 00 45 94 e-mail: S.W.Vervest@student.rug.nl Supervisor / University I.J. Kuiper MSc EMA RA 2nd Supervisor / University
ABSTRACT
This is a compliance study of the IFRS 5 non-current assets held for sale and discontinued operations presentation & disclosure requirements. Theories applicable on IFRS 5 are discussed and the standard is researched for complexity since prior researchers have
suggested this. Furthermore, accounting classification systems in Europe are investigated due to the unique population and research. The research population contains the hundred largest European companies over financial year 2011.
The research results show that the compliance in IFRS 5 presentation & disclosure
requirements is low. The discussion in theories suggests that voluntary disclosure, earnings management and decision usefulness theory can be applied on IFRS 5. However, these theories were not empirically linked to the results. This study agrees to some degree that items in this standard are complex, such as the lack of clarity in the classification of non-current assets held for sale/disposal groups and discontinued operations. Also, several presentation & disclosure requirements were found ambiguous. The investigation of accounting classification systems has found no evidence of an Anglo-Saxon and/or Continental Europe system present.
This study proposes recommendations to the IASB to make a choice between presenting major discontinued operations or a strategic shift of the company. Also, guidelines should be published concerning the ambiguities found in the presentation & disclosure requirements. Finally, this study proposes recommendations for further study in linking the theories with the level of compliance in IFRS 5. This may provide useful insights in the use of the standard.
SHORT PREFATORY NOTE
Here before you lies my master thesis. The research, writing and concluding has been a journey of great experience. In the first setting this study was to be focused on accounting classification systems within IFRS 5 presentation & disclosure requirements. After the empirical research I decided, in good consultation, to extend my research to a more overall discussion about IFRS 5 with a focus on the former subject. This has lead to a study that is both descriptive as exploratory. Also, having done literature and empirical research I believe this is the pinnacle for any student to achieve in his master thesis. The combination proved to be harsh, resulting in taking more time to finish the study. However, good things come to those who wait and I can say I am satisfied about the result.
I would like to thank Ineke Kuiper for her guidance and her effort in assisting me during the information gathering and writing process of the master thesis. Some complex issues where resolved thanks to mutual discussion in certain subjects. Also I would like to thank Prof. Ralph ter Hoeven for the time he made available to discuss the direction of the thesis and certain adjustments. Last but not least I would like to thank my friends and family for their endless support during this time.
TABLE OF CONTENTS
1 INTRODUCTION 5
1.1 NON-CURRENT ASSETS HELD FOR SALE & DISCONTINUED OPERATIONS 5
1.2 CROSS-COUNTRY DIFFERENCES & ACCOUNTING CLASSIFICATION SYSTEMS 8
1.3 SCIENTIFIC CONTRIBUTION 9
1.4 STUDY STRUCTURE 10
2 COMPLEXITY IN NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED
OPERATIONS 11
2.1 ILLUSTRATION AND DISCUSSION OF THE STANDARD 11
2.2 INTERPRETATION OF THE REQUIREMENTS BY THE INDUSTRY 14
2.3 CURRENT DEVELOPMENTS AND FUTURE AMENDMENTS 16
2.4 CHAPTER SUMMARY 17
3 THEORETICAL DISCUSSION 19
3.1 VOLUNTARY DISCLOSURE 20
3.2 EARNINGS MANAGEMENT 20
3.3 DECISION USEFULNESS THEORY 21
3.4 CHAPTER SUMMARY 23
4 PREVIOUS LITERATURE IN ACCOUNTING CLASSIFICATION SYSTEMS 24 4.1 PREVIOUS LITERATURE IN ACCOUNTING CLASSIFICATION SYSTEMS 24
4.2 HYPOTHESIS DEVELOPMENT CROSS-COUNTRY DIFFERENCES 31
5 RESEARCH DESIGN, POPULATION / SAMPLE AND RESEARCH
CHARACTERISTICS 34
5.1 RESEARCH DESIGN 35
5.2 POPULATION / SAMPLE 39
5.3 RESEARCH CHARACTERISTICS 41
6 RESULTS 43
6.1 OVERVIEW OF THE COMPLIANCE 43
6.2 PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION 47
6.3 MAJOR CLASSES IN THE DISCLOSURES 48
6.4 DISCLOSING REASONS FOR SELLING THE ASSETS 50
6.5 ACCOUNTING CLASSIFICATION SYSTEMS 50
7 CONCLUSION, LIMITATIONS AND RECOMMENDATIONS 53
7.1 CONCLUSION 53
7.2 LIMITATIONS 57
7.3 RECOMMENDATIONS 58
8 APPENDIX A & B 61
8.1 APPENDIX A– ITEMS REMOVED FROM RESEARCH 61
1 Introduction
International Financial Reporting Standard 5 Non-current assets held for sale and
discontinued operations is the standard for entities to illustrate their discontinued operations. It replaced the IAS 35 Discontinued operations and was implemented in 2005, along with the International Financial Reporting Standards. After the first year of implementation a research was done over the use of IFRS 5 in Dutch public listed companies. The researchers,
Blommaert and Lyckama a Nijeholt (2006) commented that the IFRS 5 requirements are very complex, which can lead to an overload of information. The effects for stakeholders could therefore be contradictive and IFRS 5 might have not have the desired effect for whom it is created. This is quite compelling since IFRS should contribute to reporting, instead of creating an even more complex environment. However, their study somewhat limited. Only research in according to them the most important regulation has been done. No research has been done whether the entities are in full compliance with IFRS 5. Their study is descriptive orientated, which limits them to only describing their results. Discussion in theories that might be applicable to the standard could explain results. Also, the results in their research where Blommaert and Lyckama a Nijeholt based their conclusion on, could be influenced by first year implementation errors, since the Raad van Jaarverslaggeving (the Dutch foundation for reporting standards) did not had any regulation concerning non-current assets held for sale and discontinued operations before. Finally, their study is only focused on Dutch public listed entities. One can wonder if the complexity is country related. These issues have led to believe that a new study concerning IFRS 5 is required.
1.1 Non-current assets held for sale & discontinued operations
A descriptive research in the degree of compliance with IFRS 5 will be created. This study will incorporate the IFRS 5 regulations that have not been mentioned by Blommaert and Lyckama a Nijeholt. Furthermore, a discussion in what theories might be applicable to IFRS 5 will be held. A discussion about the complexity of the standard will also be held since this might be an explanation for certain outcomes in the research and is suggested by the previous researchers in this subject. Last the population will contain the hundred largest companies of
Europe over the financial year 2011, which reduces the risk of country and/or
implementation errors. Creating a descriptive research in the degree of compliance with reporting can show whether the non-current assets held for sale/disposal groups and
discontinued operations standard is an attribute to IFRS. Compliance with the standard is the key for its usefulness. A study of Centre for Financial Analysis and Reporting Research (CeFARR) did a compliance study in the disclosure requirements of asset impairment. The results showed that some impairment disclosure requirements varied quite considerably and this might point at differences in applying IFRS. They commented that the burden of compliance is very high, quote: ”…the burden of compliance is heavy.” (Amiraslani, Latridis, Pope 2013: 2). Despite the study of Blommaert & Lyckama a Nijeholt and CeFARR, hypotheses in this stage cannot be made since the literature in IFRS 5 and compliance is still too limited. However, a statement could be made that this study would expect a high level of compliance due to IFRS being mandatory. The population companies have to comply with the regulation. Despite the possible complexity or burden in
compliance. Second, the companies belong to the largest auditing firms in the world. If one would reason by the theory of DeAngelo (1981); bigger audit firms have better audits; smaller companies could only do worse than the to be found average compliance with IFRS 5. The main research question will be:
- What degree of compliance do we find in the IFRS 5 presentation & disclosure requirements?
The compliance is measured in the presentation & disclosure requirements of IFRS 5. This will be done through using a checklist to verify the compliance with IFRS 5 in annual statements of the sample entities. In the following research question this study tries to identify what theories there might be for using IFRS 5. In order to do this, the study takes on an assumption. The assumption is that the use of IFRS 5 is voluntary and in some cases mandatory. To illustrate, IFRS 5 has two different topics. These are non-current assets held for sale/disposal groups and discontinued operations. The first topic is related to the
statement of financial position. It discusses how entities are entitled to activate assets as a non-current assets held for sale/disposal groups. In order to do this, an entity has to comply
with extensive regulation, of which most is controllable by the entity. Therefore, an entity chooses to use IFRS 5 non-current assets held for sale and is its use voluntary. The other topic is discontinued operations. Discontinued operations are related to the financial statement of income. It reports the effects on the profit when a major part of business of an entity is sold. The use of discontinued operations can be defined as mandatory. However, the regulation uses the term ‘major business line or geographical area’. The definition ‘major’ can be questioned since its threshold is unspecified. This could reduce the mandatory character of discontinued operations. Having explained the voluntary and mandatory use of IFRS 5, this study will now explore the view of high and low compliance in IFRS 5. The idea is that compliance can be high or low and that this, in combination with voluntary and mandatory use of IFRS, is related to certain theories. An illustration is given in table 1.
TABLE 1
High compliance Low compliance
Voluntary Voluntary disclosure Earnings Management
Mandatory Decision usefulness theory X
Different theories can be applicable on different boxes. For example, theory in voluntary disclosure can be applicable on entities that voluntary use IFRS 5 and have high compliance. Voluntary disclosure can however not be applicable with low compliance since its disclosure is voluntary. Why would a company disclose information if they cannot comply with
regulation? This will be discussed further in the concerning chapter. There the theories in table 1 will be illustrated. Concomitantly the following research question applies.
- What theories can shed light on the use of IFRS 5 non-current assets held for sale & discontinued operations, considering the degree of compliance?
Blommaert and Lyckama suggest that the standard is complex. Complexity can cause a lack of clarity in how to use the standard. This can lead to different interpretations of the standard. This leads to questions like, does this study interpret regulation the same as the auditors of the companies and/or why does it not? These issues can have an impact on results in the form of a variation in the degree of compliance. Having a variation as such would prevent this
study from having proper research results to work with. Therefore, it is deemed important to determine whether the standard is complex. Complexity could also explain an increase of a low degree of compliance, since one would rather reluctant to use standards that he or she does not understand. The third research question is:
- What issues, if any, suggest that the IFRS 5 Non-current asset held for sale and Discontinued Operations standard might be complex?
To answer this research question, this study will illustrate the IFRS 5 non-current assets held for sale & discontinued operations classification and presentation & disclosure requirements and discuss the regulation that has potential issues or ambiguities. These are then discussed with the interpretation of the regulation by the industry leaders in accounting. This will clarify the ambiguities. Furthermore, these issues will be researched in financial statements of the population to determine its effects. The combination of these proceedings should clarify if any complexity exists in the IFRS 5 standard.
1.2 Cross-country differences & accounting classification systems
Besides the main research, the study population offers the possibility to investigate cross-country differences in IFRS 5. This object of research is interesting since the IASB tries to increase the comparability of financial statements through IFRS. The results of this part of the study could identify if cross-country differences still exist. If they do, an argument could be made that the comparability of IFRS 5 has not been increased. Researchers argue that cross-country differences remain due to accounting quality is a function of the firm’s overall institutional setting, including the legal and political system of the country in which the firm resides (Soderstrom and Sun, 2007). Other researchers show based on empirical research a different outcome. There is evidence by Daske et al. (2008) that the market liquidity increases around the time of the introduction of IFRS. Other effects like the decrease in firm’s cost of capital and increase in equity valuations where also measured. Gee et al. (2010) examined the influence of tax on IFRS between Germany and the UK finds that their overall position is more similar than recorded in previous studies. These findings suggest that IFRS increases the comparability of financial reporting. Research in cross-country
differences led to believe that there certain are accounting classification systems (e.g. Mueller, 1967; Nair and Frank, 1980; Nobes, 1983). This study will analyze previous literature on accounting classification systems and will create hypotheses of their existence in IFRS 5. The research question will be:
- Till what extent is the compliance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations presentation & disclosure requirements aligned with
accounting classification systems found in previous literature?
1.3 Scientific contribution
The contribution of this study to science will be of great importance. A study of this magnitude in IFRS 5 compliance has never been preformed. The results are beneficial to several parties. It would benefit regulators like the International Accounting Standards Board1 (IASB). Based on the results of this research, regulators might discuss the usefulness
of the standard, which could lead to adjustments. This study could benefit stakeholders, since this would give them insights in compliance in IFRS 5. The second part of this study is more exploratory in nature, as it searches for theories for the use of IFRS 5 and if these are in any way related to the results. The study looks upon theories in voluntary disclosure, earnings management and decision usefulness. This abstract way of thinking provides new insights in the use of IFRS 5, which will contribute to science. The research in accounting classification systems will determine if IFRS 5 ignores or complies with cross-country differences.
Whether an accounting classification system exists or not, the results could tell parties more about IFRS 5 and standards with the same conditions. If proven to be true, this study could provide basis for future hypotheses and similar studies in other IFRS regulation. This is because an argument could be made that comparability has not increased that much.
1.4 Study structure
The structure of this study will start with an illustration and discussion of the IFRS 5 non-current assets held for sale/disposal groups and discontinued operations. Furthermore, this chapter will discuss potential issues and ambiguities in IFRS 5. This will determine if any complexity concerning the third research question is applicable. The next chapter is a theoretical discussion concerning the use of IFRS 5. Theories in voluntary disclosure, earnings management and decision usefulness are discussed. In the following chapter the literature research in accounting classification systems is held to set out hypotheses for the research. Next chapter is the research design, where this study identifies the research goals and sets out the boundaries of the research. After that, the results of the study will be presented. These will include an overview of the IFRS 5 compliance study, a specific overview of the issues and the results of the accounting classification systems. The last chapter will be the conclusion where answers on the research questions are presented and a conclusion is drawn from the findings. Also, limitations in this study are discussed and recommendations for changes in the IFRS 5 standard are proposed.
2 Complexity in Non-current Assets Held for Sale and Discontinued Operations This chapter will illustrate the classification & disclosure requirements of the non-current assets held for sale and discontinued operations, known as IFRS 5. Another goal of this chapter is too determine whether there are any signs that suggest that IFRS 5 might be complex. This is done by first illustrating the standard and second discussing potential issues and ambiguities where applicable. This will create a discussion that will indicate which regulation requires more clarification. In order to clarify these ambiguities, they will be discussed with interpretation from leaders in the accounting industry. This will be taken into account and an empirical research concerning how companies present these ambiguities will be made. The combination of these should provide enough basis to determine possible complexity.
2.1 Illustration and discussion of the standard
The International Accounting Standards Board2 (IASB) presented IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations in 2004. With this IFRS the IASB replaced its
IAS 35 Discontinued Operations. In addition to setting out a standard for requirements in classification, measurement and presentation disclosures of non-current assets held for sale it tries to achieve convergence of accounting standards around the world. This is one of prime goals of the IASB, as well as the Financial Accounting Standards Board3 (FASB). In
achieving this goal the IASB took consideration from the FASB statement No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144), issued in 2001.
The classification requirements are illustrated and discussed below. IFRS 5 has three types of classifications:
- Non-current assets held for sale - Disposal groups
- Discontinued operations
Non-current assets held for sale are mostly related with individual assets and disposal groups
2The IFRS Foundation is an independent, not-for-profit private sector organization working to set out accepted international financial reporting standards.
that contain groups of assets and liabilities that are disposed in a single transaction. A
disposal group may be part, single or a group of cash-generating units. These are presented in the annual statement of financial position. Discontinued operations are the results of major activities that are terminated and reported in annual statement of income. IFRS 5 tries to capture the reporting of major activities of companies that are being terminated, why they are being terminated and its financial impact. A non-current asset can be classified as held for sale if the following two requirements are applicable:
- the asset (or disposal group) must be available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such assets (or disposal groups); and
- its sale must be highly probable. (IFRS 5.7) For a sale to be highly probable the following must apply:
- the appropriate level of management must be committed to a plan to sell the asset (or disposal group)
-‐ an active program to locate a buyer and complete the plan must have been initiated; -‐ the asset (or disposal group) must be actively marketed for sale at a price that is
reasonable in relation to its current market value
-‐ the sale should be expected to qualify for recognition as a completed sale within one year from the date of classification and actions required to complete the plan should indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
-‐ Exception on the fourth bullet is that when delay in the period of one year are caused by events or circumstances beyond the entity’s control and there is sufficient
evidence that the entity remains committed to its plan to sell the asset the period may be extended. (IFRS 5.8)
IFRS 5.7 is quite clear, however IFRS 5.8 is not. Questions arise in the definitions, what is ‘the appropriate level of management’, ‘an active program’ and ‘actively marketed’. However, this is an area where the professional judgment of an auditor comes into play and this is not in scope of this study. This is mentioned because it might be an explanation for low compliance (Nelson; 2002).
Discontinued operations are defined as the following:
A discontinued operation is a component of an entity that either has been disposed of, or is classified as held for sale, and;
(a) represents a separate major line of business or geographical area of operations (b) is part of a single coordinated plan to dispose of a separate major line of business or
geographical area of operations
(c) is a subsidiary acquired exclusively with a view to resale. (IFRS 5.32) Once more this study questions the definition, what is a ‘major line of business or geographical area of operations’? The lack of a clear definition in IFRS 5 might be an explanation for low compliance. What this study finds remarkable is that the non-current assets held for sale and discontinued operations are both defined in IFRS 5 but their definitions are not aligned. When a non-current asset held for sale is sold but does not represent a major line of business or geographical area of operations they are prohibited of presenting the results in the discontinued operations according to IFRS 5.32.
The presentation & disclosure requirements are as follows. The standard requires non-current assets held for sale and disposal groups in the statement of financial position to be presented separately from the other assets. Similarly, the liabilities of disposal groups are presented separately from other liabilities. The standard prohibits offsetting the assets and liabilities against each other. The major classes of the assets and liabilities are to be separated in either the financial position or the disclosures. As for the disclosures, the standard requires a description of the non-current assets and disposal groups. The facts & circumstances of the sale or leading to the expected disposal and the expected manner and timing of that disposal need to be disclosed as well. A gain or loss recognition concerning the fair value
measurement of the non-current asset should be disclosed, if not separately presented in the comprehensive income. These are regulation concerning non-assets held for sale. Specific regulation (e.g. reclassifications and prior periods) is not mentioned as they are rarely being used and the importance of this chapter is to capture the essence of the standard. The study finds several ambiguities. For example, the presentation requirements are unclear as to where the non-current asset held for sale should be presented in the statement of financial position. The standard only states separate, which could be interpreted in several ways. Second, what are ‘major classes of the assets and liabilities’? Is this merely the separation of current and
non-current assets/liabilities or should these involve a deeper level (e.g. property, plant & equipment, inventories, etc…). The disclosures are quite clear, however there is some lack of clarity concerning the facts and circumstances. The question is, do companies need to
provide a reason for the sale because IFRS 5.41 states that ‘facts & circumstances leading to the sale or expected sale’ needs to be disclosed.
The discontinued operations are presented in the statement of income as a post-tax profit or loss. This single amount exists out:
-‐ the post-tax profit or loss of discontinued operations; and
-‐ the post-tax gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation. (IFRS 5.33)
The disclosures of the discontinued operations involve an analysis of the single amount in the statement of income. The analysis exists out:
-‐ the revenue, expenses and pre-tax profit or loss of discontinued operations; -‐ the related income tax expense as required by IAS 12(81)(h);
-‐ the gain or loss recognized on the measurement to fair value less costs to sell or on the disposal of the assets or disposal group(s) constituting the discontinued operation; and
-‐ the related income tax expense as required by IAS 12(81)(h). (IFRS 5.33) The net cash flows attributable to the operation, investing and financing activities of
discontinued operations must be reported in either the cash flow or in the notes. The amount of income from continuing operations and from discontinued operations attributable to owners of parent must be reported in either the income statement or in the notes.
2.2 Interpretation of the requirements by the industry
In the previous paragraph several ambiguities regarding the IFRS 5 standard have been mentioned. It is interesting what the accounting industry views are towards these ambiguities and this might explain possible complexity. Therefore, the ambiguities in the previous
paragraph are cited below with views from the accounting industry. For these views the IFRS manuals of Deloitte, Ernst & Young (EY), Grand Thornton (GT), Mazars and
(a) IFRS 5.38 requires non-current assets held for sale and/or disposal groups in the statement of financial position to be presented separately from other assets. Similarly, the liabilities of disposal groups are presented separately from other liabilities. How should these be presented in the statement of financial position? Deloitte, EY, Mazars and PwC state clearly that the non-current assets held for sale should be presented separately from the other assets. This means that the non-current assets held for sale are positioned apart from the non-current and current assets. This goes the same for the liabilities held for sale. The firms give no further comments on this item. GT has a different interpretation. They present the non-current assets held for sale separately under the current assets. This is done for the liabilities as well. As the other firms, GT does not comment on how they interpret the regulation.
(b) According to IFRS 5.38 the major classes of the assets and liabilities are to be separated in either the financial position or the disclosures. How is the definition of ‘major classes’ to interpreted?
Deloitte and PwC mention that the major classes should be separated but give no example of what major classes are. GT shows a statement of financial position of what the major classes should be. These are items as Goodwill, Property, Plant and Equipment, Inventories, Cash and Cash equivalents, Deferred tax liabilities and Provisions. Ernst & Young created an example financial statement to assist entities in creating their own. The financial statement shows that EY uses the same major classes as GT and more. These are intangibles, debtors, creditors and interest-bearing liabilities.
(c) IFRS 5.41 states that the ‘facts & circumstances leading to the sale or expected sale’ need to be disclosed. Does this include disclosing a reason for the sale?
Deloitte, Mazars and PwC do not state how they interpret the ‘facts & circumstances’ and if a reason for the sale should be disclosed. EY and GT give both examples on how this should be disclosed. GT discloses that the management has decided to discontinue the operation. Furthermore, they disclose what assets are classified as held for sale and what has been sold. GT states the following; ”This decision was taken in line with the Group’s strategy to focus
on its web-based retail business” (EY: p30). EY discloses that the group has decided to
discontinue the operation. They disclose when the transaction is completed and on what the effective date of the transaction will be. As for the disclosing the reason for sale, EY has
disclosed the following; “The business of Hose Limited has been operating in an
unpredictable product environment, making it difficult for management to derive real growth and profitability from the segment” (EY: p.63) Based on the examples of both industry
leaders this study feels disclosing a reason for the sale of a ‘major line of business or geographical area of operations’ is required.
2.3 Current developments and future amendments
At the moment the accounting industry is waiting for the IASB to publish a new exposure draft on IFRS 5. The last exposure draft was published in September 2008, which led to responses from industry leaders. The exposure draft proposed to change the definition of discontinued operations by withdrawing its initial definition and replacing it by the following.
(a) is an operating segment (as that term is defined in IFRS 8) and either has been disposed of or is classified as held for sale or
(b) is a business (as that term is defined in IFRS 3 Business Combinations (as revised in 2008)) that meets the criteria to be classified as held for sale on acquisition. (IASB Exposure draft, 2008)
In addition, the exposure draft proposed that an entity should determine when the definition is applicable regardless of whether it is required to use IFRS 8. Second, the exposure draft proposed to change the amount disclosed for operating segments. Normally this amount is determined by the amounts reported to the chief operating decision maker. The exposure draft proposes to change the amount to the amounts that are presented in the statement of comprehensive income, even if segment information disclosed includes different amounts. Third, disclosures for all components of an entity that have been disposed of or are classified as held for sale, except for businesses that meet the requirements for held for sale on
acquisition.
Several industry leaders have responded on the exposure draft. BDO clearly states that they do not agree with the proposed definition. They argue that a component or a part of an operating segment can be of significance, especially when it is a major line of business or geographical area of operations. The reason for changing the definition to an operating segment is that several users of financial statements stated that a discontinued operation
should be part of a strategic shift. BDO argues that the threshold for discontinued operations at an operating segment level is too high. For example, a company could decide to dispose a significant part of an operating segment without terminating the operating segment. This could result in not having to disclose discontinued operations. GT agrees with the argument that a disposal activity should be reported under the discontinued operations if it represents a strategic shift. However, as BDO sees the risk of lesser reporting of discontinued operations, GT sees the opposite. The number and nature of an operating segment depends on the amount of information provided and reviewed by the chief operating decision maker. He can choose to review information on a very detailed level, which would result in quantitative disclosures of the discontinued operations. E&Y also believes a discontinued operation should be included only when a strategic shift is applicable. They add that the current
definition ‘major line of business’ or ‘geographical area’ is too subjective and hint for the use of a stronger definition like an operating segment. Deloitte states that the might sound
appealing for the entities that already have identified their operating segments. Entities that never were obliged to disclose operating segments have to discuss with every disposal
weather it concerns an operating segment. As for the second amendment, BDO and GT agree that the amount presented in the discontinued operations, should be based on the statement of comprehensive income. On the third amendment BDO and GT do not agree because this will lead to excessive disclosures for components of an entity that might not be relevant towards the idea of the strategic shift. Deloitte and E&Y do not comment on this amendment.
2.4 Chapter summary
This chapter has found two issues and three ambiguities. This study finds IFRS 5.8 where the highly probability of a sale is determined which will mean that the asset can be activated for a non-current asset held for sale/disposal group lacking in clarity. The standard is document in terms like ‘actively marketed’, ‘level of management’ and ‘active program’, which are unclear and do not have a certain threshold. IFRS 5.32 has the same issue, as a discontinued operation has to be a ‘major line of business or geographical area’, this study wonders what is defined by the term ‘major’? Any framework on how to judge whether these terms are applicable is not included in the standard. Also, it appears that non-current assets held for sale/disposal groups and discontinued operations are not aligned. This is surprising since
they are presented in a way that they belong in the same subject. When the sale of a non-current assets held for sale/disposal groups is realized and it is not a ‘major line of business or geographical area’ it cannot be included in the discontinued operations according to IFRS 5. As final this study finds two ambiguities in IFRS 5.38 and one in IFRS 5.41. These ambiguities concern presentation of non-current assets held for sale/disposal groups in the statement of financial position, disclosures of the major classes of these and if the facts and circumstances of the discontinued operations should disclose a reason for sale. These will be empirically researched to determine the complexity. In the issues that this study presents the current developments illustrate that some leaders in the industry agree that the term ‘major line of business or geographical area’ should be less subjective. And also that IFRS 5 perhaps should play its role more in being the standard for strategic shifts and how to report those effects.
3 Theoretical discussion
In the introduction the concept of linking the voluntary and mandatory use of IFRS with the degree of compliance has been discussed. This study finds three theories in this concept that might be applicable for the use of IFRS 5. These are supplemented to the table 2.
TABLE 2
High compliance Low compliance
Voluntary Voluntary disclosure Earnings Management
Mandatory Decision usefulness theory X
In voluntary use of the standard this study finds two theories that might have a link with IFRS 5 compliance. These are voluntary disclosure and earnings management. The idea behind voluntary disclosure theory is that entities disclose information free beyond
regulation that is deemed relevant for the user. After all, IFRS 5 does publish information the effects of discontinued operations, concerning the nature, amount, timing and future cash flows. Earnings management is the theory that describes the use of reporting standards by the manager to manipulate the entities reported earnings. This theory is discussed because the activation of a non-current asset held for sale makes it possible to pre maturely take losses. Earnings management should be applicable on both kinds of compliance considering its voluntary character. However, a study by Zhou & Lobo (2001) shows that low compliance is often more related to earnings management and vice versa. Therefore earnings management is drawn in low compliance box and voluntary disclosure in the high compliance corner since the entity whishes to gain advantages by using voluntary disclosure.
Next to voluntary disclosure of IFRS 5 there is mandatory disclosure. This is applicable to the presentation & disclosure requirements of discontinued operations. This study believes that the decision usefulness theory might be applicable with high compliance. The theory argues that if you can’t prepare the reporting correct, at least try to make it more useful. These theories that now have been linked to table 2 will be discussed and illustrated why they are linked to the certain boxes.
3.1 Voluntary disclosure
Entities might have several reasons for voluntary disclosing information. Voluntary disclosure can benefit entities in lowering their cost of capital (Francis et al, 2005). Other benefits according to the FASB (2001) can be better credibility and improved investors relationships, access to more liquid markets and lesser danger of litigation alleging inadequate informative disclosure and better defenses when such suits are brought.
Voluntary disclosure of non-current assets held for sale will disclose information concerning the effects of discontinued operations, concerning the nature, amount, timing and future cash flows. However, the FASB also acknowledges the fact that entities will compare the benefits with the costs of applying the standard.
3.2 Earnings management
The positive accounting theory by Watts & Zimmerman (1978) is one of the theories in earnings management. This theory is concerned with, quote: “predicting such actions as the
choices of accounting policies by firm managers and how managers will respond to
proposed new accounting standards” (Scott 2009: 284). These predictions are concentrated
among three hypotheses.
(a) The bonus plan hypothesis. If all considered equal, managers with bonus plans tend to choose accounting policies that would benefit them more then policies that lie in the interest of shareholders.
(b) The debt covenant hypothesis. If all considered equal, managers of entities tend to choose accounting policies that would prevent the entity from violating its debt contracts.
(c) The political cost hypothesis. If all considered equal, managers of entities that face political cost tend to choose accounting policies that would avoid these costs. These hypotheses can explain reasons for using IFRS 5. For example, take in consideration the bonus plan hypothesis. If a manager has overachieved his profit goal that entitle him to a bonus and a major asset was going to be sold the next year, he might consider applying non-current assets held for sale in the non-current year in order to reduce the profit. In this way it will be easier to achieve next years goals because he has already depreciated the asset using the non-current asset held for sale classification. This example goes for the political cost
hypothesis as well. If an entity shows extreme profits, chances are high that society will act with more taxes or other constraints. If the entity was going to sell an asset the next year, it could use non-current asset held for sale classification to diminish the profit in the current year. Both examples are part of a phenomenon called earnings management. Earnings management is, quote: “the choice by a manager of accounting policies, or actions affecting
earnings, so as to achieve some specific reported earnings objective” (Scott 2009: 403). So
in theory the classification non-current assets held for sale could be used to manipulate earnings to a desired level for the manager. This study sees no benefit for the stakeholder in using a fair value approach one year prior to a potential sale. This would only damage the reliability of the information. Ball (2006), who did research to the pros and cons of IFRS for investors foresees these problems with ‘fair value accounting’ as well. He states, quote: “On
the one hand, this philosophy promises to incorporate more information in the financial statements than hitherto. On the other, it does not necessarily make investors better off and its usefulness in other contexts has not been clearly demonstrated.” (2006: 14) In chapter 2
ambiguities in the standard are described. The interpretation of these ambiguities depends on the professional judgment of the auditor. A study by Nelson et al. (2002) has shown that the more ambiguities in a regulation, the easier the auditor accepts positions or arguments from management. Considering IFRS 5.7, which depends a lot on the auditor’s judgment, the chances are higher that a non-current asset held for sale is activated for management purposes. This can increase the chances of earnings management. Other studies show that discontinued operations are being used for managing earnings. A study by Barua et al. (2009) shows that entities shift operating expenses to income-decreasing discontinued operations to increase core earnings. Based on literature and argumentation this study believes that IFRS 5 can be used earnings management purposes. If the theory of earnings management would be adopted, the disclosures would be limited (Zhou & Lobo; 2001).
3.3 Decision usefulness theory
The decision usefulness theory takes the view that, “if we can’t prepare theoretically correct
financial statements, at least we can try to make financial statements more useful” (Scott
2009: 59). The replacing of IAS 35 Discontinued operations by IFRS 5 was mainly triggered for achieving more convergence between IFRS and US GAAP. This increases the
comparability between IFRS and US GAAP annual statements, which is more useful for investors. The use of non-current assets held for sale in the statement of financial position creates a separation of the core business and business to be discontinued, which gives the user a clearer picture of the entity. This goes for the statement of income as well, where the discontinued operations are presented separately. The importance of users is also recognized in the exposure draft of September 2008. In the exposure draft the main discussion is if the term ‘major line of business or geographical area of operations’ should be changed to operating segment. This is because users of financial statements suggested that IFRS 5 should capture the strategic shift and not only major lines of business or geographical area of operations. So if the decision usefulness theory were to be adopted the study expects the IFRS 5 presentation & disclosure requirements to be quite detailed (Zhou & Lobo; 2001). Since we have discussed its comparability and indentifying core business advantages it is interesting to discuss what would happen if IFRS 5 where not to be used, as this study deems its use voluntary. This does not include the discontinued operations, since these are
mandatory. When the non-current assets held for sale classification is not used, the assets remain in the statement of financial position under non-current assets. The disclosures of the non-current asset will therefore be either disclosed as voluntary information or not at all. This means that the preemptive fair value measurement on the asset is not allowed and no separation of cash flow of the asset in the cash flow statement can be made. In terms of decision usefulness theory it is beneficial to use IFRS 5. If we look at the adoption of the voluntary disclosure theory by accounting major accounting body’s, The IASB/FASB draft of the Conceptual Framework (2008) shows that the primary user group, which are
stakeholders in the entity, have a need of information about the amount, timing, and uncertainty of the firm’s future cash flows. This is consistent with IFRS 5, since it
contributes information towards the amount to be depreciated of the sale, the timing of the sale and the future cash flows need to be separately stated from the cash flow statement. Therefore according the decision usefulness theory IFRS 5 is useful in providing information for stakeholders.
3.4 Chapter summary
In this chapter the study introduced the idea of relating theories to compliance in IFRS 5. Some previous studies and reasoning suggest that the theories voluntary disclosure, earnings management and decision usefulness can have a relationship with compliance. In earnings management this study notices that IFRS 5 can be used for this purpose, considering the fair value measurement one year prior to the potential sale can be used to diminish earnings. This can be used for several purposes (e.g. exceeding bonus plans and debt covenants). Next to earnings management the decision usefulness theory suggests that IFRS 5 is used for this as well. Combining the increased comparability with US GAAP, simpler indentifying core businesses and increasing information for stakeholders concerning amount, timing and future cash flows suggests that a stakeholder has more information when IFRS 5 is used.
4 Previous Literature in accounting classification systems
4.1 Previous literature in accounting classification systems
Studies in classification of accounting and reporting systems have two approaches. The first is the judgmental approach, which focuses on the identification of relevant environmental factors and linking these to national accounting practices. Based on these links international groupings are proposed. The work of Mueller (1967) and Nobes (1983, 1988) are examples of this approach. The empirical approach tries to analyze the individual accounting practices and develops patterns. On these patterns international groupings are proposed. Examples of this approach are Nair and Frank (1980) and Gray (1988). This study will examine both approaches as both have limitations. Judgmental studies have no empirical research, which allows them only to rationalize thought. Results of empirical studies are widely different, due to their research design and dataset. Therefore this study will analyze the primary studies in both approaches.
Hattfield (1911) was the first researcher to discus accounting system classifications in France, Germany, the U.K. and the U.S. In his research he concludes that a three-group classification should exist, France and Germany, the U.K. and the U.S. Here the first separation between the Anglo-Saxon and the Continental Europe accounting system are described.
Mueller (1967) went on with research in the same field as Hattfield. However, Mueller tried to explain this phenomenon form a cultural perspective. He defined four basic patterns related to differences in approach and objectives in accounting practices.
- A macroeconomic pattern is found in countries where national economic policies are its main importance. Companies in these countries would rather follow the policies instead of leading them and therefore accounting is more smoothed to create more profitable
economic stability. For example, Sweden grants a tax-shield for certain reserves, which can be used when the national economy needs stimulation.
- The microeconomic pattern is found in countries where a firm’s continuity is the main point of business. Accounting concepts are derived from economic analysis and therefore
accounting is more viewed as a branch of business economics. The Netherlands is an atypical case regarding the microeconomic pattern. In the Netherlands there is much
emphasis for replacement-value accounting and other subjects like segmental reporting. - The independent discipline approach views accounting as a service function. Accounting is
considered to be capable enough to create it’s own business practices in classification and measurements requirements. According to Mueller The United States and The United Kingdom are prime examples of this pattern.
- In the uniform accounting approach, accounting is a means of administration and control. Here a uniform approach gives ease of use and a means of control for different kind of users. Typical examples of this pattern where Germany and Switzerland.
Mueller used these approaches as the basis for the international classification of accounting practices. Besides the patterns Mueller recognized a wider set of influences. Mueller
recognized a countries legal system, political system and social climate to be of influence on the accounting and reporting system.
In 1980 Nair and Frank published an article regarding the impact of disclosures and measurement practices on international accounting classifications. They discuss whether classification of countries into groups is the same under disclosure and measurement practices. Using a data source supplied by Price Waterhouse & Co. (1973, 1975) they discovered that there is a difference between the uses of these practices and recommend for future classifications to use this separation in practices. Furthermore they created a
classification of countries into groups on both practices (figure 1). For this research the disclosure practice (figure 1) is of major interest due to the research design of this study.
FIGURE 1
Source: Nair & Frank, 1980 p.436 (disclosure practices model)
The model (figure 1) above has five groups, which contain countries in the research design. These are Belgium, France, Greece and Spain in group one. Group three Germany. Group four the Netherlands and the United Kingdom. Group six the Scandinavian countries and Group seven Italy and Switzerland.
It was not until Gray (1988) before culture in accounting was specifically researched. His study was done in fields that took more significance in explaining behaviors and influences on social systems. Gray especially took interest in literature research in the anthropology, sociology and psychology fields. (e.g., Parsons and Shils, 1951; Kluckhohn and Strodtbeck, 1961; Inkeles and Levinson, 1969; Douglas, 1977; and Hofdstede, 1980) It is noticeable that Hofstede (1984) had a lot of influence on Gray’s study. Hofstede’s research concerned cultural dimensions and identified four of these. These were individualism, power distance, uncertainty avoidance and masculinity. Later on a fifth and sixth dimension were identified, long-term orientation and indulgence versus restraint. On these dimensions Gray described four accounting values. These values are best described as creating the foundation for culture in accounting. Gray identified the following accounting values: (1)
professionalism versus statutory control; (2) uniformity versus flexibility; (3) conservatism versus optimism; (4) secrecy versus transparency. According to Gray these accounting NAIR, R. D., The Impact of Disclosure and Measurement Practices on International Accounting Classifications , Accounting Review, 55:3 (1980:July) p.426
27 Hofstede, Gray proposed an extension on the model of Hofstede (1980, p.27). According to Gray, quote:”...the values or attitudes of accountants may be expected to be related to and
derived from societal values with special reference to work-related values. Accounting ‘values’ will, in turn, impact on accounting systems.” (1988, p.5)
FIGURE 2
Source: Gray, 1988 p.5 (Culture Areas Hofstede)
As with the disclosure model of Nair and Frank (1980) this study will analyze the countries
A B A C U S
FIGURE 1
CULTURE AREAS (HOFSTEDE)
More developed Latin Belgium France Argentina Brazil Spain Italy Less Developed Asian Indonesia Pakistan Taiwan Thailand India Malaysia Philippines Germanic Austria Israel Germany Switzerland Less developed Latin Colombia Ecuador Mexico Venezuela More developed Asian Japan Costa Rica Chile Guatemala Panama Peru Portugal Salvador Uruguay Near Eastern Arab countries Greece Iran Turkey Yugoslavia Anglo Australia Canada Ire 1 and New Zealand U.K. U.S.A. African East Africa West Africa Asian-Colonial Hong Kong Singapore Nordic Denmark Finland Netherlands Norway Sweden South Africa
If Hofstede has correctly identified Individualism, Power Distance, Uncertainty Avoidance, and Masculinity as significant cultural value dimensions then it should be possible to establish their relationship to accounting values. If such a relationship exists then a link between societal values and accounting systems can be established and the influence of culture assessed.
Before an attempt can be made to identify significant accounting values which may be related to societal values it is important to understand the meaning of the four value dimensions identified by Hofstede (1980, 1983) and referred to earlier. These dimensions are well expressed in Hofstede (1984, pp. 83-4) as follows:
Individualism versus Collectivism
Individualism stands for a preference for a loosely knit social framework in society wherein individuals are supposed to take care of themselves and their immediate families only. Its opposite, Collectivism, stands for a preference for a tightly knit social framework in which individuals can expect their relatives, clan, or other in-group to look after them in exchange for unquestioning loyalty (it will be clear that
in the model (figure 2) that are also in the research design. These are: France, Spain and Italy in the More developed Latin area. Germany and Switzerland in the Germanic area. The U.K. in the Anglo-Saxon area. The remaining five countries are listed in the Nordic area.
Nobes (1983) summarizes the research done on international classification of
accounting practices and provides a more developed approach. This leads to a model (figure 2) in the classification of accounting practices. As the model looks like having a similar approach to Mueller it has one major difference. Nobes embraces the suggestion of Nair and Frank (1980), which was separating disclosure, and measurement practices. However, Nobes criticized the data used by Nair and Frank for having straightforward mistakes, misleading answers and neglecting other issues and therefore could not rely their results. Based on former research and taken into account this criticism Nobes created a hypothetical
classification of financial reporting measurement practices for western countries (figure 3). Nobes mentioned he did not create a model for disclosure practices because it would require an additional paper.
In 1998 Nobes published another paper regarding the subject of international differences in financial reporting. The paper searches for a general model of reasons for international differences in financial reporting. Nobes summarizes reasons proposed in previous literature for international accounting differences (figure 4) en reviews his model made in 1983. In this research Doupnik and Salter (1995) are mentioned for their model and variables, which are more based on the work of Hofstede (1980) and Gray (1988). Nobes argues that there are international differences in financial reporting systems due too the purposes for these reporting’s. There are four different financing markets, based on strong credit, strong equity and on whether the market is dominated by in- or outsiders. These markets determine the demand of information of companies, for example markets where there are strong inside players (e.g. government, family or banks) would result in more private provision of accounting information. In these markets there is less need for public disclosure. However, in dominant outsiders markets the need for public disclosure higher because the providers of finance won’t have as much private access as strong insiders.
FIGURE 4
Accounting differences are mostly divided in the Anglo-Saxon and Continental European system. In the Anglo-Saxon system accounting differs from tax rules and in the continental European system accounting follows the tax rules. Other differences are for example unsettled currency gains, legal reserves, provisions for depreciations, pensions and profit and loss formats. These accounting differences are linked to the different financing markets. For example, strong equity outsider markets tend to have more Anglo-Saxon accounting. Nobes states five variables where he defines his model on. These variables are the type of country culture, the strength of the equity-outside system, the type of company, country degree of cultural self-sufficiency and the type of financial reporting. The type of country culture and strength of the equity-outside system are described earlier. The main importance in a type of company is whether the control is widely dispersed among outsiders. If this is common in a country, the demand for public disclosures is higher. A countries cultural self-sufficiency comes from its history of invasions, social climate, religion and so on. This leads to a country being either cultural self-sufficient or cultural dominated. The last is the type of financial reporting the country uses. These differences can lead to insights in culture and give a broader orientation on the international classification of accounting practices.
d’Arcy (2001) also commented on the subject of accounting models. Here she
concludes: ”Different classification models are traced back to the differences in conceptual
and mythological research designs” (2001, p.327). Also it seems that the use of which
database is very important to this research. d’Arcy tries to find a distinction between the Anglo-Saxon and Continental Europe accounting systems. Using the TRANSACC reference matrix as a database she did not find a relation that would define this distinction between the Anglo-Saxion and Continental Europe accounting model.
An important research to mention is a study done by Kvaal and Nobes (2010). They examined whether there are there are systematic differences in IFRS accounting policies between countries. Using information form the annual reports of companies in the blue chip indices of the five largest stock markets that use IFRS, they reject a null hypothesis that IFRS practice is the same across countries. They collected data in the use of accounting policies in annual reports and find that national practice continues where this is allowed by IFRS. As this study focused on IFRS 5, which is rule-based the study of Kvaal and Nobes provide a
significant conclusion. It suggests that the results of our research are more likely that cross-country differences do not exceed beyond the bounds of obliged regulation. This might be an explanation or a contradiction for future results.
Nobes (2011) tested his model (figure 3) designed in 1983. He used the data from Kvaal and Nobes and supplemented the remaining countries. His dataset contained the following countries: Australia, United Kingdom, Germany, France, Spain, Netherlands and Italy. Nobes concludes quote;” All the statistical techniques lead to the same conclusion:
Anglo-Saxon and Continental European groupings can be discerned in the IFRS practices of very large companies.” (2011, p. 280). His conclusion is particular as the model is based on
measurement practices. Nobes (1983) acknowledges the work Nair and Frank (1980) that research in these country classifications should be separated in disclosure and measurement practices. Nobes reviewed his results by separating the measurement from the disclosure practices and found that besides Sweden the differences where not big enough to alter the classification of the seven countries and therefore his conclusion would be valid.
4.2 Hypothesis development cross-country differences
This study thrives to find out till what extent the degree in compliance is aligned with IFRS 5 reporting. Research in previous literature states two important facts. Nobes (2011) finds evidence that a two-way accounting classification within IFRS exists. This is known as the Anglo-Saxon and European continental groupings. The theory behind these groupings is that Anglo-Saxon accounting is strong equity based and commercially driven. European
continental accounting is weak equity based, government driven and tax dominated. Based on these factors companies tend to choose different accounting principles for several reasons (e.g. minimizing profit for taxation reasons). If one would rationalize through the
information approach to decision usefulness, which recognizes the individual responsibility for predicting future firm performance, accounting systems where more stakeholders exist should have better disclosures. This is consistent with the legitimacy theory that argues the position a company takes within a society. Once a company has manifested itself in a society it creates ‘social contracts’ with its environment, which it owes her rights to exist to. So based on these theories the Anglo-Saxon economy with strong equity market and commercially driven would have better disclosures.
Now the question remains, which countries are defined by the Anglo-Saxon
classification within the sample group? Most of the researchers (e.g. Mueller, 1967; Nair and Frank, 1980; Gray, 1988; Kvaal and Nobes, 2010; Nobes, 1983, 1988, 2011) agree that the U.K. is an Anglo-Saxon country and is separated from the Continental European countries. Regarding The Netherlands the researchers remain divided. Mueller defines the Netherlands as having their entire own economic system and therefore should not be in any classification. Nair and Frank’s model put the Netherlands together with the U.K. Gray model that is based on Hofstede culture values argues that the Netherlands should be in the Nordic area. Nobes agrees that the Netherlands indeed have their own economic system, however he has added The Netherlands too the Anglo-Saxon group like Nair and Frank. Nobes does note that the Netherlands is an outlier in the Anglo-Saxon group. Due to the dispute in literature the Netherlands will not be taken into account in either the Anglo-Saxon group or the Continental European group.
In the Continental European classification there are two classifications noticeable. The researchers agree that France and Spain have the same accounting classification. The second classification visible is the Scandinavian classification. According to Nair and Frank and Gray Denmark, Norway and Sweden should be grouped together. There is no mention of Finland in Nair and Frank’s work and Gray adds this country to the Nordic area. In this research Finland is also added to the Scandinavian classification. As for Germany, Italy, and Switzerland there is no real distinction found in previous literature. Gray and Mueller put Germany and Switzerland together. Nair & Frank and Nobes state Germany as an individual classification, however Nobes does not mention Switzerland in his model. This is properly because Switzerland is not obliged under the European Union to use IFRS, yet a lot of
companies in the FTSE 100 choose to do so. The researchers are also divided about Italy. For these countries the study will not try to classify them, as is there no clear suggestion in which classification they should grouped. This leads us to the following hypotheses. As Nobes (2011) states that his research concludes a distinct difference between Anglo-Saxon and Continental European classification that will be the first hypothesis that will be tested. This leads to the following hypothesis:
H1: Within the sample there is a distinct accounting classification of Anglo-Saxon and
Continental Europe countries visible.
To determine if there are accounting classifications within the Continental European the following hypotheses are stated.
H2: Within the Continental European accounting classification there is a separate
accounting classification of France and Spain together visible.
H3: Within the Continental European accounting classification there is a separate
accounting classification of the Scandinavian countries visible. Based on the other hypotheses the null hypothesis has to be:
H0 : Differences in degree of compliance in IFRS 5 presentation & disclosure
requirements are not related to accounting classification systems.
This research has two main outcomes (regardless of the classifications within the Continental European classification). If H1 is proven it will mean that the statement of Kvaal and Nobes
is false and cross-country differences neglect IFRS 5 to some degree. If H0 is proven, the
statement can be made that cross-country differences have no effect on IFRS 5 where it is not allowed and IFRS 5 does reduce the effects of accounting systems, which means it is proven to be effective in the harmonization concerning non-current assets held for sale, disposal groups and discontinued operations.
5 Research design, population / sample and research characteristics
The study does a research in the degree of compliance in the IFRS 5 requirements and investigates accounting classification systems. To study this, the research performs an empirical research on the presentation & disclosure requirements of IFRS 5. With this research this study tries to answer the following questions:
- What kind of degree in compliance do we find in the IFRS 5 presentation & disclosure requirements?
- What issues, if any, suggest that the IFRS 5 Non-current asset held for sale and Discontinued Operations standard might be complex?
- Till what extent is the degree in compliance in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations presentation & disclosure requirements aligned with accounting classification systems found in previous literature?
To answer these questions, the research is divided into three main paragraphs. The research design will explain how it tries to capture the degree of compliance. The second paragraph, the data gathering will show what data is selected from the population and will explain more about the sample. The research characteristics will illustrate the outline of the research. First the research goals are defined in order to determine what this research tries to find. The following research goals are identified based on the research questions:
- Identify the degree of compliance in the IFRS 5 presentation & disclosure requirements.
- Capture the related information regarding the ambiguities and determine if there is a complexity.
- Determine if any differences in degree of compliance in IFRS 5 presentation & disclosure requirements align with the accounting classification systems found in previous literature.
5.1 Research design
In order to determine the degree of compliance, every annual statement in the sample will be checked with a list of IFRS 5 presentation and disclosure requirements. In order for users to understand how the compliance is determined or to recreate the study, disclosure indexes on which the compliance is determined are presented and illustrated. An annual statement will be checked with a selected list (disclosure index A & B) of items made in accordance with the IFRS 5 presentation & disclosure requirements. These items will be checked on
applicability and availability. There are three different outcomes possible. - The item is not applicable (e.g. no discontinued operations).
- Applicable and available (e.g. there are discontinued operations and sufficient disclosures are available).
- Applicable but not available (e.g. there are discontinued operations, however no sufficient information is disclosed).
Based on the outcome a score will be assigned. The determination of the scores is described in the dichotomous. This research uses unweighted scores to maintain its research usefulness. This is described in the unweighted scores paragraph. In order to determine the compliance grade, the total score will be divided by the highest achievable score. This will show the percentage of the standard that is presented or disclosed. This percentage will represent the ‘compliance grade’ on which differences will be analyzed.
There are two disclosure indexes. The disclosure index A is for non-current assets held for sale and disposal groups. The disclosure index B is for discontinued operations. Not all presentation & disclosure requirements by IFRS 5 can be used in the research. For the presentation of the non-current assets held for sale, disposal groups and discontinued
operations no scores are admitted. This is because annual statements are selected on the basis if they present non-current assets held for sale, disposal groups or discontinued operations. If scores where to be applied it would show biased results. For the presentation of prior year numbers no scores are applied as well. This is because IFRS 1 requires this as well and this research investigates only IFRS 5. Several other disclosures are also not used by the
