Managerial Auditing JournalTransition to IFRS in Greece: financial statement effects and auditor sizeIoannis Tsalavoutas Lisa Evans

Article information:To cite this document:Ioannis Tsalavoutas Lisa Evans, (2010),"Transition to IFRS in Greece: financial statement effects andauditor size", Managerial Auditing Journal, Vol. 25 Iss 8 pp. 814 - 842Permanent link to this document:http://dx.doi.org/10.1108/02686901011069560

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Users who downloaded this article also downloaded:Warwick Stent, Michael Bradbury, Jill Hooks, (2010),"IFRS in New Zealand: effects onfinancial statements and ratios", Pacific Accounting Review, Vol. 22 Iss 2 pp. 92-107 http://dx.doi.org/10.1108/01140581011074494Leopold Bayerlein, Omar Al Farooque, (2012),"Influence of a mandatory IFRS adoption on accountingpractice: Evidence from Australia, Hong Kong and the United Kingdom", Asian Review of Accounting, Vol.20 Iss 2 pp. 93-118 http://dx.doi.org/10.1108/13217341211242169Apostolos A. Ballas, Despina Skoutela, Christos A. Tzovas, (2010),"The relevance of IFRS to anemerging market: evidence from Greece", Managerial Finance, Vol. 36 Iss 11 pp. 931-948 http://dx.doi.org/10.1108/03074351011081259

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Transition to IFRS in Greece:financial statement effects

and auditor sizeIoannis Tsalavoutas and Lisa Evans

Division of Accounting and Finance, The University of Stirling, Stirling, UK

Abstract

Purpose – The paper aims to explore the impact of the transition to International FinancialReporting Standards (IFRS) on Greek listed companies’ financial statements with a focus on net profit,shareholders’ equity, gearing and liquidity. It also seeks to examine any differences in the impactacross the sub-samples of companies with Big 4 and non-Big 4 auditors.

Design/methodology/approach – In line with recent literature, the paper employs Gray’scomparability index. The sample consists of 238 Greek companies, representing 75 per cent of thecompanies listed on the Athens Stock Exchange at the end of March 2006.

Findings – Implementation of IFRS had a significant impact on financial position and reportedperformance as well as on gearing and liquidity ratios. On average, impact on shareholders’ equity andnet income was positive while impact on gearing and liquidity was negative. Only companies withnon-Big 4 auditors faced significant impact on net profit and liquidity. They also faced a significantlygreater impact on gearing than companies with Big 4 auditors. A large number of companies withmaterial negative changes is identified, suggesting that transition to IFRS and the fair value optiondoes not necessarily result in higher shareholders’ equity figures. Many companies providedinadequate transitional disclosures. This is significantly related to auditor size.

Practical implications – The findings suggest that reporting quality has improved under the newaccounting regime, especially for companies with non-Big 4 auditors.

Originality/value – Prior literature indicates that the impact revealed in companies’ reconciliationstatements can have significant effects on users’ decision making. On that basis, the study canstimulate future research and is relevant to standard setters and regulators.

Keywords Accounting, Auditors, Greece, Standards

Paper type Research paper

1. IntroductionEuropean Union Regulation 1606/2002 requires all publicly traded companies to prepareconsolidated financial statements on the basis of International Financial ReportingStandards (IFRS)[1]. It applies from 1 January 2005. Financial statements prepared in2004 under national GAAP had to be restated in accordance with IFRS to providecomparatives. Reconciliation statements explaining how the transition from previousGAAP to IFRS affected companies’ financial statements were also required.

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/0268-6902.htm

The authors thank the Institute of Chartered Accountants of Scotland for funding this paper.They gratefully acknowledge helpful comments received from Paul Andre, Salvador Carmona,Alan Goodacre, David Hatherly, Eddie Jones, Stergios Leventis, Chris Nobes, Mike Smith,Panayiotis Vroustouris, Pauline Weetman, two anonymous referees, the participants of theworkshop “Accounting in Europe” (Paris, September 2007) and the seminar participants at theDivision of Accounting and Finance, University of Stirling (October 2007).

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Received 7 October 2009Reviewed 8 April 2010Accepted 16 May 2010

Managerial Auditing JournalVol. 25 No. 8, 2010pp. 814-842q Emerald Group Publishing Limited0268-6902DOI 10.1108/02686901011069560

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Greece has a distinctive culture and financial reporting regime where creativeaccounting is common and enforcement of accounting regulation is weak. GreekGAAP[2] differs significantly from IFRS and several creative accounting practicestolerated under Greek GAAP are not permitted under IFRS. It was therefore expectedthat Greek companies’ financial statements should be affected considerably by thetransition to the new accounting regime. In addition, prior research suggests thathigher earnings management (i.e. lower accounting quality) and lower audit effort areassociated with non-Big 4 auditors in Greece (Caramanis and Lennox, 2008). We alsoexpected, therefore, that the financial statements of companies with non-Big 4 auditorswould experience a greater impact on transition to IFRS. Hence, improvement offinancial reporting quality was expected.

Therefore, the present paper examines the transition to IFRS by Greek listedcompanies, focusing on the following objectives:

. We examine the impact of IFRS adoption on companies’ financial statements (netprofit, equity, gearing and liquidity) for the financial year 2004.

. We also use audit firm size as a proxy for accounting quality (DeAngelo, 1981;Watts and Zimmerman, 1986) and we partition our sample across companies withBig 4 and non-Big 4 auditors to examine any differences in the impact on the abovemeasures.

Our results can be summarised as follows. The introduction of IFRS had a positive impacton Greek listed companies’ shareholders’ equity and net profit. However, it had a negativeimpact on gearing and liquidity. The effects on equity and gearing were statisticallysignificant for all companies, but the impact on net profit and liquidity is driven by theimpact on companies with non-Big 4 auditors. These companies also faced a greaterimpact on gearing than the remaining firms. We interpret this finding as a particularfeature of the Greek market since there is evidence of lower earnings management forcompanies with Big 4 auditors. These findings suggest that the introduction of IFRSimproves the quality of the accounting information provided by companies.

Our findings contribute to and are in line with the growing literature on IFRSimplementation in different cultural and regulatory contexts. In particular, our findingscontribute to the literature on international GAAP comparisons by extending the use ofGray’s comparability index (Weetman et al., 1998) to key ratios and by contributing tothe discussion of its limitations. By measuring the impact of transition by means of acommonly applied index, the paper provides a benchmark for comparison with studiesexamining the impact of mandatory transition in other countries (Haller et al., 2009;Cordazzo, 2008; Lopes and Viana, 2008), especially those with stakeholder accountingregimes such as Germany, France and Italy (Spathis and Georgakopoulou, 2007; Bellaset al., 2007). Subsequently, we expect our findings to be of interest to investors, analysts,regulators and enforcers, not only in Greece but also in other jurisdictions undergoingtransition to IFRS – in particular those whose reporting regimes portray similarfeatures. The findings should also be of interest to the International AccountingStandards Board (IASB).

As a subsidiary contribution and to facilitate a better understanding of the impactof transition, the paper provides an in-depth comparison of the de jure differencesbetween Greek GAAP and IFRS. To the best of our knowledge, there is no such recentcomparison available in the English language academic literature.

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The remainder of the paper is organised as follows: Section 2 reviews earlierliterature pertinent to our study. Section 3 provides an overview of the background tothe Greek accounting environment. Section 4 discusses the de jure differences betweenIFRS and Greek GAAP and introduces our research hypotheses. Section 5 describes thedata and research methods employed. In Section 6, our findings are discussed in depthwith reference to the research hypotheses, the prior literature and the context to Greekaccounting provided in Sections 3 and 4. Section 7 discusses the limitations of thestudy and Section 8 forms the concluding remarks.

2. Literature reviewStudies using reconciliation statementsThe impact of different national accounting practices on profit measurement was firstquantified by means of a “conservatism index” (see research methods section) by Gray(1980). Gray’s study differed from other studies of harmonisation (Van der Tas, 1988;Archer et al., 1995) which instead calculate the incidence of accounting differences(Weetman et al., 1998; Street et al., 2000).

Gray’s seminal work has been widely replicated and extended, in particular bystudies using companies’ form 20-F reconciliations to US GAAP (Weetman and Gray,1990, 1991; Cooke, 1993; Hellman, 1993). Adams et al. (1993) extended the use of theindex also to measuring conservatism in equity (see below)[3]. To emphasise theindex’s use as a measure of comparability (without judging relative conservatism),Weetman et al. (1998) renamed the index “comparability index”, terminology which hasbeen adopted by subsequent studies (Gray et al., 2009; Haller et al., 2009).

Adams et al. (1993) were the first to use the index in comparing national (Finnish)GAAP with International Accounting Standards (IAS). Such comparisons became thefocus of comparability studies from the late 1990s (Weetman et al., 1998; Adams et al.,1999; Street et al., 2000; Ucieda Blanco and Garcia Osma, 2004; Haverty, 2006).

The recent transition of European companies to IFRS is now giving rise to studiesattempting to capture the impact of this, making use of the 2004 financial statements,initially prepared on the basis of national GAAP and restated under IASs ascomparatives for the 2005 financial statements (Bertoni and De Rosa, 2006; Lopes andViana, 2008; Cordazzo, 2008; Gray et al., 2009; Haller et al., 2009). Our study follows thisstrand of the literature and provides a benchmark for comparison with these studies.

Bertoni and De Rosa (2006) find that Italian GAAP is more conservative thanIFRS, but that this result is not as strong as had been expected. Similarly, Cordazzo(2008) reports higher net income and shareholders’ equity under IFRS than underItalian GAAP for a different sample of Italian companies. Lopes and Viana (2008)find that the transition to IFRS had led to less conservative reported profits forPortuguese listed companies. Gray et al. (2009, p. 431) find that companies adoptingIFRS for the first time in Europe in 2005 and that are cross-listed in the USA, there is“a significant gap between IFRS and US GAAP measures of income, thereby,signifying de facto divergence from US GAAP in regard to income determination”.They also find, inter alia, that UK GAAP yielded significantly lower measures ofequity than US GAAP. Haller et al. (2009) measure the effect of the transition fromGerman GAAP to IFRS on equity and net income of German companies which had toadopt IFRS in 2005. They find a significant increase in shareholders’ equity and innet income, on average[4].

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Prior literature notes a number of limitations of using reconciliation statements, mostnotably poor compliance with disclosure requirements and inconsistent and incompletepresentation of reconciliations (Weetman and Gray, 1990, 1991; Adams et al., 1993, 1999;Street et al., 2000; Ucieda Blanco and Garcia Osma, 2004; Aisbitt, 2006). Street et al. (2000)also note that auditors do not always report on incomplete compliance with IAS. Further,in some prior studies the small size of populations or samples meant that a case study orpilot study approach had to be adopted (Weetman and Gray, 1991; Cooke, 1993; Hellman,1993; Whittington, 2000), i.e. findings could not be tested for statistical significance. Oneissue relates to the timing of studies: changes to national accounting regulations makecomparison of earlier studies with later ones problematic. There is also a risk that theresults reflect short-term timing differences, which may reverse in later accountingperiods (Street et al., 2000; Norton, 1995). The relevance of these and other limitations toour study are discussed in more detail in Section 7.

3. The distinctive Greek accounting environmentThe Greek state has been criticised for patronage and pursing sectional, rather thansocietal interests (Ballas et al., 1998). It presents a low-trust society, whose citizensportray ambivalent behaviour: a pursuit of state favour as well as attempts to cheat thesystem (Ballas et al., 1998). This is detrimental to self-regulation of accounting, or trustin the “true and fair view” of financial statements. Instead, it requires state regulationand extensive rules, with increased monitoring costs (Ballas et al., 1998). This systemfosters “an excessive adherence to prescribed forms [. . .] without regard to innersignificance” (Ballas et al., 1998, p. 279).

High taxes and the close link between taxation and accounting rules result in taxavoidance and evasion as well as creative accounting and earnings managementpractices (Baralexis, 2004), which are well documented in the literature (Polychroniadis,2002; Spathis, 2002; Spathis et al., 2002; Leuz et al., 2003; Baralexis, 2004; Caramanis andSpathis, 2006; Burgstahler et al., 2006; Ghicas et al., 2008). Although overstatement ismore common, understatement also occurs (Baralexis, 2004).

Ownership concentration is high and owners are directly involved in companies’management. They are therefore able to monitor and motivate staff without the needfor incentive schemes; there is therefore also less need for financial statements as ameans of communication with owners (Tzovas, 2006). (Greek GAAP therefore hasfewer disclosure requirements than does IFRS.) As a result, ownership concentration“contributes to the adoption of an aggressive tax-reducing strategy, since theirownership status does not appear to generate significant non-tax costs” (Tzovas, 2006,p. 374; Venieris, 1999). The demand for accounting income is strongly influenced by thepayout preferences of various stakeholder groups, who prefer less volatile earnings,thus creating greater scope for income smoothing (Spathis and Georgakopoulou, 2007,with reference to Ball et al. (2000) and Guenther and Young (2000).

Management performance is poor with losses common, leading to a need “to raisefunds (especially working capital) from the debt-orientated capital market” (Baralexis,2004, p. 443, with reference to the Federation of Greek Manufacturing (1999)). Banksare the main capital provider for Greek companies (Venieris, 1999; Tzovas, 2006).Features of bank lending are inter alia the importance of collateral, personalrelationships, political intervention and social criteria[5] (Ballas, 1994; Ballas et al.,1998; Baralexis, 2004). Debt financing leads to conservatism and an emphasis on

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historical costs: “This has torpedoed many attempts to modernise accounting policies,especially in the area of disclosure” (Ballas, 1994, p. 114). Auditing is not consideredeffective (Kontoyannis, 2005) and qualified audit reports are very common (GrantThornton, 2007), but constitute no effective sanction.

The Greek legal system belongs to the civil (or Roman) law family. Accounting andcommercial law have been strongly influenced by French precedents (Ballas, 1994;Ballas et al., 1998); they include, for example, a General Accounting Plan closely basedon the French Plan Comptable General (Ballas, 1994; Venieris, 1999). French-stylecivil-law countries, where ownership concentration is common, typically provide theweakest legal protection for creditors and shareholders and the poorest enforcement oflegislation (La Porta et al., 1998). In spite of some improvement (Grant Thornton andAthens University of Economics and Business (AUEB 2005, 2006), companiesfrequently comply with the form but not the substance of corporate governance rules(Ballas et al., 1998, above).

The Athens Stock Exchange (ASE) has been considered a developed market since2000 (Mandikidis, 2000), in spite of a collapse in 2000-2003. ASE’s major indices are:Main index, FTSE 20, FTSE Mid 40 and Small Cap 80. At the end of 2006,317 companies were listed with a total market capitalisation of e158 billion[6]. Foreigninvestors held 52.31 per cent of the market capitalisation of FTSE 20, 39.80 per cent ofFTSE 40, and 15.63 per cent of Small Cap 80 companies (Central Security Depository,2006). This indicates that foreign investors follow mainly large Greek firms. InNovember 2005, ASE was aligned with the International Classification Benchmark(ICB[7]) and since 2 January 2006 Greek listed companies are disaggregated across17 “super-sectors” (henceforth: sectors). This allows comparison of the Greek sectorswith the corresponding ones in international stock exchanges. The capital market isregulated and supervised Hellenic Capital Market Commission (HCMC).

Law 3301/2004 introduced Regulation 1606/2002 to all Greek listed companies’accounts, including individual company accounts[8]. The transition to IFRS has beencharacterised as a complex and potentially problematic process, made more so by alack of preparedness of companies and accountants (Spathis and Georgakopoulou,2007, with reference to Floropoulos (2006), Grant Thornton and AUEB (2003)) survey.This, together with inefficiencies in auditing, raised concerns for companies’compliance with IFRS requirements.

Companies’ financial/fiscal years end either on 30 June or 31 December (PD 186/92,Art. 26). Legislation (Law 2190/20 and PD 360/85) also contains detailed regulation onthe publication of full and summarised financial statements. Following preparers’ andauditors’ requests, this was amended in 2006. The effect was that full financialstatements had to be published within three months of the balance sheet date. Thus, atthe end of March 2006, the first sets of annual financial statements of most Greek listedcompanies prepared in accordance with IFRS became available.

4. Differences between GAAP and IFRS and research hypothesesDifferences between Greek GAAP and IFRSThe Greek accounting framework differs substantially from IFRS and has beencharacterised as a stakeholder-oriented, tax-driven (Spathis and Georgakopoulou,2007), and conservative (Ballas, 1994) (but see below). According to Ding et al. (2007),Greece is the country (of 30 examined) with the highest number of issues absent from

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local GAAP but covered by IAS (“absence score”). Additionally, Greece is the tenthmost “diverged” country (of 28) with regard to differences between national rules andIASs (Ding et al., 2007; Spathis and Georgakopoulou, 2007)[9].

According to Ding et al. (2005) “divergence” is closely related to culture and, asargued above, Greece has a distinctive culture. Ding et al. (2007) also identify a positiveassociation between ownership concentration and “absence”. Ownership concentrationis a particular feature of the Greek market. Ding et al. (2007) also find a negativeassociation between “divergence” and the importance of the equity market which, asdiscussed in the previous section, is low in Greece.

Appendix 1, Table AI shows the main differences between IFRS and Greek GAAPas at the time of transition, i.e. 2005[10]. The appendix shows that Greek GAAP doesnot recognise the concepts of deferred tax, assets held for sale, investment properties,biological assets and biological produce. It also does not use the fair value model.Depreciation and amortisation rates for assets are not calculated on the basis ofexpected useful lives, but rather specified by the government. Revaluation, of land andproperty only, occurs every four years and also refers to government indices. Start-upcosts and interest during the construction period of properties are capitalised togetherwith acquisition costs. Government grants are recognised within equity. Proposeddividends are recognised as liabilities. An option permitted pension deficits to berecognised only where they relate to employees who will retire during the followingyear. Financial instruments are carried at cost and there are no specific requirementsfor hedge accounting. Greek GAAP permits the “pooling of interests method” ofconsolidation and treats joint ventures as jointly controlled operations. Subsidiariesengaged in different activities may be excluded from consolidation, and the definitionof investments in associates does not explicitly refer to the concept of significantinfluence (in cases of less than 20 per cent interest).

Implementation of IFRS and the curtailment of certain creative accounting practicesGreek GAAP permits certain accounting treatments, which could be exploited ascreative accounting. It was expected that seven IFRS in particular would curtail thesepractices and, as a result, their implementation would improve the quality ofaccounting information. These practices include recognition of start-up costs asintangible assets, which enabled companies to avoid a reduction in profit and tooverstate net assets. A lack of a clear distinction between research and developmentexpenses permitted companies also to capitalise research expenses. IAS 38 preventsthese treatments, leading to a negative impact on shareholders’ equity.

Recognising pension liabilities only in relation to employees due to retire during thefollowing year allowed companies to report higher net assets. Under Greek GAAPcompanies also did not need to explicitly disclose liabilities recognised. Adoption ofIAS 19, which requires recognition of defined benefit liabilities for all employees inservice would reduce net assets and require more comprehensive disclosures.

Greek GAAP also permits much leeway in the recognition of provisions. In practicethat means that they are often only recognised where this leads to tax advantages. IAS37 contains more specific recognition criteria of provisions and would therefore have anegative impact on net assets. Similarly, IAS 39 contains specific measurement criteriafor of loans and receivables. In addition, Greek GAAP has no requirement relating tohedge accounting. These differences were expected to have a negative impact on net

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assets. Further, under Greek GAAP companies may acquire up to 10 per cent of ownshares and recognise these as assets, usually leading to an impact on market prices[11].This was done frequently in practice. Thus, the requirement of IAS 32 for deduction ofown shares from shareholders’ equity was expected to reduce net assets.

IAS 36 requires companies to assess assets for impairment, and lays down explicitrules and guidance on how to do so and how any impairments are to be accounted for.Greek GAAP is less explicit and in practice Greek companies rarely recognisedimpairments.

Further, unlike IAS 2, Greek GAAP permits the use of LIFO (last-in, first out), whichis frequently used in practice. IAS 2 also explicitly requires companies to valueinventories at the lower of cost and net realisable value and recognise any impairment,while under Greek GAAP, changes in the value of inventories were disclosed in thenotes but not recognised. Finally, IAS 18 introduced different requirements for revenuerecognition of goods sold and explicit requirements for revenues relating to theprovision of services. (The latter are absent from Greek GAAP.) The necessaryadjustments were expected to affect net assets negatively by reducing the value ofcurrent assets (inventories and receivables).

H1: IFRS impact on financial position and reported performanceConsidering the discussion above, it can be expected that the reconciliation statementsrequired as part of IFRS implementation would reveal significant differences betweenthe book value of equity and net profit produced under the two different regimes.Although it is expected that the differences will be significant, it is difficult to predictthe sign of the net changes. This is because some of the accounting practices underGreek GAAP were more, but others were in fact less conservative than IFRS-basedpractices. Accordingly, our first research hypothesis is formed as:

H1. The financial position and reported performance of Greek listed companieshave been significantly affected by the transition to IFRS.

H2: IFRS impact on gearing and liquidityBartov and Kim (2004, p. 354) suggest that “the level of accruals may indicate theintegrity of the reported book value”. Managers may:

[. . .] inflate accounting income, and thus book values, by inflating accruals [i.e. engaging inearnings management]. Thus, low (high) accruals may indicate conservative (aggressive)accounting, which means that the book value is higher (lower) than it appears.

Leuz et al. (2003, p. 525) state that:

[. . .] outsider economies with relatively dispersed ownership, strong investor protection, andlarge stock markets exhibit lower levels of earnings management than insider countries withrelatively concentrated ownership, weak investor protection, and less developed stock markets.

They classify Greece (along with Austria) as the country with the highest earningsmanagement. Ding et al. (2007) find that “absence” creates opportunities for earningsmanagement. Considering that Greece has a very high “absence” score (see above), thefinding of Leuz et al. (2003) is not surprising.

The areas of earnings management identified above would also have an impact onkey ratios such as gearing and liquidity. (This is also supported by Butler et al. (2004)

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who find a positive association between abnormal accruals and liquidity.) Therefore,implementation of IFRS, which do not allow for the same accounting practices wouldhave a significant impact on these ratios.

These issues are particularly relevant to the Greek context and the transition toIFRS since banks are major providers of finance (Venieris, 1999; Tzovas, 2006) andthese ratios affect contractual obligations and debt covenants (Ormrod and Taylor,2004). Further, Baralexis (2004) finds that credit finance is the most important motivefor companies to overstate profits. Accordingly, our second research hypothesis isformed as:

H2. Key ratios such as liquidity and gearing[12] have been affected significantlyby the transition to IFRS.

H3: IFRS impact and audit qualityDeAngelo (1981) and Watts and Zimmerman (1986) suggest that big audit firms mayprovide audits of higher quality than small audit firms since the former are moreindependent. Several empirical studies use a dichotomous variable (e.g. Big 4 vsnon-Big 4) to proxy for differences in audit quality. Prior literature suggests that thisproxy does indeed capture differences in audit quality.

On that basis, the audit firm proxy has been used by Caramanis and Lennox (2008)to examine earnings management and audit quality in Greece[13]. They demonstratethat the Big 5 audit firms work more hours than the non-Big 5 firms. They thereforeuse audit hours as a proxy for audit effort and find that “abnormal accruals are morelikely to be positive when audit hours are lower” and that “the magnitude ofincome-increasing abnormal accruals is greater when audit hours are lower”(Caramanis and Lennox, 2008, p. 117). These results suggest that “low audit effort (i.e. anon-‘Big 5’ auditor) is associated with earnings management” (Caramanis and Lennox,2008, p. 117). (Leventis and Caramanis (2005) also provide evidence that audit effort inGreece is correlated with audit firm size.)

Based on these findings and the prior literature relating to creative accountingunder Greek GAAP, it is expected that the impact from the transition to IFRS issignificant and significantly greater for companies with non-Big 4 auditors than forfirms with Big 4 auditors, since the latter are less likely to apply creative accountingpractices. Accordingly, the third research hypothesis is formed as follows:

H3. The impact on shareholders’ equity, net profit, liquidity and gearing wassignificant and significantly greater for companies with non-Big 4 audit firmsthan for companies with Big 4 auditors.

5. Research methods and dataResearch methodsTo address the research objectives outlined above, we follow recent literature (Grayet al., 2009; Haller et al., 2009) and use Gray’s comparability index (Weetman et al.,1998). Hellman (1993), Whittington (2000) and Bertoni and De Rosa (2006) have alsoemployed the index to explore differences in return on equity. We expand on previousstudies by exploring the impact of IFRS recognition and measurement requirements ongearing and liquidity. Where Greek reported equity (or other) is compared to thatreported under IFRS, the index is expressed by the formula:

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1 2EquityIFRS 2 EquityGR

jEquityIFRSjð1Þ

In parallel, to previous studies, a value larger than 1.0 implies that equity under GreekGAAP is higher than equity under IFRS, a value lower than 1.0 implies that equityunder Greek GAAP is lower than equity under IFRS and an index value of 1.0 isneutral. We calculate average index values as the sum of all companies’ indices dividedby the number of companies under examination.

One limitation of the index is that it reports extreme values where equity underIFRS approaches zero and equity under Greek GAAP is a relatively large amount(Weetman et al., 1998; Street et al., 2000). However, the fact that the formula reportschanges comparable to those used under the accounting concept of materialityoutweighs the presence of such outliers (Weetman et al., 1998; Street et al., 2000)[14].

We follow the prior studies in using as the denominator the “yardstick” orbenchmark of the adjusted equity (or other), i.e. the equity (or other) as reconciled toIFRS, because we assume that IFRS are of higher quality than Greek GAAP (Ding et al.,2007, Section 4), and because application of IFRS is now required by EU andsubsequently Greek law. Therefore, an international investor would view anydifferences between Greek GAAP and IFRS as departures from IFRS rather thandepartures from Greek GAAP. This implies that an investor could theoreticallycompare companies from different European countries on the basis of IFRS reportedFigures (but within the limitations identified inter alia by Ball (2006), Zeff (2007) andSoderstrom and Sun (2007). Using IFRS as denominator further facilitates comparisonwith other studies focusing on other countries.

Although there is no agreed threshold of materiality, most researchers provide theirresults based on two bands of materiality thresholds: 5 and 10 per cent (Weetman andGray, 1990, 1991; Weetman et al., 1998; Adams et al., 1999; Street et al., 2000). Inaddition, because we expect to find changes of considerable magnitude, and to avoidloss of what we consider relevant information, we also provide information based onthe 20 per cent band. In line with prior studies and auditors’ perceptions of materiality,we consider changes of less than 5 per cent as not material, and changes of more than10 per cent as material, with a “grey area” between 5 and 10 per cent.

To avoid distortion through extreme values, we exclude cases where the comparabilityindex were more than one-and-a half of the boxplot length (Fielding and Gilbert, 2004,p. 125; Pallant, 2005, p. 61). For all tests, we examine the normality of the distribution of oursamples by employing the Kolmogorow-Smirnov statistic. Since we find no normallydistributed variables (see below), we test the significance of the impact measured by theuse of Gray’s comparability index focusing on the median, instead of the mean values, withone sample t-test for median as applied by Minitab. To examine the differences in theimpact measured across the sub-samples and the book-to-market ratios across thesub-samples, we employ the Mann-Whitney U-test, which is appropriate for independentsamples. Regarding the differences in the book-to-market ratios within the sub-samplesfor the two different periods, we employ the Wilcoxon Signed Rank test, which isappropriate for repeated measures (Pallant, 2005).

DataIn contrast to previous (comparability) studies based on (sometimes) small samples, thepresent research investigated the majority of available Greek listed companies’

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accounts, thus avoiding sampling bias. 43 companies belonging to the banking,insurance and financial services sector were excluded (due to their specific accountingand reporting requirements). We also excluded 20 companies whose shares weresuspended from trading or were under supervision by the HCMC, five early adopters ofIFRS and 11 companies with a 30 June balance sheet date (because, at the time of datacollection, their financial statements were not yet available)[15]. Thus, from apopulation of 317 listed companies at the end of March 2006 (including those undersuspension/supervision), 238 companies were utilised in this study. This sampleconsists of 193 companies publishing consolidated accounts and 45 publishingindividual accounts[16]. Table I provides descriptive statistics with reference to oursample regarding 2005. Appendix 2, Table AII shows the disaggregation of thesecompanies across the relevant ASE sectors classification.

As is apparent from Table I, our sample consists mainly of small companies. Giventhe collective importance of small and medium-sized listed companies in Greece andthe anticipated impact of transition in particular on these companies (Kontoyannis,2005), we hope our results to be particularly relevant.

We acquired from the ASE the 2005 and 2006 market values as well as the publicationdates of the financial statements. We also acquired from ASE the 2004 financialstatements (under Greek GAAP) in electronic format. The file contained all line items ofthe statements for each listed company. We then downloaded from the ASE web site the2005 financial statements. From these, we captured “by hand” and transferred to aspreadsheet for analysis the comparative figures referring to the 2004 accounts underthe IFRS, together with the adjustments from the reconciliation statements.

Quality of transitional informationReconciliation statements were not presented uniformly. Therefore, we followed theapproach of Aisbitt (2006) and we created three categories for evaluating the quality ofcompanies’ transitional disclosures:

(1) detailed, for companies which provided both reconciliation statements andadditional, narrative disclosures explaining the transition to IFRS;

(2) adequate, for companies which provided reconciliation statements both forearnings and shareholders’ equity but did not provide additional narrativedisclosures; and

Values in e millions Mean SD MinimumLower

quartile MedianUpper

quartile Maximum

Marketcapitalisationa 291 1,042 2 15 41 145 10,017Sales 206 542 0.4 22 55 175 5,475Shareholders’ equity 116 340 210 16 33 87 4,513Net profit 13 48 267 20.08 1.5 6 458

Notes: n ¼ 238; amarket capitalisation as at one month after the publication of the 2005 annualresults; data are for 237 companies as one company was not traded one month after the announcementof its annual financial results; financial data are based on IFRS 2005 figures; e1 ¼ US$1.2597 ande1 ¼ £0.6930 (28 April 2006 2 FT)

Table I.Data descriptive statistics

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(3) inadequate, for companies which did not provide reconciliation statements orwhich provided inadequate reconciliations and narratives (i.e. which did notenable the users to evaluate the impact caused by individual standards).

Although we do not form a specific research hypothesis, we explore the potentialrelationship between the level of transitional disclosures and auditing firm byemploying a x 2-test.

6. Results and discussionQuality of transitional informationTable II shows that 42 out of the 238 companies in the sample (17.6 per cent) providedinadequate reconciliation disclosures. Five of these provided reconciliation statements,which did not allow identification of the individual standards’ effects, and theremaining 37 did not provide reconciliation statements for either shareholders’ equityor net income. This also provides an illustration of the ineffectiveness of auditing: notone audit opinion contained a qualification regarding non-compliance with therequirements of IFRS 1.

These inadequate disclosures support findings by Ballas (1994) and Tsakumis(2007) who argue that Greece represents a high conservatism and high secrecy society,and the insufficient enforcement supporting findings by La Porta et al. (1998) (seeabove). In fact, Avlonitis (2007), director of the HCMC’s “Listed companies’ supervisiondivision”, acknowledged companies’ non-compliance with IFRS measurement and/ordisclosure requirements. However, the HCMC’s approach taken was not to imposestrict fines on the basis that this was a transition period.

As Table II shows, there is a statistically significant relationship between thequality of companies’ transitional disclosures and audit firm size (at 1 per cent level).Arguably, this may be a result of the fact that Big 4 firms could attract experiencedemployees from their foreign operations to assist in the transition process.

Nevertheless, the high level of non-disclosure identified is surprising and raisesconcerns about enforcement and the role of regulators and auditors in IFRSimplementation. The Grant Thornton (2006) and HCMC (2006) non-academic studiesreach similar conclusions with regard to Greece. It is interesting also to note thatsimilar issues were identified by Lopes and Viana (2008) for Portugal as well as byCordazzo (2008) for Italy. Both studies identified companies, which would fall under thecategory of “inadequate” disclosures as this is defined here: 8 per cent for Italy and20 per cent for Portugal.

The following sections examine the findings relating to each research hypothesis.Where relevant, references to prior literature and to the observations on the Greek

Transitional informationDetailed Adequate Inadequate

Auditing firm Big 4 16 34 2Non-Big 4’ 56 90 40

Notes: n ¼ 238; Pearson x 2: 9.441ª, 2df, Asymp. Sig. (two-sided) 0.009; ª0 cells (0.0 per cent) haveexpected count less than 5; the minimum expected count is 9.18

Table II.Transitional informationand auditing firms

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accounting context and framework (Sections 3 and 4) are discussed. The analysisfocuses on median index values because the outcome of the Kolmogorov-SmirnovStatistic suggests normal distribution cannot be assumed.

Impact on financial position, performance, financial indicators (H1 and H2) and auditquality (H3)Table III presents the distributions of the effect on financial position and performanceas measured with reference to equity, earnings, gearing and liquidity (H1 and H2),across our bands of materiality. It also shows descriptive statistics and the results ofthe significance test employed. In the same table, we also provide evidence relating toH3 (i.e. partitions with reference to audit firm).

Profit after tax was not available for 50 companies under Greek GAAP. Therefore,impact on earnings is only examined for the 188 companies, which did provide thisinformation in 2004.

The median index of 0.97 (significant at 10 per cent) reveals that more companies’(119) shareholders’ equity was affected positively by the transition to IFRS thannegatively (93). Similarly, the mean index value shows that, on average, shareholders’equity under Greek GAAP was 1 per cent lower than under IFRS (not significant). (Notethat the thresholds of materiality do not coincide with those of statistical significance.)Based on these findings we accept H1, with regard to Shareholders’ equity.

There is a broad range of index values. A total of 62 companies faced a materialnegative and 70 a material positive impact. A total of 85 companies were affected bymore than 20 per cent. The fact that a similar number of companies were affectednegatively and positively is in line with the suggestion that it was difficult to predictthe sign of the overall impact, since not all the accounting practices under Greek GAAPwere more conservative than IFRS-based practices.

Our findings are in line with the findings of Haller et al. (2009) for Germany, Lopesand Viana (2008) for Portugal, and of Cordazzo (2008) and Bertoni and De Rosa (2006)for Italy (which, according to Ding et al. (2007) is also characterised by high “absence”and high “divergence”). All studies found that the number of companies positivelyaffected was higher than those negatively affected by the transition to IFRS.

More specifically, our analysis shows that the majority of the Greek companiesmaintained the cost model after transition to IFRS but used the option of IFRS 1 to usefair value as deemed cost[17]. This, along with the reversal of dividends (IAS 10), wasthe main driving factor for the positive impact on equity, offsetting the negative effectfrom other standards on the transition date. The large number of companies facing amaterial negative change suggests that:

. overstated shareholders’ equity reduced after the introduction of specificstandards which curtailed creative accounting practices in many firms; and

. Greek GAAP is not necessarily more conservative than IFRS with reference toshareholders’ equity per se as the “absence” of requirements relating to therecognition of liabilities in Greek GAAP (Ding et al., 2007; see also Appendix 1,Table AI) results in fewer liabilities recognised.

This effectively gives rise to higher net assets.Thus, as expected, we find[18] that IAS 2, IAS 18, IAS 19, IAS 36, IAS 37, IAS 38

and IAS 32/39 all cause a non-material but significant negative impact. It is noted that

Transition toIFRS in Greece

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Com

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Net

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Gea

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4214

2857

1735

162

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Ss

284

2316

313

164

1221

516

91-9

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296

235

05

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1616

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82

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223

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180

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ean

0.99

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1.01

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0.92

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0.58

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SD

0.25

0.28

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Notes:

Sig

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** 5

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Table III.Impact on 238 companies’shareholders’ equity,gearing and liquidityand on 188 companies’net profit

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their provisions prevent the use of the previous creative accounting methods identifiedby Polychroniadis (2002), Baralexis (2004), Spathis (2002), Spathis et al. (2002) andCaramanis and Spathis (2006), such as insufficient bad debt and pension provisions,insufficient depreciation and impairment charges, capitalisation of expenses, andvaluation of inventories at cost (rather than lower of cost and market). As a result, theimplementation of most of these standards has a negative effect on all (IAS 2 and 36),virtually all (IAS 37 and IAS 38) or the large majority (IAS 18, IAS 19, IAS 32/39) ofcompanies to which they are relevant. It can therefore be argued that the quality ofGreek financial reporting under IFRS has been improved.

With regard to net profit, Table III shows that the overall impact was positive, witha mean index of 0.88. The median value of 0.96 (significant at 1 per cent level) supportsthis finding, as does the fact that 94 companies faced a positive change. For themajority of these (73) this change was material ($10 per cent). In total of 39 companiesfaced material negative impact. These findings lead us to accept H1 with regard to netprofit.

These findings suggest that there is, in aggregate, significant difference between thede facto application of Greek GAAP and IFRS. They are also in line with our andKontoyannis’ (2005) expectations that the transition to IFRS would lead to materialchanges in companies’ reported performance. Similarly, Lopes and Viana (2008) andBertoni and De Rosa (2006) report that the change to IFRS led to less conservativeaccounting practices in Portugal and Italy with regard to profit, although (there) theaggregate difference is smaller. It is also noted that positive impact on earnings is alsoidentified in Germany by Haller et al. (2009).

Further, in line with our expectations, gearing and liquidity have also been affectedsignificantly by the transition to IFRS (H2)[19] The median index value of 0.56 forgearing is significant at 1 per cent level and the average index value is 0.58. Again abroad range of index values is revealed. 212 companies (89 per cent) faced a materialchange in their gearing ratio. For 191 companies gearing under Greek GAAP waslower.

Our findings with regard to the liquidity ratio are similar. The ratio underGreek GAAP was on average 6 per cent higher than that under IFRS. The median wassignificantly higher by 2 per cent (H2). It was higher for 128 and lower for83 companies. Fewer companies (108) faced material effects; however almost half ofthese (55) faced a change of more than 20 per cent. These findings lead us to acceptH2 with regard to both ratios.

The fact that for the majority of companies’ transition to IFRS led to higher gearingand lower liquidity ratios might be expected to be an important issue for Greekcompanies which are largely debt-financed, since as pointed out by Aisbitt (2006), suchchanges to companies’ financial positions may have an impact on contractualobligations. However, in Greece “[. . .] a consequence of the close relationship betweenbanks and companies is such that a violation of a debt covenant may not have seriousconsequences for a firm” (Tzovas, 2006, p. 375). Lending decisions are not based onlyon financial criteria, but also on other “qualitative” characteristics of the firm.

H3 is supported with reference to net profit, gearing and liquidity (i.e. the twospecific categories of the balance sheet related to earnings management) but not forshareholders’ equity. More specifically, for earnings we find a significant non-materialimpact for companies with a non-Big 4 auditor, but a not significant material impact

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for companies with a Big 4 auditor. However, the difference in the impact revealedacross the two sub-samples is not significant. These findings are in line with ourexpectation that the earnings of companies with non-Big 4 were creatively adjusted byaccounting practices not permitted under IFRS, while for companies with a Big 4auditor this was not the case or was the case to a lesser extent. In a similar vein, we findthat for companies with non-Big 4 auditors the impact on liquidity was significantwhile this was not the case for companies with Big 4 auditors. However, the medianindex values of the two sub-samples are not significantly different. Further, althoughgearing for both groups of companies was affected materially the impact on companieswith non-Big 4 auditors was significantly greater. This confirms our expectations.

7. LimitationsThe limitations arising from poor compliance with disclosure requirements andinconsistent and incomplete presentation of reconciliations identified by priorliterature (Weetman and Gray, 1990, 1991; Adams et al., 1993, 1999; Street et al., 2000;Ucieda Blanco and Garcia Osma, 2004; Aisbitt, 2006) also apply to the present study.

Furthermore, there is a risk that the results reflect short-term timing differences,which may reverse in later accounting periods (Street et al., 2000; Norton, 1995). Thestudies examining compulsory transition to IFRS in the EU can only make use of the2004 financial statements and thus cannot assess the impact of timing differences (cf.also Bertoni and De Rosa, 2006). Furthermore, this period may not reflect a typicaleconomic environment and typical accounting policies (cf. Norton, 1995). Since the EURegulation was passed in 2002, the latter makes it likely that at least some companies’accounting policy choices were influenced by anticipation of the change.

An additional problem for studies using prior period comparatives is the risk of“noise” being introduced by prior period adjustments (Ucieda Blanco and Garcia Osma,2004), or by non-specific (“big bath”) adjustments which may not relate to IFRStransition at all (Lopes and Viana, 2008). In this study, we identified 121 companieswhich provided adjustments under the category “Other” (i.e. not referring to theadoption of a particular standard). This may have contained several adjustmentsnetted off. Although such adjustments may cause a material change to shareholders’equity, it is impossible for a user of the financial statements to capture or assess theseadjustments.

Further, de jure rules may differ from de facto accounting practice (Hellman, 1993;Norton, 1995). This needs to be taken into account when differences in de jureaccounting regulation are examined and discussed in order to explain or contextualiseempirical (comparison index) findings. Given the problems of creative accounting andweak enforcement outlined above, it is quite likely that some distortion is introducedby this in the Greek case (cf. Avlonitis, 2007)[20].

8. ConclusionsIn this paper, we examine the impact of transition to IFRS on the financial statementsof Greek listed companies. Given the substantial de jure differences between GreekGAAP and IFRS (Ding et al., 2007), we assumed that Greek companies’ financialposition and results would have been affected considerably.

Our first objective was to identify and evaluate the impact and materiality of IFRSadoption on companies’ financial position, performance and key ratios. Based on prior

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evidence regarding the relationship between audit effort and earnings managementwith auditor type in Greece, our second objective was to test the potentially differentfindings across sub-samples of companies with Big 4 and non-Big 4 auditors.

We found that implementation of IFRS did indeed have a significant impact on thefinancial position and reported performance as well as on gearing and liquidity ratios,of Greek listed companies. On average, impact on shareholders’ equity and net incomewas positive (immaterial and material, respectively). With regard to gearing andliquidity, the impact was negative (material and immaterial, respectively, on average).

Only companies with non-Big 4 auditors faced significant impact on net profit andliquidity on transition to IFRS. They also faced a significantly greater impact ongearing than companies with Big 4 auditors. However, the large number of companiesmaterially affected with reference to all measures examined is somewhat surprising.

With respect to equity, the findings do not support the notion that Greek GAAP ismore conservative than IFRS as applied (de facto) in this context of transition. A largenumber of companies with material negative changes are identified and explanationssupport this finding.

While expecting a level of non-compliance with disclosure requirements in theGreek context (e.g. “low trust” society, low importance of the “true and fair view”, highownership concentration), the high level of non-compliance with IFRS 1 requirementsis still surprising. This appears to be related to the type of audit firm. It also supportsprevious research suggesting low enforcement in Greece (La Porta et al., 1998;Baralexis, 2004), as well as Ball’s (2006) and Nobes’ (2006) concerns in relation touneven implementation of IFRS across different jurisdictions.

Mandatory adoption of IFRS and its effect on Greek companies’ financial statementsas identified by our study may have important implications for the Greek economy. Forexample, the fact that for the majority of companies’ transition to IFRS led to highergearing and lower liquidity ratios might have an impact on contractual obligations(Aisbitt, 2006). Further, there is evidence that information revealed in companies’reconciliations statements can affect significantly market participants’ perceptionsabout the quality of companies’ financial statements. Hence, following such significantimpact on companies’ financial statements, significant stock market reactions andchanges to value relevance of accounting information might be expected. Futureresearch could shed light on these issues.

Additionally, using quantitative measures is an essential first step in investigatingthe impact of transition from one accounting regime to another, however, it is unlikelyto be sufficient on its own. Some of the particular features of Greek GAAP and of theGreek socio-economic context may also exist in other countries to some extent,especially in continental Europe (e.g. patronage, low trust and formalism). Theserequire detailed regulation and monitoring, and may make a principles-basedaccounting system difficult to implement in practice because it is alien to local culture.It would be interesting to investigate the impact of such features in more depth byconducting qualitative research, but this is outside the scope of the present paper.

Notes

1. International Accounting Standards (IASs) were issued by the International AccountingStandards Committee. Since 2001, the IASB has been issuing IFRS but many IASs are still inplace.

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2. By Greek GAAP, we mean codified accounting rules, in particular Law 2190/20 andPresidential Decree (PD) 186/92 (Tax Law-known also as Code of Books and Records) andpronouncements of the Committee of Accounting Standardisation and Auditing (ELTE).This is a narrow definition of GAAP. The term “GAAP” in other jurisdictions may refer alsoto professional pronouncement or non-promulgated guidance or practices (Evans, 2004).

3. Traditional definitions of conservatism imply understatement of book values and earningsfigures, however, differences in earnings figures are temporary and will eventually reverse(Garcıa Lara and Mora, 2004 – but see Weetman (2006) for an example of perpetualconservatism). Garcıa Lara and Mora (2004) therefore distinguish between balance sheetconservatism and earnings conservatism, the former implying understatement of the bookvalue of equity, the latter a desire to require a higher degree of verification for recognition ofgood news than for bad news.

4. We have identified an unpublished study by Bellas et al. (2007) which is based on a sample of83 ASE listed companies and provides limited descriptive statistics which suggest that fixedassets, tangible assets and total liabilities are significantly higher, and that there was greatervariability for most balance sheet measures under IFRSs than under Greek GAAP. The studynotes also an impact of IFRS implementation on ratios, however, provides only limiteddiscussion and analysis of these results. The study of Bellas et al. (2007) does not examine anyrelationship of its respective findings with audit firm size. Further, it does not explain ordiscuss the differences between the two accounting frameworks nor it excludes or discussesoutliers, which means that results may be distorted by a small number of exceptional cases.Finally, Bellas et al. (2007) differ from ours in their methodology for capturing the impact ofIFRS. This means their findings cannot be compared with academic studies exploring theimpact of transition in other European countries with reference to Gray’s comparability index.

5. Such as number of employees (Bellas et al., 2007).

6. e1 ¼ US$1.3187 and e1 ¼ £0.6738 (31 December 2006-FT).

7. ICB distinguishes between four levels of classification consisting of ten industries, 18super-sectors, 39 sectors and 104 sub-sectors. The Greek sectors are comparable to 17 of theICB sectors (ASE, 2005).

8. Similar arrangements also apply in Italy, the Czech Republic, Estonia, Lithuania, Malta,Slovakia and Slovenia (Bertoni and De Rosa, 2006). For Greece, this was the case becauseIFRS are considered to be higher quality standards and thus would improve comparabilityof information provided by companies.

9. Nobes (2009) inter alia underscores one limitation of the Ding et al.’s (2007) study. Theauthors use data referring to the de jure differences between IAS and national GAAP as ifthese lead also to de facto differences. However, this may not be necessarily the case in somecountries because some issues may be anyway irrelevant. Nobes (2009) also criticises thedistinction between the categories of “absence” and “divergence” that Ding et al. (2007) formon the basis of the Nobes (2001) study. Although Ding et al. (2009) respond to this criticism,these comments need to be considered when discussion about the substantial differencesbetween Greek GAAP and IFRS is made in this study.

10. We thank Panayiotis Vroustouris and Mike Smith for constructive comments on the contentof this Appendix.

11. This effect is explicitly suggested by Company Law 2190/20 (Article 16, paragraph 5).

12. We define gearing as total long-term liabilities/net assets and liquidity as currentassets/current liabilities.

13. This proxy has also been used by Owusu-Ansah and Leventis (2006) and Leventis et al.(2005) in research on timeliness of reporting and audit report lag by Greek companies.

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14. Alternatively, we could have captured the impact by adding all companies’ shareholders’equity (or other) under both frameworks and then calculating an average index for each caseof reference (whole sample, industry etc). However, we are not trying to measure the averagechange to the aggregate values of shareholders’ equity (or other) of all companies (which wasthe approach followed by the three prior Greek studies). Instead, we measure the averagepercentage change of companies’ transition to IFRS, treating each company equally,independent of size, thus, avoiding the distorting effect of the few large companies (see datasection).

15. Additionally, the present study is part of a larger project examining compliance withdisclosure requirements. Companies with a later reporting date may have “learned” from thedisclosures provided by companies reporting earlier. We therefore excluded these companiesto avoid bias.

16. We have performed our analyses for companies provided individual accounts separatelyfrom those provided consolidated financial statements. The overall results are notqualitatively different. We thank an anonymous referee for pointing this out.

17. Because of a long tradition of keeping assets at historical cost, Greece (and other ContinentalEuropean countries) was not expected to adopt immediately the fair value model for assetvaluation (Nobes, 2006) (we are grateful to David Alexander for pointing this out). We findindeed that companies continue using the cost model but it appears that they used the optionprovided by IFRS 1 for offsetting the negative effect from other standards on the transitiondate. (We are also grateful to Monica Veneziani for confirming that in Italy companies alsomaintained the cost model, since mechanisms for regular fair valuations are not yetestablished.)

18. The results discussed in this paragraph are not tabulated but are available on request. It isnoted that because of inconsistencies in presentation and lack of sufficient disclosures withinthe income statement reconciliations (confirmed also by the studies of HCMC (2006) andGrant Thornton (2006)), we were unable to examine the impact of individual standards withregard to net profit.

19. Caution is required when interpreting the gearing comparability index. A lower than 1.0index value means that gearing under Greek GAAP was lower, so we see a negative impact,which is the opposite interpretation to other measures. In general, the results for financialindicators have to be treated cautiously as ratios may be close to 0 and a relatively smallchange, in absolute figures, results in a large percentage change.

20. For studies post IAS 1 (revised), the prohibition to claim compliance with IASs/IFRS unlesscompanies comply completely could be expected to bring some improvement (Street et al.,2000) (see also Glaum and Street (2003) for further references), as should compulsoryadoption of IASs/IFRS.

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Further reading

Ballas, A.A. (1998), “The creation of the auditing profession in Greece”, Accounting,Organizations and Society, Vol. 23 No. 8, pp. 716-36.

Becker, C., Defond, M., Jiambalvo, J. and Subramanyam, K. (1998), “The effect of audit quality onearnings management”, Contemporary Accounting Research, Vol. 15, pp. 1-24.

Callao, S., Jarne, J. and Lainez, J. (2007), “Adoption of IFRS in Spain: effect on the comparabilityand relevance of financial reporting”, Journal of International Accounting, Auditing andTaxation, Vol. 16, pp. 148-78.

Caramanis, C. (2002), “The interplay between professional groups, the state and supranationalagents: Pax Americana in the age of globalisation”, Accounting, Organizations and Society,Vol. 27, pp. 379-408.

FTSE (2009), Country Classification September 2009 Update, available at: www.ftse.com/Indices/Country_Classification

Hofstede, G. (1980), Culture’s Consequences: International Differences in Work-related Values,Sage, London.

Larson, R.K. and Street, D.L. (2004), “Convergence with IFRS in an expanding Europe: progressand obstacles identified by large accounting firms’ survey”, Journal of InternationalAccounting Auditing and Taxation, Vol. 13, pp. 89-119.

Papas, A. (1993), “Group accounting in Greece”, in Gray, S.J., Coenenberg, A. and Gordon, P. (Eds),International Group Accounting: Issues in European Harmonisation, 2nd ed., Routledge,London, pp. 121-34.

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Appendix 1

IFR

SG

reek

GA

AP

IAS

2“i

nv

ento

ries

”P

arag

rap

hs:

9,25

,17

,21

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,34

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Art

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efits

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16“p

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,p

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39,

50,

51T

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nb

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ion

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ich

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asy

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rov

ided

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yof

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.Th

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bas

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set

by

the

Min

istr

yof

Fin

ance

(mos

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cen

tly

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.D.

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2003

).T

hes

ear

en

otin

lin

ew

ith

the

asse

ts’

use

ful

liv

es

(con

tinued

)

Table AI.Summary of key

accounting differencesbetween IFRSs and GreekGAAP as at 31 December

2005

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)

IFR

SG

reek

GA

AP

IAS

17“l

ease

s”P

arag

rap

hs:

8,20

and

33T

her

eis

no

dis

tin

ctio

nb

etw

een

fin

ance

leas

esan

dop

erat

ing

leas

es.A

llle

ases

are

trea

ted

asop

erat

ing

leas

es*

* How

ever

,L

aw32

29/0

4(A

rt.

13),

pro

vid

esco

mp

anie

sw

ith

the

opti

onto

adop

tIA

S17

and

thu

sre

cog

nis

eal

sofi

nan

cele

ases

IAS

18“r

even

ue”

stan

dar

d’s

obje

ctiv

eR

even

ue

reco

gn

itio

nis

dri

ven

by

tax

con

sid

erat

ion

s.R

even

ue

isre

cog

nis

edas

soon

asse

rvic

esor

pro

du

cts

hav

eb

een

inv

oice

dw

hic

hu

sual

lyta

kes

pla

ceaf

ter

the

del

iver

yof

goo

ds

orse

rvic

es.

How

ever

,v

ery

lim

ited

gu

idan

ceis

pro

vid

edw

ith

reg

ard

tore

ven

ues

from

serv

ices

Th

eef

fect

ive

inte

rest

met

hod

isn

otu

sed

for

reco

gn

isin

gre

ven

ue

aris

ing

from

inte

rest

IAS

19“r

etir

emen

tb

enefi

ts”

Par

agra

ph

s:64

,93

and

93A

Un

der

Gre

ekL

awth

ere

isn

oco

nce

pt

ofa

defi

ned

ben

efit

pla

n.

Aco

mp

any

has

the

obli

gat

ion

top

aya

lum

p-s

um

toth

eem

plo

yee

sw

ho

are

mad

ere

du

nd

ant

orre

tire

.T

he

amou

nt

ofth

atsu

md

epen

ds

onth

eem

plo

yee

len

gth

ofse

rvic

e,th

ew

ayof

leav

ing

the

com

pan

y(r

edu

nd

ancy

orre

tire

men

t)an

dsa

lary

up

onth

atd

ate.

Inth

eca

seof

reti

rem

ent,

the

amou

nt

ofb

enefi

tis

equ

alto

the

40p

erce

nt

ofth

eam

oun

tin

the

case

ofre

du

nd

ancy

.T

hes

eb

enefi

tsfa

llw

ith

inth

ed

efin

edb

enefi

tsc

hem

esu

nd

erIA

S19

.S

uch

liab

ilit

ies

fall

into

the

defi

nit

ion

ofp

rov

isio

ns

un

der

Gre

ekla

wan

dsh

ould

be

reco

gn

ised

inth

eb

alan

cesh

eet.

How

ever

,in

pra

ctic

em

ost

com

pan

ies

foll

owth

ere

qu

irem

ents

ofa

tax

law

and

reco

gn

ise

thes

eli

abil

itie

son

lyin

rela

tion

toem

plo

yee

sd

ue

tore

tire

du

rin

gth

ey

ear

afte

rth

ep

erio

den

dIA

S20

“acc

oun

tin

gfo

rg

over

nm

ent

gra

nts

and

dis

clos

ure

ofg

over

nm

ent

assi

stan

ce”

Par

agra

ph

s:7

and

12

Gov

ern

men

tg

ran

tssh

all

not

be

reco

gn

ised

un

til

ther

eis

reas

onab

leas

sura

nce

that

the

gra

nts

wil

lbe

rece

ived

.How

ever

,aco

mp

any

’sco

mp

lian

cew

ith

the

con

dit

ion

sat

tach

ing

toth

eg

ran

tis

not

con

sid

ered

Gov

ern

men

tg

ran

tsar

ere

cog

nis

edd

irec

tly

wit

hin

shar

ehol

der

s’eq

uit

y.T

hey

may

not

be

offs

etag

ain

stth

eco

stof

asse

tsIA

S21

“th

eef

fect

sof

chan

ges

info

reig

nex

chan

ge

rate

s”P

arag

rap

h:

28

Th

ere

cog

nit

ion

ofn

on-m

onet

ary

item

sat

fair

val

ue

isn

otp

erm

itte

d

(con

tinued

)

Table AI.

MAJ25,8

838

Dow

nloa

ded

by U

nive

rsita

s B

unda

Mul

ia, M

r U

nive

rsita

s B

unda

Mul

ia A

t 04:

36 1

9 A

pril

2015

(PT

)

IFR

SG

reek

GA

AP

Ex

chan

ge

dif

fere

nce

sar

isin

gon

the

sett

lem

ent,

oron

tran

slat

ing

oflo

ans

orcr

edit

sin

resp

ect

ofth

eac

qu

isit

ion

ofp

rop

erti

esat

rate

sd

iffe

ren

tfr

omth

ose

atw

hic

hth

eyw

ere

tran

slat

edon

init

ial

reco

gn

itio

nd

uri

ng

the

per

iod

orin

pre

vio

us

fin

anci

alst

atem

ents

,can

be

reco

gn

ised

asas

sets

un

der

the

hea

din

g“e

xp

ense

sof

per

enn

ial

dep

reci

atio

n”.

Non

real

isab

leg

ain

sfr

omex

chan

ge

dif

fere

nce

sof

curr

ent

rece

ivab

les

are

reco

gn

ised

wit

hin

equ

ity

.G

ain

son

fore

ign

curr

ency

mon

etar

yb

alan

ces

are

def

erre

du

nti

lse

ttle

men

tIA

S23

“bor

row

ing

cost

s”P

arag

rap

hs:

11,

17an

d24

Bor

row

ing

cost

sd

irec

tly

attr

ibu

tab

leto

the

acq

uis

itio

n,

con

stru

ctio

nor

pro

du

ctio

nof

ap

rop

erty

are

eith

erex

pen

sed

inth

ep

erio

din

curr

edor

cap

ital

ised

sep

arat

ely

asas

sets

un

der

the

hea

din

g“e

xp

ense

sof

per

enn

ial

dep

reci

atio

n”

and

amor

tise

dov

era

max

imu

mp

erio

dof

fiv

ey

ears

To

the

exte

nt

that

fun

ds

are

bor

row

edg

ener

ally

bu

tth

enu

sed

for

the

pu

rpos

eof

obta

inin

ga

qu

alif

yin

gas

set,

no

amou

nt

ofb

orro

win

gco

sts

isel

igib

lefo

rca

pit

alis

atio

n.

Th

eco

nst

ruct

ion

per

iod

star

tsw

hen

the

loan

isre

ceiv

edan

db

orro

win

gco

sts

are

not

det

erm

ined

bas

edon

the

val

ue

ofth

eca

pit

alin

ves

ted

bu

tra

ther

the

inte

rest

ofth

elo

anas

soci

ated

wit

hth

eco

nst

ruct

ion

ofth

eq

ual

ify

ing

asse

tis

cap

ital

ised

.C

apit

alis

atio

nof

bor

row

ing

cost

sin

rela

tion

toin

ven

tori

esis

not

per

mit

ted

IAS

27“c

onso

lid

ated

and

sep

arat

efi

nan

cial

stat

emen

ts”

Par

agra

ph

:20

Asu

bsi

dia

rym

ust

be

excl

ud

edfr

omco

nso

lid

atio

nif

its

bu

sin

ess

acti

vit

ies

are

sod

issi

mil

arfr

omth

ose

ofth

eot

her

enti

ties

wit

hin

the

gro

up

soth

atth

etr

ue

and

fair

vie

wof

the

fin

anci

alst

atem

ents

mig

ht

be

dis

tort

ed*

* Law

3487

/06

doe

sn

otal

low

this

trea

tmen

tan

ym

ore

IAS

28“i

nv

estm

ents

inas

soci

ates

”P

arag

rap

hs:

6an

d23

Inv

estm

ents

inas

soci

ates

are

acco

un

ted

for

usi

ng

the

equ

ity

met

hod

bu

tth

eca

rry

ing

amou

nt

doe

sn

otin

clu

de

any

goo

dw

ill

aris

ing

.It

isre

cog

nis

edse

par

atel

yin

the

con

soli

dat

edst

atem

ents

asin

tan

gib

leas

set

and

isei

ther

exp

ense

din

the

per

iod

incu

rred

oram

orti

sed

ineq

ual

tran

ches

over

am

axim

um

per

iod

offi

ve

yea

rsT

he

inv

esto

rsh

all

hol

dat

leas

t20

per

cen

tof

the

inv

estm

ent

toac

cou

nt

for

itas

anas

soci

ate

IAS

31“i

nte

rest

sin

join

tv

entu

res”

Par

agra

ph

:30

Gre

ekL

awre

mai

ns

sile

nt

inth

isre

spec

tan

din

tere

sts

injo

int

ven

ture

sar

eca

rrie

dat

cost

(th

eir

trea

tmen

tis

asth

atof

join

tly

con

trol

led

oper

atio

ns

un

der

IAS

31)

IAS

36“i

mp

airm

ent

ofas

sets

”P

arag

rap

hs:

6,8,

9,10

,an

d18

Wh

ile

Gre

ekL

awre

qu

ires

aco

mp

any

tore

cog

nis

eim

pai

rmen

tsof

asse

tsth

ere

isn

oex

pli

cit

req

uir

emen

tto

asse

ssan

nu

ally

wh

eth

erth

ere

isan

ind

icat

ion

ofim

pai

rmen

t.A

dd

itio

nal

ly,

the

con

cep

tsof

val

ue

inu

se,

reco

ver

able

amou

nt

and

the

asse

t’s

use

ful

life

are

not

refe

rred

toin

this

con

tex

t

(con

tinued

)

Table AI.

Transition toIFRS in Greece

839

Dow

nloa

ded

by U

nive

rsita

s B

unda

Mul

ia, M

r U

nive

rsita

s B

unda

Mul

ia A

t 04:

36 1

9 A

pril

2015

(PT

)

IFR

SG

reek

GA

AP

Wh

ere

anas

set

isco

nsi

der

edto

be

per

man

entl

yim

pai

red

,th

eim

pai

rmen

tis

reco

gn

ised

soth

atth

eas

set’

sv

alu

eis

show

nat

the

low

erof

cost

and

fair

val

ue.

Th

eim

pai

rmen

tca

nb

ere

ver

sed

.T

he

rev

ersa

lis

opti

onal

and

istr

eate

das

exce

pti

onal

rev

enu

eIA

S37

“pro

vis

ion

s,co

nti

ng

ent

liab

ilit

ies

and

con

tin

gen

tas

sets

”P

arag

rap

hs:

10an

d12

Gre

ekL

awd

oes

not

exp

lici

tly

dis

tin

gu

ish

bet

wee

np

rov

isio

ns

and

con

tin

gen

tli

abil

itie

s.In

gen

eral

itre

qu

ires

com

pan

ies

tore

cog

nis

eli

abil

itie

sfo

ran

yri

skw

hic

hca

nb

ed

efin

edb

ut

doe

sn

otsp

ecif

yre

cog

nit

ion

crit

eria

.T

his

allo

ws

ple

nty

ofro

omfo

rsu

bje

ctiv

ity

wh

end

ecid

ing

wh

eth

eror

not

tore

cog

nis

ep

rov

isio

ns

(see

for

exam

ple

pen

sion

liab

ilit

ies)

.U

sual

ly,

com

pan

ies

reco

gn

ise

pro

vis

ion

sre

lati

ng

tota

xis

sues

IAS

38“i

nta

ng

ible

asse

ts”

Par

agra

ph

s:8,

11,

13,

17,

54,

57,

72an

d88

Alt

hou

gh

the

defi

nit

ion

ofan

inta

ng

ible

asse

tis

sim

ilar

toth

atof

IAS

38,

ther

ear

en

osp

ecifi

cre

cog

nit

ion

crit

eria

.In

tan

gib

leas

sets

are

reco

gn

ised

atco

st.A

dd

itio

nal

ly,s

tart

-up

cost

s,ca

pit

alex

pen

dit

ure

,et

c.sh

ould

eith

erb

eex

pen

sed

inth

ep

erio

din

curr

edor

cap

ital

ised

asin

tan

gib

les

un

der

the

hea

din

g“e

xp

ense

sof

per

enn

ial

dep

reci

atio

n”

and

amor

tise

din

equ

altr

anch

esov

era

max

imu

mp

erio

dof

fiv

ey

ears

(see

abov

e)L

icen

ses

and

rese

arch

and

dev

elop

men

tex

pen

ses

can

also

be

reco

gn

ised

asin

tan

gib

leas

sets

.In

par

ticu

larl

y,l

icen

ses

ofm

obil

ete

leco

mm

un

icat

ion

sar

eam

orti

sed

over

ap

erio

dof

20y

ears

and

rese

arch

and

dev

elop

men

tex

pen

ses

are

amor

tise

dov

era

per

iod

ofth

ree

yea

rsT

he

law

doe

sn

otex

pli

citl

yd

isti

ng

uis

hb

etw

een

rese

arch

and

dev

elop

men

tp

has

esan

dp

erm

its

cap

ital

isat

ion

ofb

oth

Th

ela

wd

oes

not

con

sid

erth

eco

nce

pt

ofin

tan

gib

leas

sets

wit

hin

defi

nit

eu

sefu

lli

ves

Goo

dw

ill

aris

ing

onan

acq

uis

itio

nsh

ould

eith

erb

eex

pen

sed

inth

ep

erio

din

curr

edor

amor

tise

din

equ

altr

anch

esov

era

max

imu

mp

erio

dof

fiv

ey

ears

IAS

32“fi

nan

cial

inst

rum

ents

:d

iscl

osu

rean

dp

rese

nta

tion

”P

arag

rap

h:

33

Gre

ekla

wp

erm

its

list

edco

mp

anie

sto

hol

du

pto

10p

erce

nt

ofth

eir

shar

esin

issu

ew

ith

the

pu

rpos

eof

enh

anci

ng

the

mar

ket

val

ue

ofth

eir

shar

es(L

aw21

90/2

0,A

rtic

le16

,p

arag

rap

h5)

.O

wn

shar

esar

eca

rrie

dat

cost

ash

eld

-to-

mat

uri

tyin

ves

tmen

tsG

reek

Law

allo

ws

only

for

two

typ

esof

fin

anci

alin

stru

men

tsw

hic

har

esi

mil

arb

ut

not

iden

tica

lto

thos

ere

ferr

edto

inIA

S39

:(a)

hel

d-t

o-m

atu

rity

inv

estm

ents

and

(b)

avai

lab

le-

for-

sale

fin

anci

alas

sets

,w

hic

har

ere

cog

nis

edat

cost

(con

tinued

)

Table AI.

MAJ25,8

840

Dow

nloa

ded

by U

nive

rsita

s B

unda

Mul

ia, M

r U

nive

rsita

s B

unda

Mul

ia A

t 04:

36 1

9 A

pril

2015

(PT

)

IFR

SG

reek

GA

AP

IAS

39“fi

nan

cial

inst

rum

ents

:re

cog

nit

ion

and

mea

sure

men

t”P

arag

rap

hs:

9,46

,71

Th

eef

fect

ive

inte

rest

met

hod

isn

otco

nsi

der

edfo

rsu

bse

qu

ent

mea

sure

men

tof

loan

san

dre

ceiv

able

sT

he

law

doe

sn

otsp

ecif

yan

yre

cog

nit

ion

and

mea

sure

men

tre

qu

irem

ents

for

hed

ge

acco

un

tin

gIA

S40

“in

ves

tmen

tp

rop

erty

”P

arag

rap

h:

30G

reek

Law

doe

sn

otre

cog

nis

eth

eco

nce

pt

ofin

ves

tmen

tp

rop

erty

.Alt

hou

gh

ad

isti

nct

ion

bet

wee

n“o

per

atin

g”

and

“non

-op

erat

ing

”p

rop

erti

esex

ists

,th

ela

tter

are

reco

gn

ised

assu

chon

lyif

they

hav

en

otb

een

use

dor

they

are

not

curr

entl

yin

use

.A

ccor

din

gly

,p

rop

erti

esh

eld

toea

rnre

nta

lsar

eco

nsi

der

edas

“op

erat

ing

”A

sth

ere

isn

ose

par

ate

clas

sifi

cati

onof

pro

per

ties

and

inv

estm

ent

pro

per

ties

the

cost

mod

elis

app

lied

toal

lIA

S41

“ag

ricu

ltu

re”

Par

agra

ph

s:5,

10,

and

13T

her

eis

not

exp

lici

tg

uid

ance

reg

ard

ing

bio

log

ical

asse

tsan

dag

ricu

ltu

ral

pro

du

ceu

nd

erG

reek

Law

IFR

S3

“bu

sin

ess

com

bin

atio

ns”

Par

agra

ph

:1,

54an

d56

Gre

ekL

awp

erm

its

bot

hth

ep

ooli

ng

ofin

tere

sts

and

the

pu

rch

ase

met

hod

for

bu

sin

ess

com

bin

atio

ns.

How

ever

,in

mos

tca

ses

bu

sin

ess

com

bin

atio

ns

are

bas

edon

the

leg

alfo

rmra

ther

than

onw

het

her

anac

qu

irer

can

be

iden

tifi

ed.

Acc

ord

ing

ly,

com

pan

ies

foll

owth

ep

ooli

ng

ofin

tere

stm

eth

odan

dsu

bse

qu

entl

y,g

ood

wil

lrar

ely

isre

cog

nis

ed.R

ecog

nit

ion

ofn

egat

ive

goo

dw

ill

isp

erm

itte

dan

dis

reco

gn

ised

inco

nso

lid

ated

shar

ehol

der

s’eq

uit

yas

“dif

fere

nce

aris

ing

onco

nso

lid

atio

n”

Sources:

Nob

es(2

001)

;S

akel

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Com

pan

yL

aw21

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0

Table AI.

Transition toIFRS in Greece

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Appendix 2

Corresponding authorIoannis Tsalavoutas can be contacted at: Ioannis.Tsalavoutas@stir.ac.uk

Sectors Total number of companies

Media 14Travel and leisure 16Healthcare 8Retail 13Personal and household goods 39Technology 22Constructions and materials 32Food and beverages 31Basic resources 17Telecoms 3Oil and gas 2Industrial goods and services 27Chemicals 11Utilities 4Total 238

Table AII.Distribution of companiesacross ASE sectorsclassification

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