Thijs Kerstens | Staff Audit & Consultant Climate Change and Sustainability Services Thijs Kerstens has been working at EY as Staff since
1 September, 2014
1. Overall Approach
There are fundamental differences in the overall approach between sets of accounting standards. The first fundamental difference is whether accounting standards are principles-based. Principles-based accounting standards are developed based on specific principles or objectives that govern financial reporting that is ‘useful’ to decision makers. For instance, the matching principle that expenses be matched with revenues. Rules-based standards are the counterpart of principles-based accounting standards. Although rules-based standards are based on principles, they include more exceptions to these principles and more detailed implementation guidance. Both IFRS and DAS are considered principles-based accounting standards. Perhaps driven by the litigious environment in the USA, USGAAP is believed to be more rules-based. A perceived benefit of rules-based standards is greater comparability of financial statements (Schipper, 2003).
Another fundamental difference is the option to deviate from the set of accounting standards. Deviation from a set of accounting standards being applied is commonly referred to as true-and-fair-view-override (TFVO). The essence of accounting standards is providing guidance in a way that reflects economic reality and provides a true and fair view. Under IFRS the TFVO is only permitted in extremely rare circumstances to achieve a true and fair view. IFRS than requires specific disclosures with respect to the TFVO. Departure from DAS is required (!) if necessary to provide a true and fair view and there is no requirement to disclose this departure. Under DAS the TFVO is required whereas under IFRS it is almost forbidden. Absent the requirement to disclose deviation from DAS it is difficult to quantify the use of the TFVO to assess whether this is actual difference between DAS and IFRS (de facto difference) or whether this is merely a difference ‘on paper’ (de jure difference). Early research on the implementation of TFVO across EU member states in Europe shows that only 10 out of 400 listed companies across Europe used TFVA (van Hulle, 1997, p. 716). Research on listed firms reporting under UKGAAP, with a similar TFVO as DAS, substantiates its limited use (Livne and McNickols, 2009). Livne and McNickols (2009) attribute this limited use in part to the high cost involved. For instance, litigation cost, conflict with auditors, and scrutiny by analysts and institutional investors.
2. Strictness
Specific accounting standards with a set of accounting standards generally address the following issues: recognition and measurement of transactions, presentation, and disclosure. Recognition/ measurement pertain to when a transaction has to be recognised (derecognised) on (from) the primary overviews. Primary overviews are the statement of financial position (balance sheet), the (comprehensive) income statement, the statement of changes in equity, and the cash flow statement. For instance, IFRS requires that when financial instruments are being recognised on the balance sheet they are measured at fair value. Presentation is where and how transactions need to presented on in the primary overviews. For instance, IFRS requires the comprehensive income statement to minimally consist of a number of defined items. Disclosure requirements are additional disclosures in notes on specific transactions presented on the face of the primary overviews. For instance, IFRS and DAS require a movement schedule of tangible fixed assets that includes investments, divestures, and depreciation.
Several detailed comparisons have been made between IFRS and DAS (e.g. Ernst & Young, 2013; Deloitte, 2013). One way of comparing differences between sets of accounting standards is by their strictness. Based upon the Ernst & Young (2013) publication I present an overview of differences in strictness of DAS and IFRS.[1] From this table it follows that IFRS is stricter in 241 requirements compared to 111 requirements were DAS is stricter. In 80 requirements IFRS and DAS are contradictory. These differences will be discussed per topic below.
Table 1.
Differences between DAS and IFRS
| Issues | IFRSstricter | DASstricter | IFRS and DAS contradictory | Total | |
| Presentation | 33 | 53 | 15 | 101 | |
| Recognition and Measurement | 152 | 30 | 65 | 247 | |
| Disclosure | 56 | 28 | 0 | 84 | |
| Total Differences | 241 | 111 | 80 | 432 | |
| This table is based on the 2013 Ernst & Young publication: Vergelijking IFRS met Nederlandse wet- en regelgeving. | |||||
2.1 Presentation
Contrasting the notion that IFRS is overall stricter, DAS is stricter with respect to the presentation of primary overviews. This is not surprising. Under DAS there are specifically defined sets of primary overviews. IFRS does not provide specific guidance for the presentation of the primary overviews. IFRS merely states the minimum required items in the primary overviews and includes the requirement that additional items are required when it is relevant to the understanding of the entity’s financial position or performance. Another general difference is that IFRS requires 2 years of comparative information on the statement of financial position.
In table 2, I present a breakdown of the differences between IFRS and DAS per topic. The table shows that especially equity and financial instruments are topics with significant differences between DAS and IFRS. Especially presentation of items within equity is strictly defined under DAS. For instance, this refers to legal reserves to restrict dividend pay-out to equity holders of unrealised gains to avoid expropriation of debt holders by equity holders. With respect to the presentation of financial instruments IFRS is stricter and is related to for instance detailed guidance on the classification of a financial instrument as debt or equity.
2.2 Recognition and Measurement
Given that most differences between sets of accounting standards are related to recognition and measurement, most professional publications focus thereon. Areas with major differences between IFRS and DAS are fixed assets and impairments, financial instruments, investments and consolidation, and business combinations. Derivative financial instruments under IFRS are in principle measured at fair value whereas under DAS it is a policy choice to measure them either at book value of fair value. With respect to fixed assets there are for instance differences how to account for goodwill. Under IFRS goodwill is not depreciated whereas under DAS it is a policy choice how to account for goodwill (depreciation, recognition in equity, recognition in the profit & loss). Also, goodwill and other intangible assets that are not depreciated have to be tested annually whether they are impaired.
With respect to recognition and measurement IFRS is overall stricter than DAS. In general IFRS has less policy choices than DAS.
Table 2.
Differences between DAS and IFRS
| Differences per topic | IFRS stricter? | |||||||||
| Topics (alphabetic) | Total | P | R/M | D | Total | P | R/M | D | ||
| Business combinations | 17% | 0% | 8% | 1% | YES | NO | YES | YES | ||
| Cash flow statement | 9% | 7% | 2% | 7% | YES | NO | YES | YES | ||
| Contingent liabilities | 12% | 0% | 0% | 8% | YES | NO | YES | YES | ||
| Discontinued operations | 3% | 4% | 2% | 3% | YES | YES | YES | NO | ||
| Earnings per share | 4% | 2% | 4% | 2% | YES | NO | YES | YES | ||
| Employee benefits | 5% | 4% | 5% | 2% | YES | NO | YES | YES | ||
| Equity | 3% | 15% | 3% | 0% | YES | NO | YES | NO | ||
| Financial Instruments | 4% | 16% | 13% | 6% | YES | YES | YES | NO | ||
| Fixed assets & impairments | 2% | 9% | 20% | 16% | YES | YES | NO | YES | ||
| Foreign currency | 5% | 2% | 3% | 4% | YES | NO | YES | NO | ||
| Government grants | 2% | 1% | 4% | 3% | YES | NO | YES | NO | ||
| Inventory | 2% | 1% | 3% | 1% | YES | YES | YES | YES | ||
| Investments & consolidation | 10% | 6% | 11% | 4% | NO | NO | NO | NO | ||
| Provisions | 2% | 2% | 2% | 2% | YES | YES | YES | YES | ||
| Segment disclosures | 2% | 5% | 0% | 7% | YES | YES | YES | YES | ||
| Financial institutions | 3% | 15% | 9% | 11% | YES | YES | NO | YES | ||
| Taxation | 2% | 1% | 3% | 1% | NO | NO | NO | NO | ||
| Other | 10% | 10% | 7% | 20% | YES | YES | YES | YES | ||
| Total Differences | 100% | 100% | 100% | 100% | 88% | 44% | 77% | 61% | ||
| P=Presentation; R/M=Recognition and Measurement; D=Disclosure. This table is based on the 2013 Ernst & Young publication: Vergelijking IFRS met Nederlandse wet- en regelgeving. | ||||||||||
2.3 Disclosure
Significant differences in disclosure requirements between IFRS and DAS are related to fixed assets and impairments and the specific accounting standards for financial institutions. Under IFRS more disclosures are required for fixed assets and impairments. For 61% of the topics IFRS has more disclosure requirements. Several specific topics have specific requirements with respect to the Dutch jurisdiction leading to more disclosure requirements under DAS, e.g. equity and taxation. Although there are more disclosure requirements under IFRS, research amongst the size of the financial statements of Dutch listed commercial and industrial firms does not reveal a sharp increase in the amount of disclosures around the introduction of IFRS in 2005 (Litjens, 2011). The research does show a consistent increase in the magnitude of disclosures over the years.
References
Deloitte (2013) IFRSs and NL GAAP – Highlighting the key differences.
Ernst & Young (2013) Vergelijking IFRS met Nederlandse wet- en regelgeving.
Van Hulle, K. (1997) the true and fair view override in the European Accounting Directives, European Accounting Review, 6:4, 711-720.
Litjens, R. (2011) Toelichtingen beursfondsen in 10 jaar meer dan verdubbeld!, Accountancynieuws, 5:13, 5-6.
Livne, G. and M. McNichols (2009) An empirical investigation of the true van fair override in the United Kingdom, Journal of Business Finance & Accounting, 36:1, 1-30.
[1] I compared this analyses to earlier editions of the Ernst & Young publication. The general conclusions with respect to strictness between IFRS and DAS is relatively stable the last 5 years.
