effects of adoption of international financial reporting standards

Accounting in Europe, Vol. 1, 2004

Effects of Adoption of InternationalFinancial Reporting Standards in Belgium:The Evidence from BEL-20 Companies

EVA K. JERMAKOWICZ

University of Southern Indiana, USA

ABSTRACT This study examines the adoption of International Financial ReportingStandards (IFRS) by BEL-20 companies in Belgium. The research analyses the applicationoflFRS in the consolidated financial statements of Belgian publicly traded companies. InBelgium, as in several other continental European countries, a close link exists betweenaccounting and taxation. The study provides insight into IFRS implementation problemsbased on a survey sent to BEL-20 companies. The survey focused on the impact that IFRSconversion has on companies, their internal organization and accounting and financestrategy. The benefits and challenges of the adoption of IFRS are analysed, as well as thelevel of understanding and experience with IFRS, perception of the quality of IFRS, andthe impact of adoption of IFRS on consolidated equity and net income. Principaldifferences between IFRS and Belgian generally accepted accounting principles (GAAP),having a major impact on the conversion to IFRS, are identified. This study should beimportant not only to the European Union (EU) countries but to countries which will jointhe EU in the future, and to other countries worldwide that are adopting IFRS.

1. Introduction

The rapid development of global financial markets demands harmonization ofaccounting standards and approaches around the world. In 1999 the EuropeanCommission presented its Financial Services Action Plan, the implementation ofwhich should contribute to the realization of an integrated market for financialservices in the European Union (EU) by 2005 (Communication, 1999). In thearea of financial reporting, the Action Plan proposed that all listed companiesreport under the same accounting framework. Rather than develop a distinctEuropean accounting framework, it was decided to boost internationalharmonization by putting the full weight of the EU behind the efforts of theInternational Accounting Standards Committee (IASC) in its drive to developinternational accounting standards (IAS) (Van Hulle, 2004).

Correspondence Address: Eva K. Jermakowicz, School of Business, University ofSouthern Indiana, 8600 University Boulevard, Evansville, IN 47712, USA.E-mail: [email protected]

0963-8180 Print/04/000051-20 © 2004 European Accounting AssociationPublished for the European Accounting Association by Taylor & Francis Ltd

52 E. K. Jermakowicz

In June 2002, the Parliament and the Council of the European Union endorseda Regulation (IAS Regulation) which requires all listed companies in theEuropean Union to prepare their consolidated financial statements in accordancewith the International Accounting Standards (IAS) from 1 January 2005(Regulation, 2002). EU Member States will have the option to extend the IASRegulation to unlisted companies and to individual company accounts. Thispolicy is aimed directly at the removal of barriers to cross-border trading insecurities by ensuring that company financial statements throughout the EU arehigh quality, transparent and comparable.

Previous studies have investigated issues related to accounting harmonizationin Europe and possible consequences of the IAS Regulation (Haller, 2002;Harding, 2000; Nobes and Parker, 2002; Olivier, 2000; Walton, 2000; Cairns,2003; Flower, 2004). The study conducted by McLeay et al. (1999) distinguishesharmonization from standardization and presents a method for measuringharmonization which allows for choice between alternative accountingtreatments. This research continues work in this area by forming priorexpectations on the impact of implementing IFRS from regulatory constraints atthe country level and testing these forecasts using a questionnaire. The aim of thisstudy is to analyse the effects of the adoption of the IAS Regulation reported byBEL-20 companies, which have the most actively traded stocks on the BrusselsStock Exchange.

For purposes of this study, IFRS includes those issued by the InternationalAccounting Standards Board (lASB) as well as IASs issued by the IASB'spredecessor, the IASC.

2. Application of IFRS in Belgium

Belgian accounting is cited in accounting literature as an example of thecontinental model of accounting. It is characterized by its basis in CommercialCode, its emphasis on financial reporting conformity with tax regulations,protection of creditors, conservatism, a focus on the balance sheet and the use ofprovisions to smooth earnings (Pauwels, 1979; Kirkpatrick, 1982; Gelders, 1984;Lefebvre etai, 1985; Haustraete, 1991; Jorissen and Block, 1995; Theunisse andAerts, 1995). Institutional factors reflect the greater role of banks as suppliers ofcapital and the close relation between suppliers of capital and the firms in whichthey invest. Due to the general aim of creditor protection, recognition andmeasurement principles are based on a prudent capital maintenance concept.

The principle of fiscal neutrality, which means that the accounting lawdominates financial reporting unless the fiscal law expressly provides otherwise,is the cornerstone of the relationship between financial reporting and taxation(Jorissen and Maes, 1996). The concept of fiscal neutrality was criticized from itsintroduction in the Accounting Law on Bookkeeping and Financial Reporting forIndustrial and Commercial Companies on 17 July 1975, e.g. by Steenbergen andVan Hulle (1977, p. 83) and Paemeleire and Vogelsang (1978, p. 47). In many

International Financial Reporting Standards 53

cases the fiscal law and fiscal administration accepts the accounting regulations.However, neutrality is often not achieved since Parliament uses fiscal law tostimulate the economic activity of enterprises, e.g. fiscal accelerated depreciationrates (Van HuUe, 1981; Haustraete, 1991). Moreover, such laws requireregistration in the books of the company as a precondition for obtaining the taxrelief that provide the stimuli. Because certain assets or liabilities must be valuedaccording to the applicable tax laws instead of being valued at economicallyjustified values, the balance sheet and profit and loss account do not provide a trueand fair view.

In the 1990s, growing competition and globalization pushed EU companies toseek capital abroad for financing the global trade and investment activities.However, international capital markets, including the New York Stock Exchange(NYSE), did not accept financial statements prepared on the basis of theirnational accounting standards derived from the Accounting Directives.Consequently, many multinational companies in Europe were required toprepare a second set of financial statements prepared in accordance with eitherUS GAAP or IAS. As a result, Belgium was among seven EU nations (alsoAustria, Germany, France, Finland, Italy and Luxembourg) which have madeprovisions allowing companies under specific prerequisites to prepare theirconsolidated accounts in accordance with IAS or US GAAP instead of nationalrules.

Currently, Belgian listed and non-listed companies have the possibility ofobtaining an exemption from applying Belgian GAAP when preparing theirconsolidated financial statements. Such an exemption is subject to authorizationby the Banking, Finance and Insurance Commission (for holdings, financialinstitutions and insurance companies) or by the Minister of Economic Affairs (forall other companies). If such authorization is granted, the so-called 'globalplayers' can apply an internationally recognized foreign GAAP instead ofapplying Belgian GAAP. Such an international framework is generallyunderstood to be either IFRS or US GAAP and may only be applied to theextent that it complies with the fourth and seventh European Directives. The'global players exemption' will become obsolete in 2005 for listed Europeancompanies since they will be required to implement IFRS.

With the adoption of the IAS Regulation, requiring all EU listed companies toprepare their consolidated accounts in conformity with IFRS, EU publicly listedcompanies are facing many challenges and opportunities, including fair valuemeasurements to be considered to a greater extent (Eichhorst et ai, 2002;Alexander, 2003). In addition, the IASB Framework focuses on measuringeconomic profit, not taxable profit or distributable income.

Implementing IFRS should lead to greater international harmonization withrespect to the consolidated accounts of listed companies, because there are farfewer options in the IASB's standards compared with the EU's directives.Eliminating different methods of accounting for the same transactions leads toimproved comparability of financial statements because similar economic


transactions are accounted for similarly. That should, in turn, result in accountinginformation that is more decision-useful to creditors, investors and all other usersof the financial statements.

There is a danger that the IAS Regulation will result in a significant reductionin the level of accounting harmonization in the EU if the Member States will notextend the IAS Regulation to unlisted companies and individual accounts(Flower, 2004).

Member States may permit or require unlisted companies to prepare theiraccounts in accordance with the IASB's standards. A group of unlistedcompanies includes many small and medium-sized companies which increas-ingly do business and compete with international customers and partners andneed useful financial information to make sound business decisions. In this groupthere are companies which prepare themselves for a possible listing and need touse the same accounting rules as listed companies. For example, Belgacom whichissued IPOs in March 2004 presented three-year comparative financial statementsin accordance with IFRS. In general, all companies, listed or unlisted, that maketheir financial statements available to the public should comply with the samestandards. On the other hand, IFRS are directed primarily at the consolidatedfinancial statements of listed companies. They are often too sophisticated forsmall and medium-sized companies and the potential benefits arising from higherquality reporting might not outweigh the costs involved due to the considerablecomplexity of the standards and the high expertise which is necessary to correctlyapply and interpret IASB standards (Arbeitskreis, 2003).

In conformity with the IAS Regulation, only consolidated accounts must beprepared in accordance with IFRS. The individual accounts of listed companiescan continue to be prepared under national law derived from the accountingdirectives. This situation was unavoidable because in many countries ofcontinental Europe, including Belgium, taxation is based on individual accounts.Member States may permit or require individual accounts to be prepared inaccordance with IFRS. If the application of IFRS in Belgium is restricted to theconsolidated financial statements of listed companies, such companies would berequired to maintain two different accounting systems, resulting in additionalcosts and complexity, creating barriers to corporate development and impairingcompetition between companies. Belgium will need to find solutions concerninghow the tax computation should be organized in the future.

Adopting IFRS and its movement towards fair value should enhance theexternal reporting perspective to inform stakeholders of the company'sattractiveness to investors, financial analysts, partners in business or employees.Shareholders and analysts should be able to obtain a better indication of thecreated shareholder value. Creditors will receive more relevant information inestimating the company's ability to make future interest payments. Suppliers willbe provided with better information concerning whether buyers will continue toplace orders. Managers will obtain useful information allowing them to steer andcontrol business in terms of maximizing economic value, in the short-term as


well as long-term perspective. Employees should receive better informationabout the financial position and the firm's value generation and its valuedistribution process.

In Belgium, the Royal Decree of 27 November 1973 on Financial andEconomic Information for Workers' Councils was an important step forward intbe development of national accounting standards. In conformity with this decree,Workers' Councils (Conseil National des Enterprise/Centrale Raad voor hetBedrijfsleven) should be provided with a clear and correct picture (a true and fairview) of the economic and financial situation of the enterprise, together with theimpact of economic and financial data on the firm's management regardingorganisation, employment and personnel. The worker's councils may eveninfluence the appointment of the company's auditor (Lefebvre and Flower, 1994;Conseil Central de l'Economie, 2004).

Adoption of the IAS Regulation brings new accounting philosophy with amuch stronger economic and business orientation, especially in terms of focusingon the information needs of the capital markets. There is a major concern that theIASB standards do not sufficiently take into account the concept of capitalmaintenance and the principle of prudence as, for example, they allow therecognition of development costs, require fair values for financial instrumentsand investment properties, prevent the recognition of certain provisions and givelarge implicit room for judgement (Haller and Eierle, 2003). The tax function ofaccounts is not covered in the IASB's conceptual framework based on theassumption that general-purpose financial statements are not used as the basis forthe computation of tax. Deferred taxes provide the link between financialreporting and tax reporting.

On 6 May 2003, the Belgian Accounting Standards Commission (ASC)('Commission des Normes Comptables/Commissie voor BoekhoudkundigeNormen') published a consultation document on its proposed implementationplan with respect to the IAS Regulation (Commission, 2003). Because of theEuropean movement towards IFRS, companies should no longer be required tomeet certain conditions to qualify for tbe IFRS exemption. As a result, Belgianprivately-owned companies could be allowed to prepare their consolidatedfinancial statements under IFRS.

On 9 January 2004, a Royal Decree was published by the Minister of Financethat establishes IFRS requirements for publicly traded companies in Belgium,excluding banks, insurance companies and regulated investment companies (RDof 4 December 2003). Tbe Royal Decree allows such companies to prepare theirconsolidated financial statements in accordance with endorsed IFRS before2005. If they choose to do that, they no longer have to obtain approval of theBelgian Banking Commission; but in the auditor's report to the consolidatedfinancial statements, the auditor will have to confirm compliance with allendorsed IFRS.

The level of accounting harmonization in Belgium will depend on reformsaiming towards reducing differences between national accounting standards and


IFRS, and changes in the existing taxation system, as well as strong enforcementof IFRS.

3. Conversion to IFRS in BEL-20 Companies

Today the Brussels Stock Exchange is a reference number for 150 Belgiancompanies of various sectors as well as an international market with the quotationof 140 foreign companies. Although Belgium is one of the smallest Europeancountries, Brussels is classified as a stock market of average importance. Basedon the share capital market value/GNP of 36.6%, Brussels equals Paris and iseven higher than Frankfurt. The volumes exchanged show a definite upward trend(Euronext, 2004). Twenty Belgian companies with the most active stocks listedon the Brussels Stock Exchange are referred to as BEL-20. They representdifferent industry sectors, including: Consumer Goods; Distribution; Technology;Communication; Manufacturing; Banking; Financial Services; and Insurance.

Research Methodology

A questionnaire on the impact of the implementation of IFRS was constructed byasking questions which tested forecasts of changes which had been made in thestudy on international standardization and harmonization conducted by McLeayetal. (1999). International harmonization should not be confused with uniformityin the use of the same accounting method by different firms (standardization).Harmonization should be seen as a process which results in a systematic choicebetween accounting methods dependent upon the nature of the firm and itsoperating environment but otherwise independent of the location in which thefirm happens to be registered (McLeay et al., 1999).

The following hypotheses from the literature have been formulated:

Hypothesis 1: Adopting IFRS by Belgian listed companies improves thecomparability of consolidated financial statements, as well as reportingtransparency.

The adoption of IFRS should improve comparability of consolidated accountsof Belgian listed companies since there are fewer options in the IASB standardscompared with Belgian accounting practices. Adopting the IASB Frameworkwith its new rules on the recognition and the valuation of assets should improvereporting transparency.

Hypothesis 2: Belgian listed companies face many challenges in adopting IFRS,including the complex nature of IFRS, high implementation costs, and volatility ofreported profits.

The questionnaire was sent electronically to finance officers of BEL-20companies (CFO, Controller or Accounting Director) responsible for IFRSprojects. The questionnaire focused on measuring the impact, either perceived or


actual, that the IFRS has either already had or will have on their company'sinternal organization and accounting and financial strategy. Questions related to acompany's stage in the IFRS implementation process were also included. Thesurvey was then followed up by personal or telephone interviews. Amongfinancial officers interviewed, 25% were Chief Financial Officers (CFO), 65%Controllers or Accounting Directors, and 10% other financial managers. Ananalysis was performed on 2003 annual reports of companies which reportedtheir transition date to IFRS as of 1 January 2002.

Table 1 presents a list of BEL-20 companies and the basis of accountingapplied in their 2003 annual reports. The number of surveys sent, repliesreceived, and telephone and personal interviews conducted is also provided.

Basis of 2003 Consolidated Accounts

Most of the BEL-20 companies use Belgian GAAP as their basis of consolidatedreporting. Three companies have applied IFRS since 2001: Agfa-Gevaert, GBLand Interbrew. Bekaert completed its IFRS conversion process during 2001;however, full compliance with IFRS has not been achieved, mainly because ofthe limited extent of segment reporting and the lack of a restatement of employee

Table 1. Basis of accounting applied by BEL-20 companies in their 2003 annual reports

BEL-20 company

Agfa-GevaertAlmanijBarcoBekaertCofinimmoColruytDelhaizeDexiaD'leterenElectrabelEortisGBLInterbrewKBCMobistarOmega-PharmaSolvayTessenderloUCBUmicore

Basis ofaccounting appliedin the 2003 annual

report

IFRS since 2001Belgian GAAPIFRS since 2003IFRS since 2003Belgian GAAPBelgian GAAPBelgian GAAPBelgian GAAPBelgian GAAPBelgian GAAPBelgian GAAPIFRS since 2001IFRS since 2001Belgian GAAPBelgian GAAPBelgian GAAPIFRS since 2003Belgian GAAPBelgian GAAPBelgian GAAP

Surveysent

YesYesYesYesYesYesYesYesYesYesYesYesYesYesYesYesYesYesYesYes

Replyreceived

YesNoYesNoYesNoYesNoYesYesYesYesYesNoNoNoYesNoYesNo

Telephoneinterview

YesYesYes

Yes

Yes

YesYesYes

YesYes

Personalinterview

Yes

Yes

Yes

YesYes

58 E. K. Jennakowicz

benefit obligations. In 2003 Bekaert decided to move to full compliance withIFRS as a 'first-time adopter'. Barco, Bekaert and Solvay were first-time IFRSadopters in 2003. The remaining companies are preparing their 2003 annualreports in conformity with Belgian GAAP; some are using extensive IFRS or USGAAP-based departures, authorized by the Banking, Finance and InsuranceCommission or by the Minister of Economic Affairs.

In 2002, Barco published the impact of the introduction of IFRS on the balancesheet and income statement with its annual report. Solvay published 2002 IFRS proforma financial statements as an appendix to its 2002 Belgian GAAP financials. TheBarco and Solvay companies were recognized last year by the Belgian Associationof Financial Analysts in its yearly awards for best financial information.

Among BEL-20 companies which have not yet implemented IFRS, 100% ofrespondents stated that they are well organized for the conversion and the IFRSproject has been put in place. Seventy-five per cent of those companies are in theimplementation phase of the conversion, and 25% are in the design phase.

Bekaert's IFRS Conversion

To be IFRS-compliant, companies must apply all the requirements of allstandards and interpretations. Bekaert implemented IFRS during 2001 andreported the impact of the restatement on annual financial periods prior to 2000 asan adjustment to the opening balance of the Group's retained earnings as of 1January 2000 (the transition date). The company reported a decrease in equity of-€33.291 million (-3%) as a result of IFRS conversion due to such adjustmentsas deferred tax liabilities and assets, provisions for pensions, and write-off ofgoodwill, formation expenses and capitalized interests. But since the companychose, for confidentiality reasons, not to disclose segment information requiredby IAS 14 as well as not to restate employee benefit obligations required underIAS 19, it was not able to present financial statements that were fully IFRS-compliant. The Banking, Finance and Insurance Commission obliged Bekaert topresent Belgian GAAP financial statements with a series of departures fromBelgian GAAP resulting from the adoption of IFRS and authorized by theCommission. In 2003 the company decided to achieve a full implementation ofIFRS. This implied the full application of segment reporting and a restatement ofemployee benefit obligations. The unrecognized actuarial losses of definedbenefit post-employment plans at the end of 2001 of —€95 million were bookedagainst reserves and deferred tax assets and liabilities. The net effect was a dropin equity of - € 8 2 million (-8%) at 1 January 2002. There was a favourableeffect on the 2002 income statement of -|-€3.2 million (+6%).

Benefits and Challenges of IFRS Conversion

Changing accounting standards may not sound like a strategic change, but it maychange fundamentally the way that businesses are run, the way that success is


measured, and the information and records that companies need to maintain(Eichhorst era/., 2002).

BEL-20 companies believe that the implementation of IFRS will have asignificant impact on their financial reporting as well as on internal organization.Table 2 lists the main benefits and costs of IFRS conversion as provided byrespondents.

Sixty-five per cent of the companies consider that conversion to IFRS provides anopportunity to improve their internal organization. Implementing IFRS reshapes thecompany's external and internal management reporting systems, since most of thesecompanies adopt IFRS not only for the consolidated accounts, but also for internalmanagement use in the parent company and subsidiaries. This should put an end tothe problems of interpretation associated with using different accounting standardsin each country of operation. Harmonization and streamlining of internal andexternal reporting by creating a single accounting 'language' across the business wasoften listed among the most important benefits of the conversion.

Sixty per cent of respondents believe that adopting IFRS will allow for greatercomparability of accounts with other listed companies since it results in amovement towards similarity in the choice between alternative accountingtreatments. Implementing IASB standards should result in better reportingtransparency. IFRS bring new rules in the recognition and the valuation of assets.Under IFRS accounting, certain 'off balance sheet' items will be brought onto thebalance sheet and additional disclosure will enable performance evaluation byindustry sector and geographic segment.

These percentages vary across business sectors. For example, companies inBanking, Insurance, and Financial Services face specific problems related to IASon Financial Instruments. Only four companies in the BEL-20 group haveprimary operations in the banking and insurance industries.

Fifty per cent of BEL-20 companies believe that they would adopt IFRSvoluntarily, if not required by the EU Regulation. Among companies which would

Table 2. Benefits and challenges of IFRS conversion

Benefits and challenges % that responded

BenefitsHarmonisation of internal and external reporting 65Better comparability with other businesses 60Greater reporting transparency 60

ChallengesIncreased volatility of earnings 90High cost of implementing IFRS 85Complex nature of IFRS 75Lack of IFRS implementation guidance 70Tax-driven nature of national standards 70


not necessarily implement tASB Standards voluntarily is Delhaize Group, whichhas 75% of its operations in the US and has to prepare the 20-F reconciliation forlisting on the NYSE. Such companies could also adopt US GAAP. The EU haschosen tERS, not US GAAP, for accounting harmonization since it wasunacceptable that a foreign standard setter, over which the EU had no influence,would determine financial reporting practices of large European companies.

Seventy per cent of respondents provided that their company's equitydecreased after conversion to tFRS at the date of transition (in those companieswhich already implemented IFRS) or will decrease as a result of implementingtERS next year. The decrease would be caused by such major adjustments asimpairment of assets or pension costs.

Ninety per cent of BEL-20 companies believe that the key factor to consider inthe convergence process is the increased volatility tERS may reveal inperformance figures. The adoption of the fair-value financial reporting approachwill introduce significant volatility in the balance sheet and, more importantly, inearnings. This factor is considered to be among the most important challenges ofimplementing IFRS. Company management will have to learn how to deal withvolatility in reported performance (including non-operational items in results).Implementing tFRS creates the opportunity to improve the system whichevaluates company and executive performance, particularly in terms ofincreasing shareholder value.

According to 85% of respondents, the task of implementing tERS is complexand costly. It requires a double workload during the transition year for financeand accounting people and many others. A training programme for staff acrossthe company is one of the most important issues of the IFRS conversion and isalso an ongoing exercise, since IFRS is a moving target. There are problems inadopting a new way of running a business by managers at all levels and otherpersonnel. Most companies use external expertise to assist them with theimplementation of their conversion project, modifications of information systemsor advice on how to communicate changes. Auditors have also been involved inthe convergence project. Another issue is the high cost of maintaining twodifferent accounting systems after implementing IFRS. For example, companieswould like the tax authority to allow that the same inventory valuation methodused in the consolidated accounts could also be applied in the individualaccounts, without negative tax consequences.

Another challenge in the process of adopting IFRS, according to 75% ofrespondents, is the complex nature of some of the tFRS, including standardsrelated to hedge accounting (IAS 39) and impaimient tests (IAS 36). For somebusinesses, criteria for the capitalization of development costs seem to be 'awayfrom economic reality' (IAS 36).

The complexity of the task of implementing tFRS is further complicated by thefact that the body of IFRS has not been finalized. In particular, there is uncertaintyregarding the financial instruments standards (IAS 32 and 39) and their impact onfinancial institutions.


Seventy per cent of the companies list the lack of adequate IFRSimplementation guidance as a challenge. This lack of guidance creates risksfor different local or national interpretations of IFRS and increases the risk for'manipulation' interpretation of financial statements.

Another challenge is that the tax-driven nature of national standards causesmajor differences in accounting requirements under national GAAP and IFRS,requiring several reconciliation items in the conversion process. The adoption ofIFRS creates the need for Belgian GAAP to be modified and to progressivelyconverge towards IFRS.

4. Financial and Accounting Impacts

For many companies, the adoption of IFRS will have a fundamental impact on anumber of important areas of financial reporting. Companies need to understandthe differences between national standards that they are currently using, andIFRS, and assess the impact of these differences on the conversion process.

Impact on Equity and Net Income

Among BEL-20 companies, Barco, Bekaert and Solvay are first-time IFRSadopters in 2003. In conformity with IFRS 1, their first reporting date under IFRSis 31 December 2003, and the transition date to IFRS is 1 January 2002 (in effect31 December 2001) since companies will present one-year comparative financialstatements. Companies are required to prepare an opening IFRS balance sheet atthe transition date (i.e. 1 January 2002), which must be in accordance with IFRSin force at their first reporting date (i.e. 31 December 2003). In the 2003 annualreport, companies have to disclose the impact of the implementation of IFRS ontheir equity on 1 January 2002, and 31 December 2002, and the reconciliation ofBelgian GAAP profit and loss account and cash flows with the restated amountsunder IFRS for the year ended 31 December 2002 (the end of the latest periodpresented under Belgian GAAP). In its 2003 annual report, Barco reported apositive result on consolidated equity of +€45.834 million (14% increase inequity) as the impact of the introduction of IFRS on its IFRS balance sheet as of31 December 2002. Bekaert reported a negative result of -€73.5 million (8.8%decrease) on equity as the result of adopting IFRS at 31 December 2002. Solvayin its 2002 report included the Group's consolidated financial statements for 2002restated on an IFRS basis, to familiarize shareholders and potential shareholderswith the impact of IFRS conversion. Solvay reported a negative result on equityof —€223 million (6% decrease) as the impact of the introduction of IFRS on itsIFRS balance sheet as of 31 December 2002.

Table 3 shows the reconciliation of a company's consolidated equity reportedunder Belgian GAAP to its equity under IFRS, illustrating Barco, Bekaertand Solvay main adjustments. Barco reported a negative impact on consolidatednet income of -€3.969 million (18% decrease) and Solvay a negative impact of


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— € 2.0 million (0.4% decrease) as a result of the conversion to IFRS for the fiscalyear 2002. Bakeart reported a favourable effect on the 2002 income statement of€3.2 million (6% increase). Table 4 reports differences in 2002 consolidated netincome under IFRS and according to Belgian GAAP.

Major factors causing the difference in the amount of net income reportedunder IFRS and under Belgian GAAP for Barco and Solvay include differentdepreciation and amortization charges, impairment losses and non-realizedexchange gains. The positive effect on Bekaert's 2002 net income was related tothe interest portion on interest-bearing provisions related to the defined benefitplans, and includes recognized actuarial gains and losses.

Principal Differences between IFRS and Belgian GAAP having a Major Impacton the Conversion to IFRS

Table 5 presents principal differences between IFRS and Belgian GAAP whichhad a major impact on implementing IFRS, as reported by BEL-20 first-timeIFRS adopters in 2003: Barco, Bekaert and Solvay. The notes to thereconciliation adjustments in the annual reports of these companies contain adescription of the applied IFRS as well as the main points of divergence with theBelgian regulation. However, the accounting regulation and the Ernst & YoungGuide to Applying IAS in Belgium (2002) have been used to check and extend theinformation contained in the notes.

Differences between IFRS and Belgian GAAP arise from the fact that IFRS aremore investor-oriented and Belgian accounting rules are very much driven byprotection for creditors. A specific environment in which Belgian accountingprinciples are defined includes the compliance with EU Accounting Directiveswhich allow Member States to put more emphasis on creditor protection andincorporate tax considerations into national laws.

Under Belgian GAAP, the prudence principle is one of the main principles forachieving fair presentation. Under IFRS prudence is one of the many qualitativecharacteristics to achieve reliable information (Ernst & Young, 2002).

Table 4. Differences in 2002 consolidated net income determined under IFRS and underBelgian GAAP (in thousands of €)

Company

BarcoBekaertSolvay

2002 netincome (loss)under Belgian

GAAP

21,636(49,511)496,000

2002 netincome (loss)under IFRS

17,667(46,266)494,000

Difference

-3,969+3,245-2,000

% change

-18.0+6.0-0 .4


Table 5. Principal differences between IFRS and Belgian GAAP which have a majorimpact on conversion

Category IFRS Belgian GAAP

Deferred taxes

Pension costs

Provisions

Dividends

Inventoryvaluation

Impairment ofassets

Depreciation offixed assets

Impairment ofgoodwill

IAS 12 requires recognizingdeferred tax liabilities andassets on temporarydifferences between thecarrying amount of an assetor liability in the balancesheet and its tax base.

IAS 19 requires a company'snet pension obligation, orasset, to be reported on thebalance sheet as service isrendered and measured atthe expected amount to bepaid.

IAS 37 refers to the existenceof a legal or constructiveobligation towards a thirdparty at the reporting date torecognize a provision.

IAS 1 prescribes only thedisclosure of dividendsproposed or declared afterthe balance sheet date.

IAS 2 requires allmanufacturing costs (directand indirect) to be includedin the cost of inventories.

IAS 36 considers that an assetis impaired when itscarrying amount exceeds itsrecoverable amount.

IAS 16 requires thatdepreciation methodsreflect the pattern in whichthe asset's economicbenefits are consumed bythe enterprise.

IFRS 3 proposes that goodwillshould not be amortized. Itshould be accounted for atcost less any accumulatedimpairment losses.Impairment tests should beperformed under IAS 36.

No specific guidance exists tocalculate deferred tax assetsand liabilities. The prudenceprinciple does not encouragerecording deferred tax asset.

Amounts paid to pension fundsor insurance companiessubject to fundingrequirements based on specificregulations are reported in theincome statement.

No need to have an obligation atthe reporting date to recognizea provision, based on theprudence principle.

Dividends proposed and to beapproved by shareholders arepresented as a liability.

Indirect production costs may beexcluded from the cost ofinventories.

No specific guidance in this area.Requirement to record'exceptional' depreciation if apermanent diminution in valueof a fixed asset occurs.

Tax-driven depreciation methodsand rates are used.

Goodwill amortized over itsuseful life. When useful lifeexceeds five years, ajustification should beprovided in the notes.

(continued)


Table 5. Continued

Category IFRS Belgian GAAP

Capitalization ofdevelopmentcosts

Financialinstrumentsand hedging

Treasury shares

Investment grant

Share-basedpayment

Earnings pershare

Segmentreporting

Cash flowstatements

IAS 36 provides rigorousimpairment criteriademonstrating that futurecash inflows are adequate tocover future cash outflows.

IAS 39 requires all financialderivatives to be reportedon the balance sheet at fairvalue, and the resultinggains and losses to bereported in the incomestatement (except for cashflow hedges).

IAS 1 requires that treasuryshares are presented in thebalance sheet as a deductionfrom equity. No gain or losson sale should berecognized in the incomestatement.

IAS 20 requires recognizingthe grant as income usingappropriate and systematicallocation basis.

IFRS 2 requires companies torecognize the fair value ofshare-based payments as anexpense in the incomestatement.

IAS 33 requires companies todisclose basic and dilutednet income per ordinaryshare on the face of theincome statement.

IAS 14 requires thatcompanies report results bybusiness and geographicsegment.

IAS 7 requires presenting thecash flow statement.

Development costs may berecognized as intangible assetsif they do not exceed a prudentestimate of their usefulness orfuture profitability.

Unrealized gains (except forunrealized exchange gains) onfinancial derivatives shouldnot be reported in the incomestatement.

Presented in the balance sheet asshort-term financial assets.Gains or losses arising on saleof treasury shares arerecognized in the incomestatement.

Grants related to non-depreciableassets are not reported inincome until the assets aredisposed of.

Disclosure required.

No specific guidance provided.

Not required.

Not required to be presented.

Principal differences between IFRS and Belgian GAAP which had a majorimpact on the conversion to IFRS reported by Barco, Bekaert and Solvay include:deferred taxes, pensions, provisions, dividends and impairment of assets.

Deferred taxes is an area which can generate material adjustments to thebalance sheet and income statement when converting from Belgian GAAP to


IFRS. Under Belgian GAAP, there has not been a tradition of accounting fordeferred taxes. Because individual accounts are the basis for income tax return,temporary differences between income in the individual accounts and taxableincome are mostly limited to items such as excess depreciation and taxedprovisions, giving rise to deferred tax assets. The prudence principle, which is abasic accounting assumption under Belgian GAAP, does not encouragecompanies to record deferred tax assets in their consolidated financial statements,although it is allowed. In 2002, Barco reported an increase in equity of 4-2.4%,Bekaert-|-1.3% and Solvay +13% as aresult of an increase in deferred tax assets.

Companies with underfunded pension obligations may face large decreases inequity during conversion to IFRS with the adoption of the employee-definedbenefit plans. In 2002 Bekaert reported a decrease in total equity of — 10.1% andSolvay of — 10.0% as a result of a major adjustment to valuation of pensionliabilities and similar obligations based on compensation at the time of retirementrather than current compensation, after conversion from Belgian GAAP to IFRS.At Barco, where general pension plans are defined contribution plans, adjustmentwas only needed in some exceptional cases, involving investments in subsidiarieswhich adopted defined benefit plans.

Since the prudence principle carries more weight under Belgian GAAP thanunder IFRS, there is not necessarily a need in Belgium to have an obligation, andin particular a constructive obligation, at the balance sheet date to recognize aprovision. In 2002, as a result of the conversion to IFRS, Barco eliminatedprovisions for social liabilities, which resulted in the decrease in equity of— 0.4% and Solvay eliminated provisions for major repairs and maintenance, notallowed under IFRS, which resulted in a decrease in equity of —2%. Solvaycreated provisions for environment-related expenses in conformity with IFRS.(In 2001, Bekaert eliminated provisions for restructuring during the conversionprocess.)

In conformity with Belgian GAAP, proposed dividends are recognized asliabilities on the balance sheet while under IFRS such dividends should bedisclosed in the notes to the financial statements. In 2002, Barco recorded anincrease in equity of +7% and Solvay an increase of +3%, as a result ofincluding proposed dividends in equity in conformity with IFRS.

Another area which can generate major adjustments during the conversionprocess is the impairment issue. Under IFRS accounting, assets should bereviewed for impairment at each balance sheet date. Belgian GAAP does not setup a framework on how and when an impairment of assets review should beperformed, although there is a requirement to record 'exceptional' depreciation inthe case of a permanent diminution in value of a fixed asset. In 2002, Solvayreported write-downs of assets with the negative impact on equity of —7%.

Other areas of accounting, as presented in Tables 3 and 5, which had a majorimpact on conversion to IFRS include: inventories, depreciation, treasury shares,government grants, refiecting the effect of changing prices, reporting cash fiowstatements and earnings per share as well as segment reporting.


Other differences between IFRS and Belgian GAAP, not presented in Tables 3or 5, which may have a major impact on the process of implementing IFRS,include: the redefinition of the scope of group consolidation, the capitalization atfair value of leases currently not reported on the balance sheet, reportinginvestment property at fair value, hedging strategies, as well as accounting fordiscontinuing operations, non-realized exchange gains and inflation accounting.

5. Concluding Remarks

The IAS Regulation has significant implications not only for financial statementpreparers and users, but also for the entire financial reporting institutionalinfrastructure as well as the level of accounting harmonization across the EU.

Belgian national accounting rules need to be changed in order to achieve thedesired goal of convergence with IFRS and comparability of financial statements.Member States may extend the adoption of IFRS totally or gradually to unlistedcompanies. The extent to which Member States will take advantage of thisopportunity is of great importance since it may have a significant impact onaccounting comparability within the EU. Although Commercial Code companieshave different objectives, tradition and culture, commercial companies mightbenefit from uniform systems across Europe.

Belgium will also need to find solutions for organizing the tax computation inthe future. It seems probable that significant disharmony will arise betweenindividual and consolidated accounts as well as in relation to the individualaccounts between countries in which the application of IFRS is extended toindividual accounts and countries where taxation is based on the individualaccounts. As long as companies need to apply two different accounting systemsin consolidated and in individual accounts, inefficiencies will exist as a result ofextra costs and complexity, creating barriers to corporate development andimpairing competition between companies.

The survey sent to Belgian companies indicates that implementing IFRS willchange dramatically the way these companies design and handle both theirinternal and external reporting activities. Harmonization of intemal and externalreporting under IFRS by creating a single accounting 'language' across thebusiness was listed among the most important benefits of the conversion. Byaligning intemal reporting under IFRS, superior information for making strategicdecisions can be available, along with an enhanced ability to meet stakeholders'expectations.

The adoption of IFRS will increase comparability of consolidated accounts aswell as levels of transparency for many companies, e.g. through expandedsegment disclosures, reporting unfunded pension obligations and the recognitionof derivatives on balance sheets at fair value.

The results of the survey reveal that BEL-20 companies are implementing thenew accounting regime which is not widely known and understood. Theimplementation of IFRS is not only about different accounting standards and


policies; it is the adoption of an entirely different system of performancemeasurement and communication with the markets.

One of the key challenges in the adoption of IFRS is its use of fair values whichmay bring increased volatility in the reported values of assets as well as earnings.Especially banks and insurance companies experience significant implemen-tation problems in a movement towards fair value accounting. Major changes tothe performance-based executive and employee compensation systems may berequired. Management will have an opportunity to reshape how companyperformance is communicated to, and evaluated by, the markets, and how themarkets evaluate the company against its competitors.

The cost aspect of the adoption of IFRS is significant. Belgian companiessurveyed indicate that the task of implementing IFRS and maintaining differentaccounting systems for individual and consolidated accounts is complex andcostly. A training programme for staff across the company which would let themadopt the new way in which a business is operated is among the most importantissues of the IFRS conversion process. The task is further complicated by the factthat IFRS is a moving target and some new standards which will be effective in2005 have not been published or other standards will be issued and early adoptionencouraged.

Other key challenges in the process of adopting IFRS include the complexnature of some of the IASB's standards and the lack of adequate implementationguidance. The lack of guidance creates risks for different local and nationalinterpretations of IFRS. Similar interpretations as well as strong enforcement ofIFRS are important in achieving the comparability of financial statements acrossthe EU.

Another challenge is that the tax-driven nature of Belgian national accountingstandards results in major differences in accounting requirements under BelgianGAAP and IFRS, requiring several reconciliation items in the conversionprocess.

Adoption of IFRS is likely to have a material financial statement impact. Thecase of three BEL-20 first-time IFRS adopters, Barco, Bekaert and Solvay, showsthat conversion from Belgian GAAP to IFRS has resulted in a significant impacton the companies' reported equity as well as net income. The biggest impact ofIFRS will be around the following financial areas: valuation of assets andretirement benefits, recognition of deferred taxes, mergers and acquisitions, andfinancial instruments (especially for financial institutions).

The legal role of individual accounts in Belgium and several other continentalEuropean countries is important concerning the determination of the amount ofincome taxes, profit appropriation and dividend distribution. IFRS conversioncreates the risk of a wide gap between the consolidated reporting (which wouldbe based on economic reality) and the statutory (single-entity) reporting (whichwould continue to be tax driven). This could result in the individual entityfinancial statements becoming meaningless from an economic and financialperspective.


It is believed that the change in accounting regime will have a positive impacton the competitiveness and the growth of European companies and the realizationof an integrated financial services market in the EU.

Acknowledgement

This work is part of a research project on Convergence of National AccountingPractices with International Financial Reporting Standards in the EuropeanUnion conducted with the support of the European Institute of Advanced Studiesin Management (EIASM) in Brussels, Belgium.

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